Binance, CEO Face Legal Action From US Regulator Over Crypto Exchange Practices

The Commodity Futures Trading Commission (CFTC) has sued Binance, the world's largest cryptocurrency exchange, and its founder and CEO, Changpeng Zhao, for operating an “illegal” exchange and a “sham” compliance program. The lawsuit alleges that Binance, Zhao, and its former top compliance executive willfully evaded US law while engaging in regulatory arbitrage for their commercial benefit. The CFTC said that Binance offered and executed commodity derivatives transactions on behalf of US persons, in violation of US laws, from at least July 2019 to the present. Binance's compliance program was ineffective, and the firm instructed employees and customers to circumvent compliance controls, the CFTC said, citing several practices first reported by Reuters in a series of investigations into the exchange last year.

CFTC's Complaint

The CFTC's complaint detailed Binance's efforts to retain US customers even after the company launched a US exchange in 2019 to serve American customers in compliance with US regulations, in partnership with a purportedly independent US firm. The US firm, BAM Trading, was in fact controlled by Zhao and managed by Binance as a de facto subsidiary, as reported by Reuters. Although Binance publicly said it was restricting US customers from trading on its platform, the CFTC noted that the firm told its commercially valuable US-based “VIP customers” how to evade its compliance controls.

Binance's compliance program was “ineffective” and the firm, under the direction of Zhao, instructed employees and customers to circumvent compliance controls, the CFTC said. The former Chief Compliance Officer Samuel Lim was accused of “aiding and abetting” Binance's violations, but he did not immediately respond to calls and messages from Reuters.

Binance's Response

Binance's representative stated that the company would continue to “collaborate” with authorities and had made “significant investments” to guarantee that there were no US customers on its network. Zhao described the CFTC's complaint as “unexpected and disappointing,” stating that an early assessment revealed an inadequate statement of facts and that he disagrees with the categorization of many of the issues claimed in the complaint.

Impact On Binance And The Crypto Industry

Binance's cryptocurrency BNB, the world's fourth-largest by market size, dropped by about 4% on the news. The lawsuit comes amid a broader and increasingly high-profile crackdown on crypto companies. For years, US prosecutors and civil investigators have targeted crypto firms for illegal offerings and failures to comply with rules designed to prevent illicit activity. But the pace of such government activity has surged recently.

Conclusion

Binance, founded in Shanghai in 2017, sits at the heart of the global crypto industry. Its core Binance.com exchange processed trades worth about $23 trillion last year, according to data provider CryptoCompare. The CFTC is responsible for oversight of commodities and derivatives markets, including Bitcoin. Firms such as brokers that facilitate US customers' trading of such products are required to register with the agency. The CFTC is seeking monetary penalties, disgorgement of ill-gotten gains, and permanent trading and registration bans. A top Binance executive told the Wall Street Journal in February that the company expected to pay penalties to resolve the US investigations.

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