Binance, CZ Sued By US Regulator CFTC Over Violations and Insider Trading Allegations

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Article updated to provide more information. Bitcoin is down to $26,750 upon news publication. All information are from the CFTC press release and case file.

Since the news has been announced, a massive outflow of $185 million worth of tokens has left Binance in the past hour; $218 million worth of tokens have flowed out in the past four hours. Note that Binance has a total asset chain of $75.6 billion as per Wu Blockchain.

  • The U.S. Commodity Futures Trading Commission (CFTC) has charged Binance and its founder, Changpeng ‘CZ’ Zhao, with multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations.
  • The complaint alleges that Binance operates an illegal digital asset derivatives exchange and engages in willful evasion of U.S. law through regulatory arbitrage.

Charges Against Binance and Entities Involved

  • The complaint charges Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited with being part of an opaque common enterprise led by Zhao.
  • The complaint also charges Samuel Lim, Binance’s former chief compliance officer, with aiding and abetting Binance’s violations.
  • The CFTC seeks disgorgement (return of ill-gotten gains), civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations.

Allegations against Binance and Changpeng Zhao

  • The complaint alleges that Binance has offered and executed commodity derivatives transactions to and for U.S. persons from July 2019 through the present, in violation of the CEA.
  • Binance is accused of operating a centralized digital asset trading platform, through an intentionally opaque common enterprise, with Zhao at the helm as Binance‚Äôs owner and chief executive officer.
  • The complaint charges that Binance knowingly disregarded applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.
  • Binance allegedly instructed its employees and customers to circumvent compliance controls in order to maximize corporate profits, and its compliance program was ineffective.
  • According to the complaint, Binance did not require its customers to provide any identity-verifying information before trading on the platform, despite the legal duty that entities like Binance functioning as futures commission merchants (FCMs) collect such information.
  • The complaint further alleges that Binance failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering.
  • Even after Binance purported to restrict US customers from trading on its platform, the complaint charges that Binance instructed its customers – in particular, its commercially valuable US-based VIP customers – on the best methods for evading Binance‚Äôs compliance controls.
  • Binance is charged with acting as a designated contract market or swap execution facility based on its role in facilitating derivatives transactions without registering with the CFTC, as required.
  • The complaint charges the entity defendants with failing to diligently supervise Binance’s activities as an FCM.
  • Zhao is alleged to have been responsible for all major strategic decisions at Binance, including devising the secret plot to instruct US-based VIP customers to evade Binance‚Äôs compliance controls and instructing Binance employees to ensure all communications about their control subversion took place over applications that facilitated the automatic destruction of evidence.

Allegations against Lim, Former Binance Chief Compliance Officer

  • Lim, Binance’s CCO from 2018 through 2022, is charged with willfully aiding and abetting Binance’s violations through intentional conduct that undermined Binance’s compliance program.
  • Lim is also charged with conducting activities to willfully evade or attempt to evade applicable provisions of the CEA, including promoting the use of ‚Äúcreative means‚ÄĚ to assist customers in circumventing Binance‚Äôs compliance controls and implementing a corporate policy that instructed Binance‚Äôs US customers to access the trading facility through a virtual private network to avoid Binance‚Äôs IP address-based controls or create ‚Äúnew‚ÄĚ accounts through offshore shell companies to evade Binance‚Äôs KYC-based controls.

Statements from CFTC Officials:

  • CFTC Chairman Rostin Behnam: ‚ÄúThis should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of U.S. law.‚Äú
  • Gretchen Lowe, CFTC’s Enforcement Division Principal Deputy Director and Chief Counsel: ‚ÄúToday’s enforcement action reflects that the CFTC and its Enforcement Division will pursue those digital asset platforms and individuals who flout and actively attempt to circumvent CFTC regulatory requirements.‚Äú

Case Background:

  • The complaint alleges that Binance has been offering and executing commodity derivatives transactions to and for US persons since July 2019, in violation of the CEA.
  • Binance is accused of having an ineffective compliance program and instructing its employees and customers to circumvent compliance controls to maximize profits.
  • The complaint charges Binance with acting as a designated contract market or swap execution facility without registering with the CFTC, as required.
  • The complaint also charges the entity defendants with failing to diligently supervise Binance’s activities as an FCM.

This is a developing story: Binance, CZ Sued By US Regulator CFTC Over Violations and Insider Trading Allegations

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