CFTC Targets Binance, CEO Changpeng Zhao for Regulatory Violations & Illegal Exchange

CFTC Files Civil Lawsuit Against Binance and Its Executives

The Commodity Futures Trading Commission (CFTC) has filed a civil lawsuit in the U.S. District Court for the Northern District of Illinois against Changpeng Zhao and three Binance entities for multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations. The suit also accuses Samuel Lim, Binance’s former chief compliance officer, of assisting and enabling Binance’s transgressions.

Allegations of Deliberate Regulatory Arbitrage and Obscure Enterprise Structure

The lawsuit alleges that Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited collectively operate the Binance digital asset trading platform, along with several other corporate entities, as part of a deliberately obscure common enterprise led by Zhao, the owner and CEO of Binance. The defendants are accused of knowingly disregarding relevant CEA provisions and engaging in a strategic pattern of regulatory arbitrage for their commercial advantage.

CFTC’s Pursuit of Penalties and Injunctions Against Binance

The CFTC is pursuing disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further CEA and CFTC regulation violations by the defendants in its ongoing litigation.

CFTC’s Commitment to Protecting American Investors

CFTC Chairman Rostin Behnam emphasized that the CFTC is committed to protecting American investors, regardless of location or supposed lack thereof. He warned that the CFTC would not tolerate the deliberate avoidance of U.S. law in the digital asset market. Behnam praised the CFTC Enforcement team’s efforts in addressing illegal activities in the digital asset space.

Accusations of Intentional Evasion of U.S. Law and Compliance Measures

Gretchen Lowe, Principal Deputy Director and Chief Counsel of the CFTC’s Enforcement Division, highlighted the defendants’ alleged intentional evasion of U.S. law at the heart of the complaint against Binance. She said that the defendants’ communications reveal that Binance’s compliance measures were disingenuous, and they consistently chose profit over adherence to the law. Lowe commended the Enforcement team for their dedication in pursuing digital asset platforms and individuals who disregard and actively attempt to evade CFTC regulatory requirements.

Case Overview: Inadequate Compliance, Supervisory Failures, and Control Evasion

The lawsuit claims that Binance has been involved in providing and carrying out commodity derivatives transactions for U.S. clients from July 2019 to the present. The company’s compliance program is allegedly ineffective, and Binance, under Zhao’s guidance, has urged employees and customers to bypass compliance measures to increase corporate profits. In a related development, Binance has recently converted $1 billion worth of BUSD into Bitcoin, Ether, and BNB. For more information on this, read this article.

Accusations Against Zhao and Lim: Control Over Binance and Willful Aiding of Violations

Zhao is claimed to be responsible for Binance’s violations due to his control over the company and his longstanding failure to act in good faith regarding Binance’s misconduct. Lim, who served as Binance’s CCO from 2018 to 2022, is accused of willfully aiding and abetting Binance’s violations through intentional actions that undermined the company’s compliance program.

Failure to Implement Fundamental Compliance Procedures

According to the lawsuit, Binance did not require customers to submit identity verification information for a significant portion of the relevant time, despite the legal obligation for entities like Binance, acting as futures commission merchants (FCMs), to collect this data. The company also reportedly failed to implement fundamental compliance procedures to prevent and detect terrorist financing and money laundering.

Allegations of Binance Advising Customers to Evade Compliance Controls

Furthermore, the complaint alleges that Binance advised its customers, particularly its valuable U.S.-based VIP customers, on the most effective ways to evade the company’s compliance controls, even after Binance claimed to limit U.S. customers from trading on its platform. The complaint also accuses Binance of functioning as a designated contract market or swap execution facility by facilitating derivatives transactions without proper CFTC registration.

Supervisory Failures and Destruction of Evidence

The lawsuit also holds the entity defendants responsible for the inadequate supervision of Binance’s FCM activities. Among the various supervisory failures mentioned in the complaint is Binance’s instruction to employees to communicate with U.S.-based customers about control evasion through a messaging app that automatically deleted written communications. The complaint states that Binance used this communication method to avoid leaving evidence of their efforts to retain U.S.-based clients.

Intentional Evasion of CEA Requirements

Additionally, the complaint accuses Binance, Zhao, and Lim of intentionally evading the CEA’s requirements. The defendants allegedly engaged in activities outside the U.S. to avoid CFTC regulation, such as deliberately structuring their entities and transactions to bypass registration requirements and guiding U.S. customers and others on how to circumvent Binance’s compliance controls.

Enforcement Team’s Pursuit of Binance and Its Executives

The Division of Enforcement staff members responsible for this case are Candy Haan, Joseph Platt, Joseph Patrick, Matthew Edelstein, Ray Lavko, Elizabeth N. Pendleton, Scott R. Williamson, and Robert T. Howell.