The United States Commodity Futures Trading Commission (CFTC) filed a lawsuit against the cryptocurrency exchange Binance and its CEO Changpeng Zhao.
The complaint was filed in the Northern District of Illinois. The agency contends the platform engaged in derivatives trading without proper registration.
According to the complaint, Binance:
- offered derivatives trading to U.S. residents since July 2019, and its compliance program proved ineffective;
- informed American VIP clients about best methods to evade monitoring of activity;
- concealed the “true reach and operations”.
In the Commission’s press release, the platform’s actions were described as “willful evasion of U.S. law,” and its compliance representations as a “fiction.”
“For many years, Binance knew it was violating CFTC rules, actively working to preserve cash flow while evading compliance requirements. This should serve as a warning to all in the digital asset space — the CFTC will not tolerate intentional circumvention of U.S. law,” Rostin Behnam, chairman of the Commission, said.
The regulator also alleges that Binance knew that it had U.S.-sanctioned clients among its customers. According to the agency, one of its employees allegedly was instructed to prepare a report detailing a rigorous compliance audit.
In the suit, the CFTC classified Bitcoin, Ethereum and Litecoin as “commodities”. In October 2022 Rostin Behnam expressed confidence that the two largest cryptocurrencies fell under the agency’s jurisdiction.
In February 2023, SEC Chair Gary Gensler hinted at designating any digital asset other than Bitcoin as securities. In March, during hearings on the Voyager Digital bankruptcy, the agency’s senior counsel William Aptgrov said that Binance.US operates an unregistered securities exchange.
Zhao commented on the news with a tweet bearing the number “4.” On his list, it signified “to ignore FUD and fake news.”
4
— CZ ? Binance (@cz_binance) March 27, 2023
ForkLog sought comment from Binance representatives, but had not received a response at the time of publication.
Adam Cochran, a partner at venture firm Cinneamhain Ventures, called the CFTC’s suit a bid to deal a fatal blow to Binance. He said authorities “have a strong chance of success.”
1/23
Oh boy https://t.co/2JnbfirRrp
Case is up and it’s bad.
This is the CFTC attempting to strike *fatal* blow to Binance, and at first read through… I think they actually have really strong chances here of succeeding in toppling the Binance empire.
— Adam Cochran (adamscochran.eth) (@adamscochran) March 27, 2023
Cochran noted that the agency indicated the existence of recorded conversations and other documents from Zhao, as well as more than 300 accounts directly or indirectly linked to him.
6/23
They also go after the fact of manipulation and self-dealing, identifying there are more than 300 “house accounts” owned by CZ, Merit Peak and Sigma chain used in proprietary trading and note it takes no reasonable anti-fraud or anti-manipulation steps. pic.twitter.com/2SzDwASUK3
— Adam Cochran (adamscochran.eth) (@adamscochran) March 27, 2023
“They have extensive chats and insider documents indicating that Zhao knew about U.S. clients and took steps to hide this in internal documents,” Cochran wrote.
The commission aims to secure penalties and injunctions against the company and its CEO. In Cochran’s view, this would spell big trouble for Binance and its future business, as well as potential multibillion-dollar penalties.
13/23
This means:
-Binance US = dead forever
-Marketmakers with US UBO = gone from binance
-Binance international payment rails in the US or partner nations = dead forever
-Technically Binance international is in violation by offering any trading service even outside US
+— Adam Cochran (adamscochran.eth) (@adamscochran) March 27, 2023
“If the defendants cannot engage with U.S. courts and defend themselves in this case, it is quite likely that the CFTC will win outright. If they do show up and participate, the investigation will open all of their books to U.S. regulators internationally,” Cochran predicted.
The only path for Binance, he called settling the dispute. However, he cautioned that even in this scenario the Commission would press for large fines. Nevertheless, such an outcome would allow Zhao to “avoid pleading guilty,” the expert concluded.
Bitcoin reacted to the news with a 4.3% drop over the last 24 hours, according to CoinGecko.
The token BNB fell 3.9% and at the time of writing was trading below $320.
Shares of crypto-related companies also fell sharply. At the time of writing, Coinbase stock was down 9.3%, MicroStrategy down 7.4%, Marathon Digital down 9.7%, Riot Platforms down 11.1%, Hut 8 Mining down 8.2%.
According to The Block, since the suit was disclosed, users withdrew $169 million from Binance, versus $46 million in deposits.
In 2022 Reuters reported that Binance had repeatedly concealed information from regulators, neglected KYC procedures and acted against the recommendations of the compliance department.
Later, sources within the U.S. Department of Justice reportedly disagreed over the charges against the exchange’s leadership. Binance representatives at the time reiterated their commitment to cooperating with law enforcement.
In early March 2023, members of the U.S. Senate Banking Committee sent Binance a letter requesting detailed information about its KYC/AML policies. They accused the platform of links to criminals, calling it a “hotbed of illicit financial activity.”
Zhao denied the allegations, while the company provided the senators with a response. But he hardly touched on the financial aspects.
In the same month CNBC, citing Chinese-language chats controlled by the trading platform, reported that some Binance employees and volunteers provide users in China and other countries with guidance on evading KYC checks.
In February, Binance’s chief strategy officer Patrick Hillmann said the company was prepared to pay fines to settle its claims with U.S. authorities.