March 27 (Reuters) – The world’s largest crypto exchange Binance and its CEO and founder Changpeng Zhao were charged on Monday by the US Commodity Futures Trading Commission (CFTC) for conducting what the regulator called an “illegal” exchange and a “sham” used to be. compliance program.
The CFTC sued Binance, Zhao and its former top compliance manager for “willful evasion” of US law, “while engaging in a calculated strategy of regulatory arbitrage to their commercial advantage.”
Zhao, a billionaire who was born in China and moved to Canada at age 12, called CFTC’s complaint “unexpected and disappointing.”
“On initial review, the complaint appears to contain an incomplete statement of facts, and we disagree with the characterization of many of the issues raised in the complaint,” Zhao said in a statement.
The lawsuit comes amid a wider and increasingly high-profile crackdown on crypto companies. For years, U.S. prosecutors and civil investigators have targeted crypto companies for illegal offerings and failure to comply with rules designed to prevent illegal activity. But the pace of such government activity has exploded in recent times.
The CFTC said in its complaint Monday that from at least July 2019 to date, Binance “offered and executed commodity derivatives transactions on behalf of U.S. persons” in violation of U.S. laws.
Binance’s compliance program was “ineffective” and the company, led by Zhao, told employees and customers to evade compliance checks, the CFTC said, citing a number of practices first reported by Reuters in a series of investigations into the exchange last year.
The CFTC also accused Binance’s former chief compliance officer, Samuel Lim, of “complicity in” Binance’s violations. Lim did not immediately respond to calls and messages from Reuters.
A spokesperson for Binance, which dominates the global digital asset sector, said the company will continue to “cooperate” with regulators.
Binance has made “significant investments” to ensure it has no US users on its platform, the spokesperson said.
CFTC Chairman Rostin Behnam said in a statement that Binance executives had known for years “that they were violating CFTC rules and were actively working to both keep the money flowing and prevent compliance.”
The CFTC is responsible for overseeing commodity and derivatives markets, including Bitcoin. Companies such as brokers that facilitate trade in such products by US customers are required to register with the agency.
Reuters reported in December that the US Justice Department had been investigating Binance since 2018 for possible money laundering and sanctions violations. Binance has processed at least $10 billion in payments for criminals and companies looking to evade US sanctions, Reuters has found.
Binance’s cryptocurrency BNB, the world’s fourth largest by market size, fell about 4% on the news.
In a tweet on Monday afternoon, Zhao wrote “4” — a reference to an earlier post with his “Do’s and Don’ts” for 2023. The fourth item on the list was “Ignore FUD, Fake News, Attacks,” using an acronym for “fear, uncertainty and doubt”, commonly used in crypto in reference to news perceived as negative.
‘PIRATES SHIP’
Founded in Shanghai in 2017, Binance is at the heart of the global crypto industry. Core exchange Binance.com processed transactions worth about $23 trillion last year, according to data provider CryptoCompare. Trading volumes reached $34 trillion in 2021, Zhao said last year.
With a holding company based in the Cayman Islands, Binance has never revealed the location of its core exchange. The CFTC charged the holding and two other Binance units.
Binance did not require clients to provide information that verified their identity before trading and “lacked basic compliance procedures to prevent and detect terrorist financing and money laundering,” the CFTC said.
The CFTC’s complaint details Binance’s efforts to retain U.S. customers even after the company, in partnership with a supposedly independent U.S. company, launched a U.S. exchange in 2019 to serve U.S. customers in accordance with U.S. regulations.
Reuters previously reported that this US company, BAM Trading, was in fact controlled by Zhao and managed by Binance as a de facto subsidiary. The CFTC said that when Zhao took on BAM’s first CEO, he “described Binance as a pirate ship and explained that he wished Binance.US to become a navy boat”.
VIP CUSTOMERS
While Binance’s global business said publicly that it prevented US clients from trading on its platform, the CFTC said Binance told its commercially valuable US-based “VIP clients” how to get around compliance checks.
Zhao kept information about Binance’s US customer base secret from some senior executives, CFTC said. In October 2020, Zhao ordered Binance staff to replace the US value for some data fields in Binance’s internal database with “UNKWN,” it said.
Binance traded on its own platform through some 300 “house accounts,” owned directly or indirectly by Zhao, though the exchange had not disclosed this activity in its public terms of use or elsewhere, CFTC said. The house accounts were exempt from Binance’s “insider trading” policy, the CFTC said.
A Binance executive told the Wall Street Journal in February that the company expected to pay fines to resolve the US investigations.
The CFTC said it is seeking monetary penalties, payout of ill-gotten gains and permanent trading and registration bans.
Reporting by Tom Wilson in London, Chris Prentice in Washington and Jaiveer Singh Shekhawat in Bengaluru; Additional reporting by Maria Ponnezhath; Edited by Shinjini Ganguli, Alun John, Marguerita Choy and Richard Chang
Our Standards: The Thomson Reuters Principles of Trust.
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