Crypto Exchange Binance, CZ Zhao Sued by US CFTC over Willful Evasion of Federal Law

News | March 29, 2023 By:

On Monday, March 27, 2023, the Commodity Future Trading Commission (CFTC) filed a lawsuit in the U.S. District Court for the Northern District of Illinois against Binance CEO Changpeng CZ Zhao and three entities that operate the Binance platform for violating US financial laws.

Founded by Zhao in 2017, Binance operates the largest crypto exchange in the world in terms of daily trading volume of cryptocurrencies. The platform offers crypto-to-crypto trading in more than 600 cryptocurrencies and virtual tokens, including Bitcoin (BTC), Ether (ETH), Litecoin (LTC), Dogecoin (DOGE), and its own Binance Coin (BNB).

The CFTC civil enforcement action alleged that Binance offered and executed commodity derivatives transactions to and for U.S. residents from July 2019 through the present. The lawsuit also alleged that Binance, under Zhao’s leadership, instructed its U.S. customers to access the trading facility through a virtual private network (VPN) to avoid Binance’s IP address-based controls or create “new” accounts through off-shore shell companies to evade Binance’s KYC-based controls.

“Binance and its officers, employees, and agents have instructed U.S. customers to use virtual private networks (“VPNs”) to obscure their location; allowed customers that had not submitted proof of their identity and location to continue to trade on the platform long after announcing such conduct was prohibited; and directed VIP customers with ultimate beneficial owners, key employees who control trading decisions, trading algorithms, and other assets all located in the United States to open Binance accounts under the name of newly incorporated shell companies to evade Binance’s compliance controls,” the lawsuit said.

According to the 74-page complaint, Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited, named in the lawsuit as part of “an opaque web of corporate entities” that constitutes Binance, failed to register with CFTC despite being required to do so.

“Despite Binance’s solicitation of and reliance on customers located in the United States to generate revenue and provide liquidity for its various markets, Binance has never been registered with the CFTC in any capacity and has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets, including laws that require the implementation of controls designed to prevent and detect money laundering and terrorism financing, in violation of the Commodity Exchange Act and the CFTC Regulations.”

The lawsuit also charges Samuel Lim, Binance’s former chief compliance officer, with aiding and abetting Binance’s violations.

“While acting as CCO, Lim advised, directed, and assisted Binance employees and customers in circumventing compliance controls intended to detect and prevent violations of law, “the suit said. “Lim also made representations on behalf of Binance regarding the platform’s compliance program and controls to regulators located in the United States.”

In a press release, CFTC Chief Counsel Gretchen Lowe accused the company and its officers of willfully avoiding U.S. law.

“Defendants’ alleged willful evasion of U.S. law is at the core of the Commission’s complaint against Binance,” said Lowe. “The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law. Today’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. I thank the Enforcement team for their dedication and hard work in bringing this action.”

The CFTC seeks civil monetary penalties, disgorgement, pre and post-judgment interest, and such other relief as the court may deem necessary and appropriate.

A copy of the original filing can be found here.