Binance Charged by CFTC for “Wilful Evasion” of US Law
Posted by Colin Lambert. Last updated: March 28, 2023
The Commodity Futures Trading Commission has filed a civil enforcement action against Binance CEO Changpeng Zhao and three entities that operate the platform, alleging there have been “numerous” and “wilful” violations of the US Commodity Exchange Act (CEA) and CFTC regulations.
In the Complaint, the CFTC alleges Binance and the other defendants, who include Samuel Lim, the crypto exchange’s former chief compliance officer, who is charged with aiding and abetting, chose to knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.
It says that Binance’s compliance program has been “ineffective” and, at Zhao’s direction, has instructed its employees and customers to circumvent compliance controls in order to maximise corporate profits.
The complaint charges that for much of the relevant period, 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. It also says the exchange failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering.
The complaint further alleges that even after Binance purported to restrict US customers from trading on its platform, it instructed its customers – in particular its commercially valuable US-based VIP customers – on the best methods for evading its compliance controls. In addition, the complaint charges Binance 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.
Among the numerous supervisory failures detailed in the complaint is Binance’s instruction to employees to communicate with US-based customers concerning control evasion through a messaging application that was set to automatically delete written communications. The CFTC argues that the reason Binance used that communication method was to avoid leaving any evidence of their efforts to retain US-based customers.
“Today’s enforcement action demonstrates that there is no location, or claimed lack of location, that will prevent the CFTC from protecting American investors,” says CFTC chair Rostin Behnam. “I have been clear that the CFTC will continue to use all of its authority to find and stop misconduct in the volatile and risky digital asset market. For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance. This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of US law.”
Gretchen Lowe, CFTC’s Enforcement Division principal deputy director and chief counsel, adds, “Defendants’ alleged wilful evasion of US law is at the core of the Commission’s complaint against Binance. 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.”