CFTC, SEC, DOJ, IRS: These Are the Ongoing Investigations Into Binance

Binance, the world’s largest cryptocurrency exchange by volume, is no stranger to tussles with regulators around the world. But things now appear to be heating up, as investigations years in the making are now resulting in formal charges.

On Monday, the Commodity Futures Trading Commission (CFTC) sued Binance, alleging that the massive company violated trading and derivatives rules. 

The lawsuit claims that Binance, its CEO Changpeng Zhao, and other employees at the exchange solicited customers in the U.S. and “chose to ignore” rules designed to block Americans from using the service and trading unregistered crypto derivatives products. 

“Binance has taken a calculated, phased approach to increase its United States presence despite publicly stating its purported intent to ‘block’ or ‘restrict’ customers located in the United States from accessing its platform,” the Commission stated.

Trouble with the CFTC

The CFTC lawsuit targets not just Binance but also CEO Changpeng Zhao and ex-chief compliance officer Samuel Lim. 

According to the CFTC, Binance has not taken compliance seriously enough: the company allegedly committed multiple trading derivatives violations, including not being properly registered to offer derivatives to American clients, and it didn’t supervise activity on its exchange sufficiently. Its anti-money laundering (AML) and know-your-customer (KYC) controls were not good enough, the CFTC also alleges. 

The lawsuit further claims that Binance knowingly evaded or helped U.S. clients dodge regulators—and even traded against its own customers. The CFTC claims Zhao used his own companies to engage in proprietary trading activity on Binance via 300 “house accounts” but did not disclose this activity. 

The CFTC first began investigating Binance over allegedly unlawful trading practices in U.S. markets in early 2021, according to a report from Bloomberg at the time. By September 2021, that investigation had been expanded to include allegations of insider trading. In its lawsuit this week, the regulator claims that the exchange’s 300 house accounts are exempt from its “a relatively new ‘insider trading’ policy.” 

It’s a pretty serious case—and if the regulator’s penalties stick, legal experts say it could significantly impact the company’s business in the U.S., or even globally, as the CFTC not only wants to hit the defendants mentioned in the lawsuit with fines, but also ban them from trading altogether. 

Zhao responded to the CFTC lawsuit on Twitter by suggesting he thinks the 74-page complaint is merely an attempt at spreading “FUD” (fear, uncertainty, and doubt.)

Long-running Department of Justice and IRS cases

Officials from the Department of Justice have been investigating Binance in 2018, according to Reuters.

The investigation also involves the IRS, and is focused on both Binance’s compliance with anti-money laundering laws and sanctions as well as potential tax offenses, according to a May 2021 report from Bloomberg.

In December, news dropped that Justice Department prosecutors were weighing up whether to aggressively go after the exchange or take time to review more evidence. Reuters reported that the exchange’s defense attorneys met with DOJ officials and discussed potential plea deals. 

Binance argued that a criminal prosecution would have negative effects on a crypto market already crushed by the collapse of blockchain project Terra and mega exchange FTX’s bankruptcy last year, according to Reuters. Representatives for the Department of Justice did not immediately respond to Decrypt’s requests for comment.

Malaysia crackdown

Back in 2020, the Malaysia Securities Commission said that Binance was breaking the law by operating in the country—adding the crypto exchange to a blacklist, and advising investors not to use the platform.

Then, in 2021, it took enforcement action against the exchange, ordering it to shutter its services. 

SEC

The U.S. Securities and Exchange Commission has had its eye on Binance for some time: the regulator in 2021 asked the company for a list of information from its U.S. affiliate, specifically how it relates to the global organization. 

And last year, the Wall Street Journal reported that the SEC was looking into the connection between Binance US and two trading firms linked to Zhao, Sigma Chain AG and Merit Peak Ltd. The CTFC alleged in its lawsuit that both firms made trades on the Binance platform but didn’t register with the CTFC. 

The charges may cause astute observers of the crypto market to draw comparisons between Binance and Zhao’s trading firms and the allegedly improper relationship between FTX and Alameda Research.

FTX, once one of the world’s biggest crypto exchanges, spectacularly collapsed last November partly because its founder, Sam Bankman-Fried, allegedly used customer money (without them knowing) to make risky bets through its sister trading company, Alameda. 

The CFTC has not accused Binance of fraud or improper use of customer funds—something Zhao has repeatedly said in public statements that his exchange does not do—but the allegation that Zhao secretly traded on his own exchange is one that likely won’t sit well with crypto investors.