What are Binance and CZ Being Accused Of? A Closer Look at the CFTC Filing

A US Federal regulatory agency just filed a lawsuit against Binance – the world’s largest crypto exchange – for a sweeping range of regulatory violations, spooking Bitcoin back down to $27,000. 

Here’s what the Commodities and Futures Trading Commission (CFTC) believes the company and its CEO, Changepeng Zhao (CZ), are guilty of.

Binance’s Violations

According to the CFTC’s complaint, Binance has accepted orders and facilitated trade involving multiple digital assets for customers within the United States, which the agency deems commodities. 

Some of those commodities, according to the regulator, include Bitcoin (BTC), Ether (ETH), and Litecoin (LTC). While there is wide agreement across agencies and parliament that Bitcoin is a commodity, the Securities and Exchange Commission (SEC) has made numerous suggestions alluding to Ether being a security instead. 

Though Binance is supposed to not serve US-based customers (except through the separate and independent firm Binance US), the CFTC alleges that its presence within the country has gradually expanded over time – particularly to commercially important institutional “VIP” customers. 

Despite knowing this would place regulatory and registration requirements on Binance, the exchange, and CZ both ignored those requirements and helped customers evade the firm’s access controls, according to the CFTC.

Binance’s disregard for such laws has been quite profitable: it pulled in $1.14 billion in revenue from derivatives transactions in May 2021 alone. Meanwhile, about 16% of accounts at the exchange had been identified by Binance as being located in the United States. 

The exchange is also accused of using and encouraging various techniques to escape regulatory requirements. This includes not establishing a fixed headquarters in any one location so that Binance won’t be subject to the laws of that area. 

Escaping KYC Controls

Binance and its employees have also allegedly encouraged US customers to use virtual private networks (VPNs) to escape KYC controls in violation of law, and for its US-based VIP customers to open accounts under shell companies to evade compliance controls. 

Finally, the CFTC accused Binance of neglecting the implementation of controls that would prevent illicit finance:

“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,” wrote the agency.

As punishment for Binance’s violations, the CFTC seeks penalties including trading and registration bans, disgorgement, and pre-and post-judgment interest.

According to CNBC, Binance has also helped Chinese customer onboard its platform while escaping KYC and AML rules, despite crypto being entirely banned within its borders. 

After being accused, CZ responded to the lawsuit over Twitter with the number “4” – his unique signal that he is avoiding commenting on “fake news” and “attacks” against Binance. 

Yes sir pic.twitter.com/4rdAeoZO8w

— Harmony (@harmony_1994) March 27, 2023