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US Regulator Sues Major Crypto Exchange Binance for Operating ‘Illegal’ Exchange and ‘Fake’ Compliance Efforts

The world’s largest cryptocurrency exchange, Binance, was sued by the US Commodity Futures Trading Commission (CFTC) on Monday for operating what the regulator called an “illegal” exchange and compliance program. “fictitious”.

CFTC sued Binance, CEO Changpeng Zhao and former top compliance officer Samuel Lim, alleging “deliberate misuse” of US law “while engaging in a calculated strategy of regulatory arbitrage to their advantage commercial”.

Mr Zhao, a billionaire widely known as “CZ” who was born in China and moved to Canada when he was 12, called the CFTC action “unexpected and disappointing”.

“After an initial review, the complaint appears to contain an incomplete statement of facts, and we disagree with the characterization of many of the issues alleged in the complaint,” Zhao said in a statement.

The lawsuit comes amid a broader and increasingly high-profile crackdown on crypto companies in the United States.

For years, prosecutors and civilian investigators have targeted crypto firms for illegal offerings and failure to follow rules designed to prevent illicit activity. But the pace of these government activities has recently increased.

The CFTC said in its complaint Monday that from at least July 2019 to the present, Binance “has 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, under Mr Zhao, told employees and customers to circumvent compliance checks, CFTC alleged, citing a number of practices first reported by Reuters in a series of investigations into the exchange last year.

The CFTC also accused former Binance compliance officer Samuel Lim of “aiding and abetting” Binance violations. Mr. Lim did not immediately respond to calls and messages.

Binance is the largest cryptocurrency exchange in the world.(Reuters: Tom Wilson)

A spokesperson for Binance, which dominates the global digital asset industry, said the company will continue to “collaborate” with regulators.

Binance has made “significant investments” to ensure there are no US users on its platform, the spokesperson said.

CFTC Chairman Rostin Behnam says Binance executives have known for years “that they were violating CFTC rules, actively working both to keep money flowing and to avoid compliance” .

The CFTC is responsible for overseeing commodity and derivatives markets, including Bitcoin.

Companies such as brokers that facilitate the trading of these products by US clients are required to register with the agency.

Reuters reported in December that the US Department of Justice had been investigating Binance since 2018 for possible money laundering and sanctions violations.

Binance has processed at least $10 billion ($14.9 billion) in payments for criminals and companies seeking to evade US sanctions, Reuters found.

The company’s own cryptocurrency, BNB, fourth in the world by market size, fell about 4% on the news. Bitcoin, the most popular cryptocurrency in the world, fell 4.4%.

In a tweet on Monday afternoon, Mr Zhao wrote “4” – a reference to an earlier post listing 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” often used in crypto in relation to perceived negative news.

Binance a ‘pirate ship’, CEO reportedly says

Founded in Shanghai in 2017, Binance is at the heart of the global crypto industry.

Its main exchange processed transactions worth around $23 trillion ($34.37 trillion) last year, according to data provider CryptoCompare. Transaction volumes hit $34 trillion ($50.8 trillion) in 2021, Zhao previously said.

With a holding company based in the Cayman Islands, Binance has never revealed the physical location of its main exchange. The CFTC charged the holding company and two other Binance units.

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After the collapse of FTX, could Binance be next?

Binance did not require clients to submit information verifying their identity prior to trading and “did not implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering,” said the CFTC.

The CFTC complaint details Binance’s efforts to retain US customers even after the company, in partnership with a supposedly independent US company, launched a US exchange in 2019 to serve US customers in accordance with US regulations.

Reuters previously reported that this American company, BAM Trading, was actually controlled by Mr. Zhao and managed by Binance as a de facto subsidiary.

The CFTC said that when Mr. Zhao hired BAM’s first CEO, he “described Binance as a pirate ship and explained that he wanted Binance.US to be a navy ship.”

VIPs receive special instructions, CFTC says

Although Binance’s global business has publicly stated that it prevents US customers from trading on its platform, the CFTC said Binance has explained to its US-based “VIP customers” of trade value, how to evade its compliance checks.

Zhao also kept information reflecting Binance’s U.S. customer base secret from certain senior executives, the CFTC said.

In October 2020, Zhao ordered Binance staff to change the US value of certain data fields in Binance’s internal database to “UNKWN”, he also alleged.

Binance traded on its own platform through some 300 “internal accounts” held directly or indirectly by Zhao, although the exchange did not disclose this activity in its public terms of service or elsewhere, according to the CFTC.

The house accounts were exempt from Binance’s “insider trading” policy, the CFTC said.

A senior Binance executive told the Wall Street Journal in February that the company plans to pay penalties to resolve the US investigations.

The CFTC said it was seeking monetary penalties, restitution of ill-gotten gains, and permanent trading and registration bans.



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