US regulator sues top crypto exchange Binance, CEO for ‘deliberate evasion’

The CFTC sued Binance, Zhao and its former top compliance officer for “deliberate evasion” of US law, “while engaging in a calculated strategy of regulatory arbitrage to their business advantage.”

Zhao, a Chinese-born billionaire who came to Canada at age 12, called the CFTC’s complaint “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. For years, US prosecutors and civilian investigators have targeted crypto firms for illegal offerings and breaches of 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 has been “ineffective” and the company, under Zhao’s leadership, told employees and customers to circumvent compliance checks, the CFTC said, citing a number of practices reported for the first time by Reuters in a series of investigations into the exchange last year. .

The CFTC also accused former Binance Chief Compliance Officer Samuel Lim of “aiding and abetting” Binance violations. Lim did not immediately respond to calls and messages from Reuters.

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 said in a statement that Binance executives have known for years “that they violated CFTC rules, working actively both to keep money flowing and to avoid conformity”.

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 in payments for criminals and companies seeking to evade US sanctions, Reuters found.

Binance’s BNB cryptocurrency, the world’s fourth largest by market size, fell around 4% on the news.

In a tweet on Monday afternoon, Zhao wrote “4” – a reference to a previous post listing his “do’s and don’ts” for 2023. The fourth item on the list was “Ignore FUD, False news, attacks,” using an acronym for “fear, uncertainty, and doubt” often used in crypto in relation to news that is perceived as negative.

‘PIRATE SHIP’

Founded in Shanghai in 2017, Binance is at the heart of the global crypto industry. Its main exchange Binance.com processed transactions worth around $23 trillion last year, according to data provider CryptoCompare. Transaction volumes hit $34 trillion in 2021, Zhao said last year.

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

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 had previously reported that this US company, BAM Trading, was actually controlled by Zhao and run by Binance as a de facto subsidiary. The CFTC said that when 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.”

VIP CUSTOMERS

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 hid information reflecting Binance’s US customer base 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 said.

Binance traded on its own platform through some 300 “internal accounts,” directly or indirectly owned by Zhao, though 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 sanctions to resolve the US investigations.

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

(Reporting by Tom Wilson in London, Chris Prentice in Washington and Jaiveer Singh Shekhawat in Bengaluru; Additional reporting by Maria Ponnezhath; Editing by Shinjini Ganguli, Alun John, Marguerita Choy and Richard Chang)

This story was published from a news feed with no text edits.