- Binance faces being banned from operating in the U.S. after the CFTC hit it with multiple violations of its regulations yesterday
- The agency accuses the exchange and its CEO, Changpeng Zhao, of “willful evasion of federal law”
- The company faces tens of billions of dollars in penalties and restitution, and a U.S. ban
The Commodity Futures Trading Commission (CFTC) yesterday filed a civil enforcement action in the US District Court for the Northern District of Illinois against Changpeng Zhao, the owner and CEO of Binance, three entities that operate the Binance platform and one other individual. The complaint charges the defendants with numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations, alleging that Binance knowingly disregarded applicable provisions of the CEA and engaged in a calculated strategy of regulatory arbitrage. The charges, which were not unexpected, could see Binance banned from operating in the U.S and pay out tens of billions of dollars in fines and restitution, with the very future of the company at stake if it is found guilty.
Multiple Entities Targeted
The Biance lawsuit targets several entities and individuals with various financial crimes, mainly relating to operating a futures exchange to U.S. citizens without registering and not doing enough to prevent potential money laundering on the platform. Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited are the entities the suit has hit, with the CFTC accusing the company of running “numerous other corporate vehicles through an intentionally opaque common enterprise.”
The CFTC charges the Binance entities with violating laws around offering futures transactions, which it calls “illegal off-exchange commodity options”; failing to register as a futures commissions merchant, designated contract market or swap execution facility; poorly supervising its business; not implementing know-your-customer (KYC) or anti-money laundering (AML) processes’ and having a poor anti-evasion program.
Zhao Accused of Directing Customers to Skirt Regulations
Zhao himself has been accused of a “long-running failure to act in good faith concerning Binance’s misconduct” and has been held responsible for all the various charges leveled at the platform, under the assumption that he was either aware of what was going on or directly orchestrated it. The charges against him include the suggestion that he directed Binance employees and U.S. customers to conceal their locations through the use of virtual private networks, and that Zhao himself had approximately 300 Binance accounts which he used to conduct “proprietary trading activity on the Binance platform.”
The complaint also targets Samuel Lim, Binance’s former chief compliance officer, who is charged with “aiding and abetting Binance’s violations”, such as attempting to “willfully evade or attempt to evade applicable provisions of the CEA”, including promoting the use of “creative means” to assist customers in circumventing Binance’s compliance controls.
Binance, Lim and Zhao Could be Banned From Operating in U.S.
The CFTC is seeking restitution and penalties that would reach into the tens of billions of dollars if levied to the full, including payouts to all U.S. customers who used the platform, making the suit a kind of class action against the exchange on behalf of all U.S. users. Zhao and Lim would also be banned from taking office at any registered U.S. entity, and Binance would be banned from the U.S. in all its forms. The filing has already led to the Binance.US takeover of Voyager Digital being put on hold at the eleventh hour.
However, if Binance chooses to settle (which it almost certainly will), the penalties will be far less, although some restructuring may be required to satisfy U.S. regulators. There is guaranteed to be much more fallout from this case in the days and weeks to come.