Binance Chief Executive Officer Changpeng Zhao rejected allegations of wrongdoing in a Monday lawsuit filed by the U.S. Commodity Futures Trading Commission (CFTC), saying Binance is committed to transparency and cooperation with regulators and law enforcement in the U.S. and elsewhere in the world.
The CFTC complaint “appears to contain an incomplete recitation of facts” and Binance.com, the world’s largest cryptocurrency exchange by trading volume, does not trade for profit or “manipulate” the market under any circumstances, Zhao wrote in a blog post on Tuesday
The lawsuit filed in the U.S. District Court for the Northern District of Illinois alleges Binance – under the direction of Zhao and Samuel Lim, a former chief compliance officer at the company – violated derivatives rules by allowing U.S. residents to trade various financial instruments involving digital assets. This without Binance holding a license or approval to provide such services in the country.
Binance set up a separate company and platform, Binance.US, for U.S. residents that offers fewer cryptocurrencies and charges higher fees.
“The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law,” Gretchen Lowe, CFTC’s enforcement division principal deputy director and chief counsel, said in a Monday statement.
Arguments
The charges come as U.S. regulators, including the Securities and Exchange Commission (SEC), this year have increasingly targeted digital asset platforms, such as the Kraken and Coinbase cryptocurrency exchanges, with fines and warnings about services that allegedly violate financial laws.
Such moves have not been without criticism from officials within the regulators themselves. SEC Commissioner Hester Peirce said on Feb. 9 that the agency’s action to impose a US$30 million fine on Kraken over its crypto staking program was “paternalistic and lazy.”
She added: “Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.”
With the charges against Binance, the CFTC seeks monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations.
A Binance spokesperson in Asia directed Forkast to Zhao’s blog post when asked for comment on the CFTC allegations.
VPNs
The CFTC said Binance helped U.S. customers evade compliance controls through use of virtual private networks (VPNs) to obscure their locations.
The regulator said Binance published a tutorial in 2019 titled “A Beginner’s Guide to VPNs” which said: “you might want to use a VPN to unlock sites that are restricted in your country.”
However, Zhao argued in the blog post that no other company uses systems more comprehensive or more effective than Binance to identify the residency of clients.
“We block US users by nationality (KYC), IP (including commonly used VPN endpoints outside of the US), mobile carrier, device fingerprints, bank deposit and withdrawals, blockchain deposits and withdrawals, credit card bin numbers, and more,” he said.
The CFTC also said in its complaint that Binance did not disclose to its customers that it was trading in its own markets and that Binance has refused to respond to subpoenas seeking information concerning its proprietary trading activity.
The exchange has traded on its own platform through about 300 “house accounts” that are directly or indirectly owned by Zhao, who has also traded on the Binance platform through two individual accounts, according to the CFTC.
Zhao, in response, said that Binance does trade in some situations.
“Our revenues are in crypto. We do need to convert them from time-to-time to cover expenses in fiat or other cryptocurrencies,” he wrote.
Anti-money laundering
The CFTC also alleges that Binance failed to implement an effective anti-money laundering program.
As of at least May 2022, Binance had not filed any suspicious activity report in the U.S. despite having filed such reports in other jurisdictions, the CFTC said. The agency said that Binance officers were aware that its platform had facilitated potentially illegal activities.
According to the CFTC, in July 2020, a Binance employee wrote to Lim asking if a user whose recent transactions “were very closely associated with illicit activity” and “over [US$5 million] worth of his transactions were indirectly sourced from questionable services” should be blocked from the exchange.
Lim responded in chats saying “[we] can let him know to be careful with his flow of funds, especially from darknet like hydra” and that “[He] can come back with a new account,” according to the CFTC .
The CFTC said that Lim’s instruction is “consistent with Zhao’s business strategy, which has counseled against off-boarding customers even if they presented regulatory risk.”
Again, Zhao countered in the blog post that Binance collaborates with regulators and government agencies around the world and holds itself to a high standard, often higher than what existing regulations require, adding “we do not shy away from challenges.”