The Commodity Futures and Trading Commission filed a complaint against crypto exchange Binance, its co-founder Changpeng Zhao and its former chief compliance officer Samuel Lim, alleging that Binance was actively recruiting US users and the exchange’s own “ineffective compliance program.” undermine. according to a filing in the Illinois federal court on Monday.
The filing has the potential to turn the exchange’s operations upside down and may just be the first salvo in a regulatory crackdown on the world’s largest crypto exchange. Aside from disgorgement and any financial costs, the CFTC motion asked the court to impose other reliefs, including trade and registration bans.
The regulator claimed that Binance, Zhao and Lim had breached eight core provisions of the Commodity Exchange Act, including laws imposing controls “aimed at preventing and detecting money laundering and terrorist financing.”
Just days before the CFTC filing, CNBC reported how Binance employees were working to circumvent the exchange’s compliance controls in China, using some of the same techniques the CFTC says Binance is trying to recruit US users.
Zhao and Lim are said to have “actively nurtured lucrative and commercially important ‘VIP’ clients, including institutional clients, located in the United States,” according to the complaint.
“Today’s enforcement action demonstrates that there is no place, or alleged lack of place, that will prevent the CFTC from protecting American investors. I have made it clear that the CFTC will continue to use all of its powers to find and stop wrongdoing in the volatility and risky digital asset market,” CFTC Chairman Rostin Benham said in a statement.
Binance and Zhao have taken steps to intentionally obfuscate where the exchange’s subsidiaries are located, the regulator said. This is part of a broader strategy that Zhao said is an attempt to “keep countries clean,” the regulator claimed in the filing.
A key part of Binance’s alleged efforts to collect fees and woo U.S. users was the exchange’s VIP program for high net worth individuals, the CFTC filing said.
“Binance is aware of the identities and geographic locations of its VIPs because Binance naturally monitors its transaction volume and fee-based revenue sources in conducting its business,” the CFTC complaint alleges.
Binance’s VIPs have been offered special privileges when law enforcement officials are pursuing them or freezing their assets, the CFTC claimed, claiming Binance warned or suggested VIPs to take their assets off the platform.
“Do not directly tell the user to run,” Binance instructed its VIP team, the filing reads. “If the user is a great trader or a smart trader, he/she will get the hint.”
Hours after filing, Zhao released a statement saying he felt the allegation did not provide a full account of the facts and said Binance is cooperating with international and US law enforcement requests and has frozen $160 million at the direction of the law enforcement year have -dating.
CNBC previously reported how Binance’s customer service and VIP representatives have been advising users in mainland China on how to circumvent Binance’s compliance systems. The use of virtual private networks and alternative non-governmental documents has been recommended to mainland Chinese traders by some volunteers and staff. The CFTC filing alleges that Binance has been conducting similar activities for its US users.
“But as best we can we try to ask our users to use VPN or ask them (if there is an entity) to provide non-US documents. On the surface you can’t see that we have US users, but in reality we should get them through other creative means,” Lim told a Binance employee, according to the 2020 file.
Lim reportedly discouraged open fraud but encouraged “creative means” to circumvent regulations. Binance “may encourage them to have a non-Kyc account,” according to Lim. KYC stands for Know Your Customer, a set of principles that guide anti-money laundering programs for financial institutions and is an important part of combating terrorism and illicit financing.
“We have made significant investments over the past two years to ensure that no US users are active on our platform,” a Binance spokesperson said in a statement, calling the complaint “unexpected and disappointing.”
Earlier in the day, Zhao posted a tweet reading “4” in apparent response to the CFTC filing.
Number four is a call to Binance’s loyal international user base to dismiss negative publicity about the exchange as “fake news.”
“The best way forward is to protect our users and work with regulators to develop a clear, thoughtful regulatory regime,” the Binance statement continued.
Zhao’s individual response reflected this. “We intend to continue to respect and work with US and other regulators around the world,” the Binance CEO wrote.
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