CFTC Sues Binance and Its CEO for Alleged Violations of US Trading Laws

The US Commodity Futures Trading Commission (CFTC) has filed a lawsuit against Binance, the world’s largest cryptocurrency exchange, and its founder and CEO Changpeng Zhao, accusing them of offering unregistered crypto derivatives products to US customers and evading compliance controls. Here’s what you need to know about this major legal action and its implications for the crypto industry.

What is the CFTC and what does it do?

The CFTC is an independent federal agency that regulates the US derivatives markets, including futures, options, and swaps. The CFTC’s mission is to protect market participants and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act (CEA).

The CEA has a broad definition of commodities, which includes both physical goods like food, metals, and energy, and financial instruments like currencies, interest rates, and indices. The CEA also covers digital assets like Bitcoin and other cryptocurrencies that are considered to be goods.

The CFTC has jurisdiction over commodity derivatives transactions that involve US persons or take place in the US. This means that any platform or entity that offers or completes such transactions must register with the CFTC and follow its rules and regulations, unless they qualify for an exemption or exclusion.

What are the allegations against Binance and Zhao?

According to the complaint filed by the CFTC in the US District Court for the Northern District of Illinois on March 27, 2023, Binance and Zhao have violated multiple provisions of the CEA and CFTC regulations by:

– Offering and executing commodity derivatives transactions, such as futures, options, and leveraged tokens, to US custom derivatives being registered as a futures commission merchant (FCM), a designated contract market (DCM), or a swap execution facility (SEF)

– Failing to implement an adequate compliance program to prevent US customers from accessing the Binance platform and its derivative products.

– Advising US customers to use virtual private networks (VPNs) or other methods to circumvent Binance’s geo-blocking measures and evade its compliance controls.

– Concealing their violations from the CFTC and other regulators by operating through a network of entities in different jurisdictions and using aliases and encrypted communications.

The complaint also names Binance’s former chief compliance officer, Samuel Lim, as a defendant for aiding and abetting Binance’s violations.

The CFTC says that since July 2019, when it said it would stop serving US customers on its main platform, Binance has asked for and taken orders from US customers worth millions of dollars. But the complaint says that Binance didn’t really stop US customers from using its platform or derivatives products. Instead, it gave them instructions on how to use VPNs or other ways to get around its restrictions and keep trading.

In the complaint, there are a few examples of internal emails and chats between Binance executives and employees that are said to show that they knew about Binance’s violations and were involved in them. For instance, the complaint quotes an email from Zhao to Lim in August 2019, where Zhao wrote: “We need to be smart about this.” We can’t just block all US users. “We need to find ways for them to trade.” The complaint also quotes a chat from October 2019 between Lim and another Binance employee, in which Lim wrote: “We have been too conservative with our approach towards the US. It’s time we take some calculated risk.”

The CFTC says that Binance not only broke the rules on purpose but also did so in a systematic and widespread way. The complaint states that Binance has offered over 900 different derivative products on its platform, many of which are based on digital assets that are commodities under the CEA. The complaint also states that Binance has served over 13 million US customers since July 2019, accounting for about 25% of its total user base.

What are the potential consequences for Binance and Zhao?

The CFTC is seeking a permanent injunction against Binance, Zhao, and Lim from further violating the CEA and CFTC regulations, as well as disgorgement of all ill-gotten gains, restitution to harmed customers, civil monetary penalties, and trading bans.

Civil monetary penalties could be very high because the CEA allows for a maximum of $1 million per violation or three times the amount of money gained for each violation, whichever is higher. The CFTC could also refer the case to the Department of Justice for criminal prosecution if it finds evidence of fraud or other criminal conduct, so the lawsuit could have significant repercussions for Binance.

Cover: “Binance Trading App on mobile phone” by wuestenigel is licensed under CC BY 2.0.