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




  • The CFTC accuses Binance of “willful evasion” of federal law
  • Binance’s compliance was ‘ineffective’ under CEO ̵[ads1]1; CFTC
  • The CFTC is citing practices first reported by Reuters last year

March 27 (Reuters) – The world’s largest crypto exchange Binance and its CEO and founder Changpeng Zhao were sued by the US Commodity Futures Trading Commission (CFTC) on Monday for running what the regulator alleged was an “illegal” exchange and a “sham” compliance program .

The CFTC sued Binance, Zhao and its former chief compliance officer for “willful evasion” of US law, “while engaging in a calculated strategy of regulatory arbitrage for their commercial benefit.”

Zhao, a billionaire who was born in China and moved to Canada at the age of 12, called the CFTC’s complaint “unexpected and disappointing.”

“Upon initial review, the complaint appears to contain an incomplete recitation 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 attack on crypto companies. For years, US prosecutors and civilian investigators have targeted crypto firms for illegal offerings and failure to comply with rules designed to prevent illegal activity. But the pace of such government activity has increased recently.

The CFTC said in its complaint on Monday that from at least July 2019 until today, Binance “offered and executed commodity derivative transactions on behalf of US persons” in violation of US law.

Binance’s compliance program has been “ineffective” and the firm, led by Zhao, told employees and customers to bypass compliance controls, the CFTC said, citing a series of practices first reported by Reuters in a series of investigations into the exchange last year.

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

A spokesperson for Binance, which dominates the global digital asset sector, said the firm would continue to “cooperate” with regulators.

Binance has made “significant investments” to ensure it does not have US users on its platform, the spokesperson said.

CFTC Chairman Rostin Behnam said in a statement that Binance executives knew for years that “they were violating CFTC rules, and actively worked to both keep the money flowing and avoid compliance.”

The CFTC is responsible for overseeing commodity and derivatives markets, including for Bitcoin. Firms such as brokers that facilitate US customers’ trading of such products 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 has found.

Zhao Changpeng, founder and CEO of Binance, at the Viva Technology conference in Paris, France June 16, 2022. REUTERS/Benoit Tessier

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

In a tweet Monday afternoon, Zhao wrote “4” — a reference to an earlier post that listed his “Do’s and Don’ts” for 2023. The fourth item on the list was “Ignore FUD, fake 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 sits at the heart of the global crypto industry. Its core Binance.com exchange processed about $23 trillion worth of trades last year, according to data provider CryptoCompare. Trade volumes will reach $34 trillion by 2021, Zhao said last year.

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

Binance did not require customers to submit information verifying their identity before trading and “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering,” the CFTC said.

The CFTC’s complaint detailed Binance’s efforts to retain US customers even after the company, in partnership with an allegedly independent US firm, launched a US exchange in 2019 to serve US customers in compliance with US regulations.

Reuters previously reported that this US firm, BAM Trading, was actually controlled by Zhao and managed by Binance as a de-facto subsidiary. The CFTC said 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 boat.”

VIP CUSTOMERS

Although Binance’s global operations publicly said it restricts US customers from trading on the platform, the CFTC said Binance told its commercially valuable US-based “VIP customers” how to avoid the compliance checks.

Zhao kept information reflecting Binance’s US customer base secret from some senior executives, the CFTC said. In October 2020, Zhao directed Binance personnel to replace the US value of some data fields in Binance’s internal database with “UNKWN,” it said.

Binance traded on its own platform through about 300 “house accounts,” directly or indirectly owned by Zhao, although the exchange had not disclosed this activity in its public terms of use or elsewhere, according to the CFTC. The house accounts were exempt from Binance’s “insider trading” policy, the CFTC said.

A top Binance executive told the Wall Street Journal in February that the company expected to pay fines to resolve the US investigations.

The CFTC said it is seeking monetary penalties, disgorgement 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

Our standards: Thomson Reuters Trust Principles.

Angus Berwick

Thomson Reuters

Award-winning investigative reporter based in London, focused on financial business journalism. He was previously a correspondent in Spain and Venezuela, where he reported on the Maduro government’s efforts to retain power. He was Reuters’ Reporter of the Year in 2019 and has won two Overseas Press Club awards.



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