Tuesday, February 27, 2024

Binance and CZ sued by CFTC over US regulatory violations

According to the CFTC i.e Commodity Futures Trading Commission, Binance failed to converge its regulatory obligations by not properly registering with the derivatives regulator. The cryptocurrency exchange has been the focus of a CFTC investigation since 2021. The exchange mentioned in February that it would likely face regulatory action in the United States and be already working with regulators.

The U.S. Commodity Futures Trading Commission (CFTC) sued crypto exchange Binance and founder Changpeng Zhao on allegations the company deliberately offered unregistered crypto derivatives products in the U.S. against federal law.

The lawsuit, filed in the U.S. District Court for the Northern District of Illinois on Monday, alleged that Binance operated a derivatives trading operation in the U.S., offering trades for cryptocurrencies including bitcoin (BTC), ether (ETH), litecoin (LTC), tether (USDT) and Binance USD (BUSD), which the suit cited to as commodities. Under Zhao’s leadership, the suit also claimed that the company directed its employees to take off their locations through the use of virtual private networks.

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The CFTC is billing Binance with infringing laws around presenting futures transactions, “illegal off-exchange commodity options,” blemishing to register as a futures commissions merchant, designated contract market or swap execution facility, unsuccessfully supervising its business, not implementing know-your-customer or anti-money laundering processes and having a weak anti-evasion program. According to the CFTC, the global exchange, which has a U.S. affiliate in Binance.US, produced a system to hide its true reach and operations.

“Binance’s reliance on a maze of corporate entities to operate the Binance platform is deliberate; it is designed to obscure the ownership, control, and location of the Binance platform,” the filing said, adding that “Zhao answers to no one but himself.”

In a press release, CFTC Chief Counsel Gretchen Lowe called Binance’s actions “willful evasion of U.S. law,” pointing to internal chats and emails.

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In addition, the suit alleged, Binance directed customers in the U.S. to use a variety of methods to evade restrictions on U.S.-based customers.

“Binance has instructed U.S. customers to evade such controls by using [virtual privacy networks] to conceal their true location,” the suit alleged. “VPNs have the effect of masking an internet user’s true IP address. VPN use by customers to access and trade on the Binance platform has been an open secret, and Binance has consistently been aware of and encouraged the use of VPNs by U.S. customers.”

The company managed important customers such as trading firms to set up shell companies in places such as Jersey, the British Virgin Islands and the Netherlands to avoid restrictions, the filing said, to escape restrictions, and was fully aware of the scale of its U.S. business.

The U.S. Commodity Futures Trading Commission (CFTC) sued crypto exchange Binance and founder Changpeng Zhao Monday on allegations the company knowingly offered unregistered crypto derivatives products in the U.S. against federal law.

The lawsuit, filed in the U.S. District Court for the Northern District of Illinois on Monday, alleged that Binance operated a derivatives trading operation in the U.S., offering trades for cryptocurrencies including bitcoin (BTC), ether (ETH), litecoin (LTC), tether (USDT) and Binance USD (BUSD), which the suit referred to as commodities. The suit also alleged that the company, under Zhao’s leadership, directed its employees to spoof their locations through the use of virtual private networks.

The CFTC is charging Binance with violating laws around offering futures transactions, “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 or anti-money laundering processes and having a poor anti-evasion program.

The news quickly sent ripples through markets, driving bitcoin’s price down by about 3% within minutes of the disclosure – though it rebounded, recovering most of the loss as the day progressed. Binance’s exchange token BNB plunged as much as 6% from its price from right before the news came out. Crypto-related stocks also fell.

CoinDesk – UnknownBNB drops (CoinDesk)

According to the CFTC, the global exchange, which has a U.S. affiliate in Binance.US, created a system to hide its true reach and operations.

“Binance’s reliance on a maze of corporate entities to operate the Binance platform is deliberate; it is designed to obscure the ownership, control, and location of the Binance platform,” the filing said, adding that “Zhao answers to no one but himself.”

In a press release, CFTC Chief Counsel Gretchen Lowe called Binance’s actions “willful evasion of U.S. law,” pointing to internal chats and emails.

In addition, the suit alleged, Binance directed customers in the U.S. to use a variety of methods to evade restrictions on U.S-based customers.

“Binance has instructed U.S. customers to evade such controls by using [virtual privacy networks] to conceal their true location,” the suit alleged. “VPNs have the effect of masking an internet user’s true IP address. VPN use by customers to access and trade on the Binance platform has been an open secret, and Binance has consistently been aware of and encouraged the use of VPNs by U.S. customers.”

The company directed important customers such as trading firms to set up shell companies in places such as Jersey, the British Virgin Islands and the Netherlands to avoid restrictions, the filing said, to escape restrictions, and was fully aware of the scale of its U.S. business.

“Binance knew that U.S. customers continued to comprise a substantial proportion of Binance’s customer base,” the filing said, citing internal monthly reports sent to Zhao, which said that, even as of June 2020 after controls had supposedly been implemented, 17.8% of customers were based in the U.S.

Without commenting on any of the specific allegations in the suit, a Binance spokesperson said the company has “made significant investments over the past two years to ensure we do not have U.S. users active on our platform,” including growing its compliance team from 100 to 750 people and spending $80 million on [know-your-customer] and other compliance vendors and tools.

“The complaint filed by the CFTC is unexpected and disappointing as we have been working collaboratively with the CFTC for more than two years. Nevertheless, we intend to continue to collaborate with regulators in the U.S. and around the world. The best path forward is to protect our users and to collaborate with regulators to develop a clear, thoughtful regulatory regime,” the spokesperson said.

The Binance spokesperson said the exchange now maintains “country blocks for anyone who is a resident of the U.S.” and blocks “anyone who is identified as a U.S. citizen regardless of where they live in the world.” The exchange also blocks U.S. cell phone providers and IP addresses, as well as U.S. bank accounts, the spokesperson said.

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