The Commodity Futures and Trading Commission has filed a complaint against crypto exchange Binance, its co-founder, Changpeng Zhao, and its former chief compliance officer, Samuel Lim, alleging that Binance is actively recruiting US users and undermining the exchanges’ own “ineffective compliance program” , according to a filing in Illinois federal court Monday.
The filing has the potential to change the exchange’s operations and is potentially just the first salvo of regulatory crackdowns against the world’s largest crypto exchange. In addition to the release and any monetary costs, the CFTC filing asked the court to impose additional relief, including trading and registration bans.
The regulator alleged that Binance, Zhao and Lim violated eight key provisions of the Commodity Exchange Act, including laws that require controls “designed to prevent and detect money laundering and terrorist financing.”
Just days before the CFTC filing, CNBC reported on how Binance officials worked to undermine the exchange’s compliance controls in China, using some of the same techniques the CFTC claims Binance is attracting US users.
Zhao and Lim allegedly “actively cultivated lucrative and commercially important ‘VIP’ clients, including institutional clients located in the United States,” the complaint said.
“Today’s enforcement action demonstrates that there is no location or allegation of non-location that prevents the CFTC from protecting American investors.” I have been clear that the CFTC will continue to use all of its powers to detect and stop misconduct in the volatile and risky digital asset market,” CFTC Chairman Rostin Benham said in a statement.
Binance and Zhao took steps to purposefully hide the whereabouts of the exchange’s subsidiaries, the regulator said. It was part of a larger strategy that Zhao said was an effort to “keep countries clean,” the regulator said in the filing.
A key part of Binance’s alleged effort to generate fees and attract US users is 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 monitors its sources of transaction volume and fee-based revenue as a matter of course in conducting its operations,” the CFTC complaint alleges.
Binance VIPs were offered special privileges when law enforcement pursued them or froze their assets, the CFTC alleged, alleging that Binance warned the VIPs or suggested they remove their assets from the platform.
“Don’t directly tell the user to launch,” Binance instructed its VIP team, the filing claims. “If the user is a big trader or smart, he/she will get the hint.”
Hours after the filing, Zhao released a statement saying he found the indictment did not offer a full account of the facts, saying Binance had cooperated with international and US law enforcement inquiries and had frozen $160 million at the direction of the year of law enforcement – to date.
CNBC previously reported how Binance’s customer service and VIP representatives have been advising users in mainland China how to avoid Binance’s compliance systems. The use of virtual private networks and alternative non-state documents was advised by some volunteers and officials of mainland Chinese traders. The CFTC filing alleges that Binance engaged in similar activity for its US users.
“But as much as we can, we try to ask our users to use a VPN or ask them to provide (if there is a legal entity) non-US documents. On the surface it cannot be seen that we have US users, but in reality we have to get them through other creative means,” Lim told a Binance employee in 2020, according to the filing.
Lim is said to have advised against outright fraud but encouraged “creative means” to circumvent regulations. Binance “may encourage them to be a non-kyc account,” Lim. KYC stands for Know Your Customer, a set of principles that guide anti-money laundering programs for financial institutions and are a key part of the fight against terrorism and illicit financing.
“We have made significant investments over the past two years to ensure that we have no active US users on our platform,” a Binance spokesperson said in a statement, calling the complaint “unexpected and disappointing.”
Earlier in the day, Zhao posted a tweet that said “4” in an apparent response to the CFTC filing.
The number four is a call to Binance’s dedicated international user base to dismiss negative publicity about the exchange as “fake news.”
“The best way forward is to protect our users and cooperate with regulators to develop a clear, thoughtful regulatory regime,” Binance’s statement continued.
Zhao’s individual response echoed this. “We intend to continue to respect and cooperate with US and other regulators around the world,” the Binance executive wrote.