B.inance is the world’s largest cryptocurrency exchange and a cornerstone of the $1 trillion digital asset market. It has 128 million customers, handles $65 billion in daily transactions, and its business partners include Cristiano Ronaldo, Italy’s Lazio soccer team, and TikTok megastar Khaby Lame. So when a US regulator announced last week that it was suing Binance for “willful evasion of US law”, it was a significant moment for a sector still reeling from the FTX collapse.
The Commodity Futures Trading Commission (CFTC) filed civil enforcement action in federal court in Chicago, seeking punishments that include fines and permanent business bans. It is suing Binance’s Canadian founder and CEO, Changpeng Zhao, and three entities that operate Binance’s global trading platform for numerous alleged violations of its regulations and the Commodity Exchange Act. Former Binance chief compliance officer Samuel Lim is also being sued.
The CFTC alleges that Binance traded crypto-related derivatives with US-based clients despite not having regulatory permission and saying in 2019 that it would no longer serve US clients. Binance said that the complaint was “unexpected and disappointing” since it had already invested an additional $80 million to ensure it complies with regulators around the world.
Running to 74 pagesThe complaint is a long read, but worth it for its claims about the unconventional way Binance operates, its attitude toward regulation, its clients (who were allegedly suggested by high-level figures to include terrorists), and how their high-level operators were apparently willing to put this into practice. all in writing.
Private conversations exposed
It is clear from the evidence presented that the CFTC has access to confidential material, including the contents of Zhao’s phone. Howard Fischer, a partner at New York law firm Moses & Singer, says the material could have been provided to the CFTC by Binance, another government agency could be sharing the evidence with the CFTC, or the material could have been provided by a member. of the company . “The CFTC’s allegations are shocking enough on their own,” says Fischer. “If they have an inside person who can contextualize and provide communications, that’s even worse for Binance and CZ. [Changpeng Zhao]. While these are just allegations, they are of course quite serious and, if true, put Binance in significant danger.”
Warnings about Hamas
The CFTC claims that Binance knew that it had facilitated potentially illegal activities, including with the Islamic militant group Hamas. The complaint says that Lim had received information in February 2019 “about Hamas transactions” on Binance and told a colleague that terrorists typically send “small sums” as “large sums constitute money laundering.” Lim’s colleague replied: “I can barely buy an AK47 with 600 dollars.”
In a conversation about certain Binance clients, including some from Russia, Lim said in February 2020: “I like it, come on. They are here for the crime.” Binance’s money laundering reporting officer agreed that “we see the bad, but we close our eyes.”
On another exchange in July 2020, a Binance employee wrote to Lim asking if a client whose transactions were “very closely associated with illicit activity” should be blocked or if it was in the class of cases “where we would like to warn the user that they can create a new account.” Lim’s response included: “He can come back with a new account, but this current one has to go, it’s tainted.”
Avoided customer checks
The complaint details a loophole to get around KYC [Know Your Customer] procedures. Customers could bypass the KYC process if they withdrew less than two bitcoins’ worth in a day, an amount equivalent to $22,000 in July 2019.
The CFTC cites a 2020 chat between Lim and a Binance colleague discussing removing the loophole: “If Binance forces mandatory KYC, [rival digital asset exchanges] he will be VERY VERY happy.”
The complaint quotes Lim as saying in an October 2020 chat that Binance’s compliance environment has become “sending email and no action… for media capture.”
The CFTC also cites a message from Lim in December 2019 stating that Binance.com “doesn’t even do AML [anti-money laundering] evaluation of names / evaluation of sanctions”.
He goes on to quote Binance’s money laundering reporting officer complaining that he had to “write a bogus annual report for the Binance wtf board of directors” after a company that had partnered with Binance requested a compliance audit.
‘Web opaque’
Binance is best known through its Binance.com platform, but the CFTC’s complaint refers to a structural complexity now commonly associated with the cryptocurrency industry, describing it as an “opaque network of corporate entities.”
The CFTC says that Binance’s organizational chart includes more than 120 entities incorporated in jurisdictions around the world, some with “combined funds.”
It alleges: “Binance’s reliance on a maze of corporate entities to operate the Binance platform is deliberate; it is designed to hide ownership, control, and location.”
The complaint is directed at three such entities, collectively referred to as Binance or the Binance platform.
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Avoid headquarters and regulation
The Binance platform has yet to establish a global headquarters where it can be regulated. Of the three aforementioned entities, the first, Binance Holdings Limited, owns intellectual property, including its trademarks, and is registered in the tax haven of the Cayman Islands. The other two, Binance Holdings (IE) Ltd, which in turn directly or indirectly owns 24 other Binance entities, and Binance (Services) Holdings Ltd, which owns Cayman-based Binance Holdings and at least 40 other entities, are registered In Ireland. . None of the three are registered with the CFTC.
Zhao’s claim that Binance’s headquarters is wherever he is is a deliberate attempt to avoid regulation, the complaint says. He cites an internal meeting in June 2019 in which Zhao explains why Binance operates through entities in numerous jurisdictions. He says it’s to “keep countries clean [of violations of law] … This is the main reason why .com is not going anywhere.”
Alleged illicit US customer base
In 2019, Binance announced that its global platform would no longer trade with US-based clients, as it prepared for the launch of Binance. USA: An affiliated company that is not part of the complaint. The heart of the CFTC’s complaint is its claim that this did not happen. It alleges that much of Binance’s trading volume and profitability comes from “extensive solicitation” and access to US clients. These clients entered into commodity derivatives transactions, betting on the prices of cryptocurrencies, for which Binance lacked CFTC approval.
The CFTC says: “Defendants have disregarded applicable federal laws while building Binance’s US customer base because it has been profitable for them to do so.” This included ignoring laws that require controls to prevent money laundering and terrorist financing.
Active Help Claims for Violations of US Law
The complaint claims that Zhao, Lim, and other senior Binance managers “actively facilitated” violations of US law by helping US clients evade their own compliance checks. For example, I would advise US customers to transact via virtual private networks (VPNs) to hide their location; allow clients to trade on Binance.com without providing proof of their identity and location; and telling high-spending clients to open Binance accounts under newly incorporated shell companies.
The CFTC quotes Binance posting a VPN beginner’s guide on its website, with Lim explaining: “CZ wants people to have a way to know how to use VPN [a Binance functionality] … it’s a business decision.”
Trading against your own users
The CFTC claimed that Zhao is the direct or indirect owner of 300 separate Binance “internal accounts” that have engaged in proprietary trading, using Binance’s own money, on Binance. It also refers to companies directly or indirectly owned by Zhao and says that he, too, traded on Binance through two individual accounts. The CFTC says that Binance does not disclose that it is trading on its own markets, or against its own clients, in its terms of use.
VIP benefits
VIP clients, or clients who generate significant income in Binance trading fees, receive immediate warning of any law enforcement activity related to their account, according to the CFTC.
Per Zhao’s instructions, the VIP team was told to contact users through “all available means” to inform them that their account had been frozen or unfrozen at the request of law enforcement. An internal policy on law enforcement requests, created by Lim but led by Zhao, reportedly states: “Don’t directly tell the user to execute, just tell them their account has been unfrozen and XXX investigated it. If the user is a great trader or a smart one, he will get the hint”.
The CFTC says bypassing compliance checks for US VIP clients was formalized in a policy called “VIP management” in which clients could present “new” KYC documentation associated with a shell company incorporated outside the US. USA
One US VIP client, an anonymous New York-based outfit called Trading Firm B, was reportedly told it would benefit from a 5-10 millisecond advantage over non-VIP rivals. Other benefits included reduced trading fees and permission to exceed Binance order message limits.
