The US Commodity Futures Trading Commission (CFTC) has sued Binance and its founder, Changpeng Zhao, alleging that the crypto exchange offered US customers unregistered crypto derivatives products and used VPNs to evade compliance controls.
The U.S. Commodity Futures Trading Commission (CFTC) has recently filed a lawsuit against cryptocurrency exchange Binance and its founder, Changpeng Zhao, alleging that 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, claims 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 further alleges that the company, under Zhao’s leadership, directed its employees to spoof their locations through the use of virtual private networks (VPNs).
The CFTC has charged 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 allegations made by the CFTC are serious and have already had a significant impact on the cryptocurrency market. The price of bitcoin fell around $1,000 after the lawsuit was first filed, while Binance’s exchange token BNB fell about 3%. Crypto-related stocks also fell after the suit was published.
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. The lawsuit alleges that “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,” adding that “Zhao answers to no one but himself.”
The lawsuit further alleges that Binance directed customers in the U.S. to use a variety of methods to evade restrictions on U.S.-based customers. For instance, the company allegedly instructed U.S. customers to evade such controls by using virtual privacy networks to conceal their true location. VPNs have the effect of masking an internet user’s true IP address, and Binance has consistently been aware of and encouraged the use of VPNs by U.S. customers.
The company even 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 and was fully aware of the scale of its U.S. business.
According to the filing, Binance knew that U.S. customers continued to comprise a substantial proportion of Binance’s customer base, 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.
Binance denies the allegations and says that it has “made significant investments over the past two years to ensure we do not have U.S. users active on our platform.” The company claims to have grown its compliance team from 100 to 750 people and spent $80 million on know-your-customer and other compliance vendors and tools.
The spokesperson for Binance stated that the lawsuit is unexpected and disappointing, as the company has been working collaboratively with the CFTC for more than two years.
However, the company intends to continue to collaborate with regulators in the U.S. and around the world. The spokesperson added that the best path forward is to protect users and collaborate with regulators to develop a clear, thoughtful regulatory regime.
Binance has now implemented 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.