CFTC Files Lawsuit Against Binance and CEO for Evading U.S. Regulations

Binance Faces Legal Battle Over Unregistered Crypto Derivatives

The U.S. Commodity Futures Trading Commission (CFTC) has sued Binance, a leading crypto exchange, and its founder Changpeng "C.Z." Zhao for allegedly offering unregistered crypto derivatives products in the U.S., violating federal law. The lawsuit was filed in the U.S. District Court for the Northern District of Illinois on Monday.

Binance Accused of Encouraging VPN Use to Evade Compliance Controls

The suit claims that under C.Z.'s leadership, Binance directed its employees to spoof their locations using virtual private networks (VPNs) to operate a derivatives trading operation in the U.S. The company offered trades for cryptocurrencies such as bitcoin (BTC), ether (ETH), litecoin (LTC), tether (USDT), and Binance USD (BUSD), which were referred to as commodities.

Crypto Market Reacts to Binance Lawsuit

Following the lawsuit filing, the price of bitcoin dropped by around $1,000, and Binance's exchange token, BNB, fell by about 3%. Crypto-related stocks also experienced declines after the suit was published.

CFTC Claims Binance's Complex Structure Hides Operations

The CFTC alleges that Binance, which has a U.S. affiliate in Binance.US, deliberately created a complex system of corporate entities to obscure its ownership, control, and location. The filing stated that "Zhao answers to no one but himself" and accused Binance of willful evasion of U.S. law, citing internal chats and emails.

Allegations of Binance Encouraging VPN Use for U.S. Customers

The suit further alleges that Binance instructed U.S. customers to use VPNs to evade restrictions and conceal their location. It claims that Binance was consistently aware of and encouraged VPN use by U.S. customers. It even directed important clients like trading firms to set up shell companies offshore to avoid restrictions.

Binance Aware of U.S. Customer Base Proportion

According to the filing, Binance was fully aware of the scale of its U.S. business, with internal monthly reports indicating that, as of June 2020, 17.8% of customers were based in the U.S., even after controls had been implemented.

Internal Chats Reveal Binance's Attempts to Hide U.S. User Activity

The CFTC filing includes internal chats between Binance employees, such as the exchange's former Chief Compliance Officer, Samuel Lim, where he appeared to direct an employee to ask U.S. customers to hide their location. Lim allegedly said, "On the surface, we cannot be seen to have U.S. users, but in reality, we should get them through other creative means."

CFTC Seeks Penalties and Bans for Binance's Alleged Violations

The CFTC is asking the court to impose penalties on Binance, including enjoining the company from further violations of the Commodity Exchange Act, civil monetary penalties, trading and registration bans, and disgorgement.

Binance Likely Anticipated Legal Action and Fines

Binance expected the lawsuit. In February, its Chief Strategy Officer admitted that the exchange was being investigated by multiple regulators and anticipated paying fines to "make amends" for past regulatory violations.

U.S. Senators Express Concerns Over Binance's Legal Operations

Earlier this month, U.S. senators, including Sen. Elizabeth Warren (D-Mass.), sent a letter to C.Z., accusing Binance of facilitating over $10 billion in payments to criminals and sanctions evaders, and calling the company "a hotbed of illegal financial activity." The lawmakers demanded information about the company's structure and balance sheets, expressing concerns over "increasingly disturbing allegations regarding the legality of its operations."