The Commodity Futures and Trading Commission has filed a grievance against Binance, its co-founder Changpeng Zhao and its former chief trading officer, as filed Monday in an Illinois federal court.
The filing could turn the operations of the exchange the wrong way up and is potentially just the primary salvo in a regulatory crackdown with the world’s largest crypto exchange. As well as to reimbursement and any monetary costs, the CFTC’s motion asked the court to impose further reliefs, including a trade and registration ban.
The regulator claimed that Binance, Zhao, and Lim violated eight core provisions of the Commodity Exchanges Act, including provisions requiring inspections “geared toward stopping and detecting money laundering and terrorist financing.”
Just days before the CFTC filed its application, CNBC reported how Binance employees worked to undermine the exchange’s compliance checks in China, using a number of the same techniques that the CFTC says Binance is targeting US users.
Zhao and Lim allegedly “actively cultivated lucrative and commercially necessary VIP clients, including institutional clients, positioned in the US,” the grievance reads.
“Today’s enforcement motion demonstrates that there is no such thing as a location, or alleged lack of location, that may prevent the CFTC from protecting US investors. I even have made it clear that the CFTC will proceed to use all of its powers to detect and stop misconduct in a volatile and dangerous digital asset market,” said CFTC Chairman Rostin Benham in statement.
Binance and Zhao took steps to deliberately conceal the situation of the exchange’s subsidiaries, the regulator said. This was part of a bigger strategy that Zhao said was an attempt to “keep countries clean,” the regulator said within the filing.
A key a part of Binance’s alleged efforts to generate fees and attract US users was the exchange’s High Net Value VIP program, as stated within the CFTC filing.
“Binance is aware of the identity and geographic location of its VIPs as Binance monitors its sources of trading volume and fee-based revenue as a matter after all when conducting its operations,” according to the CFTC.
Binance VIPs were offered special privileges when law enforcement prosecuted them or had their assets frozen, the CFTC claims, claiming that Binance is warning VIPs or suggesting they take their assets off the platform.
“Don’t directly tell the user to run away,” Binance instructed its VIP team, according to the report. “If the user is an enormous trader or a sensible one, they are going to get a tip.”
A number of hours after submitting the request, Zhao issued a statementsaying that he stated that the allegation didn’t present a full statement of the facts, saying that Binance had cooperated with international and US law enforcement inquiries and had frozen $160 million on the behest of law enforcement because the starting of the 12 months.
CNBC previously reported how Binance customer support and VIP representatives advised users in mainland China on how to circumvent Binance’s compliance systems. Some volunteers and staff advised mainland Chinese traders to use virtual private networks and alternative non-state documents. The CFTC filing claims that Binance has been conducting similar activity for its users within the US.
“But to the most effective of our ability, we try to ask our users to use a VPN or ask them to provide (if there may be an entity) non-US documents. It isn’t obvious at first glance that we’ve US users, but we should always actually get them through other creative means,” Lim told a Binance worker in 2020, according to the documentation.
Lim allegedly advised against overt cheating but encouraged “creative ways” to evade the rules. Binance “may encourage them to be a non-kyc account,” Lim. KYC stands for Know-your-Customer, a set of rules that guide anti-money laundering programs for financial institutions and is a key element within the fight against terrorism and illicit financing.
“Now we have made significant investments over the past two years to ensure there are not any energetic US users on our platform,” a Binance spokesperson said in a press release, calling the grievance “unexpected and disappointing.”
earlier that day, Zhao tweeted “4” in an obvious response to the CFTC’s filing.
Number 4 is A call to Binance’s dedicated international user base to dismiss negative publicity concerning the exchange as “fake news”.
“The easiest way forward is to protect our users and work with regulators to develop a transparent, thoughtful regulatory regime,” Binance’s statement continues.
Zhao’s individual response repeated it. “We intend to proceed to respect and cooperate with U.S. and other regulators world wide,” Binance CEO wrote.