US agency sues top crypto exchange Binance and CEO, seeks permanent trading bans

The US Commodity Futures Trading Commission (CFTC) yesterday sued Binance, the world's largest cryptocurrency exchange, saying the company and its founder, Changpeng Zhao, are charged with "willful evasion of federal law and operating an illegal digital asset derivatives exchange."

Binance committed "numerous violations of the Commodity Exchange Act and CFTC regulations," the agency said. In a press release announcing the civil enforcement action, the agency said its litigation "seeks disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations."

The CFTC alleges that the defendants operated the trading platform "through an intentionally opaque common enterprise, with Zhao at the helm as Binance's owner and chief executive officer." The agency said the defendants "chose to knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit." Samuel Lim, Binance's former chief compliance officer, was charged with aiding and abetting the violations.

CFTC Chairman Rostin Behnam said, "For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance. This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of US law."

A Reuters article said Binance was founded in Shanghai in 2017 but operates with "a holding company based in the Cayman Islands," and "has never revealed the location of its core exchange. The CFTC charged the holding company and two other Binance units."

Binance finds complaint "unexpected and disappointing"

Zhao reportedly said last year that Binance processed $34 trillion worth of trades in 2021. Binance trading totaled $23 trillion in 2022, Reuters wrote, citing data provider CryptoCompare.

Zhao issued a response on the Binance website, saying the CFTC complaint is "unexpected and disappointing... Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint." While Binance is "not perfect, we hold ourselves to a high standard, often higher than what existing regulations require," he wrote.

The CFTC's complaint, filed in US District Court for the Northern District of Illinois, said US law "requires that, subject to certain exemptions, commodity derivative transactions must be conducted on exchanges designated by, or registered with, the CFTC." The agency noted that derivatives are "financial instruments such as futures, options, or swaps that derive their value from something else," such as a benchmark rate, a physical commodity like oil or wheat, or--as in the Binance case--digital asset commodities like cryptocurrencies.

Binance did not register with the CFTC, the agency said. "Zhao, Lim, and other members of Binance's senior management have failed to properly supervise Binance's activities and, indeed, have actively facilitated violations of US law, including by assisting and instructing customers located in the United States to evade the compliance controls Binance purported to implement to prevent and detect violations of US law," the complaint said.

The CFTC complaint said Binance "instructed US customers to use virtual private networks (VPNs) to obscure their location" and "allowed customers that had not submitted proof of their identity and location to continue to trade on the platform long after announcing such conduct was prohibited." The complaint said Binance directed VIP customers and "key employees who control trading decisions, trading algorithms, and other assets all located in the United States to open Binance accounts under the name of newly incorporated shell companies to evade Binance's compliance controls."