Crypto giant Binance, CEO hit with US charges for breaking regulatory rules
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Binance and its CEO and founder Zhao Changpeng were sued for operating an alleged “illegal” exchange.
PHOTO: REUTERS
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Washington - A top United States markets regulator on Monday charged the world’s biggest crypto exchange Binance and its founder Zhao Changpeng with multiple violations, in another move by Washington against the once high-flying sector.
Binance and Zhao, who is also its chief executive officer, were sued by the US Commodity Futures Trading Commission (CFTC) for operating what the regulator alleged were an “illegal” exchange and a “sham” compliance programme.
The regulator’s lawsuit comes amid a broader and increasingly high-profile crackdown on crypto companies.
For years, US prosecutors and civil investigators have targeted crypto firms for illegal offerings and failures to comply with rules designed to prevent illicit activity.
But the pace of such government activity has surged recently.
The CFTC said in its complaint on Monday that from at least July 2019 to the present, Binance “offered and executed commodity derivatives transactions on behalf of US persons”, in violation of US laws.
Binance’s compliance programme has been “ineffective” and the firm, under the direction of Zhao, told employees and customers to circumvent compliance controls, the CFTC said, citing a number of practices first reported by Reuters in a series of investigations into the exchange in 2022.
The CFTC also accused Binance’s former chief compliance officer Samuel Lim of “aiding and abetting” Binance’s violations.
Lim did not immediately respond to calls and messages from Reuters.
CFTC chairman Rostin Behnam said in a statement that Binance executives knew for years “they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance”.
The CFTC is responsible for oversight of commodities and derivatives markets, including for Bitcoin.
Firms such as brokers that facilitate US customers’ trading of such products are required to be registered with the agency.
Reuters reported in December that the US Justice Department had been investigating Binance since 2018 for possible money-laundering and sanctions violations.
Binance has processed at least US$10 billion (S$13.3 billion) in payments for criminals and companies seeking to evade US sanctions, Reuters has found.
Bitcoin plunged below US$27,000 after the news, dropping to US$26,525 on the Coinbase exchange.
The token was trading at US$27,078.27, down 3.2 per cent at 8.40am.
Binance’s cryptocurrency BNB, the world’s fourth-largest by market size, dropped around 4 per cent on the news.
Zhao, a billionaire who was born in China and moved to Canada at the age of 12, has not yet directly addressed the CFTC’s allegations.
In a tweet on Monday afternoon, he wrote “4” – a reference to a previous post listing his “Dos and Don’ts” for 2023.
The fourth item on the list was “Ignore FUD, fake news, attacks,” using an acronym for “fear, uncertainty and doubt” often used in crypto in relation to news perceived as negative.
‘Pirate ship’
Founded in Shanghai in 2017, Binance sits at the heart of the global crypto industry.
Its core Binance.com exchange processed trades worth about US$23 trillion in 2022, according to data provider CryptoCompare.
Trading volumes hit US$34 trillion in 2021, Zhao said in 2022.
With a holding company based in the Cayman Islands, Binance has never revealed the location of its core exchange.
The CFTC charged the holding company and two other Binance units.
Binance did not require customers to submit information verifying their identity before trading and “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering”, the CFTC said.
The CFTC’s complaint detailed Binance’s efforts to retain US customers even after the company, in partnership with a purportedly independent American firm, launched a US exchange in 2019 to serve American customers in compliance with US regulations.
Reuters previously reported that this American firm, BAM Trading, was in fact controlled by Zhao and managed by Binance as a de-facto subsidiary.
The CFTC said when Zhao hired BAM’s first CEO, he “described Binance as a pirate ship and explained that he wished for Binance.US to be a navy boat”.
VIP customers
Though Binance’s global business publicly said it was restricting US customers from trading on its platform, the CFTC said Binance told its commercially valuable US-based “VIP customers” how to evade its compliance controls.
Zhao kept information reflecting Binance’s US customer base secret from some senior managers, CFTC said.
In October 2020, Zhao directed Binance personnel to replace the US value for some data fields in Binance’s internal database with “UNKWN”, it said.
Binance traded on its own platform through some 300 “house accounts”, directly or indirectly owned by Zhao, though the exchange had not disclosed this activity in its public terms of use or elsewhere, according to CFTC.
The house accounts were exempt from Binance’s “insider trading” policy, the CFTC said.
The CFTC said it is seeking monetary penalties, disgorgement of ill-gotten gains and permanent trading and registration bans. REUTERS. AFP
