Decrypt’s Art, Fashion, and Entertainment Hub.
The leading cryptocurrency exchange by trading volume, Binance, and its CEO Changpeng Zhao were sued Monday by the Commodity Futures Trading Commission (CFTC).
The U.S. regulator alleged that Zhao and his company violated trading and derivatives rules, according to a lawsuit filed by the CFTC in a Chicago federal court.
The two largest cryptocurrencies by market capitalization, Bitcoin and Ethereum, fell on the news, according to CoinGecko. Over the past hour, Bitcoin had fallen 3.3% to $26,800, and Ethereum had stumbled 2.9% to under $1,700.
Zhao responded to the lawsuit's announcement by tweeting “4,” alluding to a tweet he made in January that connects the number to “Ignore FUD, fake news, attacks, etc.”
— CZ 🔶 Binance (@cz_binance) March 27, 2023
The lawsuit alleges that Binance has operated a facility for trading digital asset derivatives in the U.S. since at least July 2019, allowing residents to trade futures, swaps, and options on cryptocurrencies including Bitcoin, Ethereum, and Litecoin.
Binance also made attempts to grow its footprint in the U.S. despite claims that the exchange would prevent U.S. residents from accessing Binance’s platform, the lawsuit claims.
“Binance has taken a calculated, phased approach to increase its United States presence despite publicly stating its purported intent to ‘block’ or ‘restrict’ customers located in the United States from accessing its platform,” it states.
Oh boy https://t.co/2JnbfirRrp
Case is up and it's bad.
This is the CFTC attempting to strike *fatal* blow to Binance, and at first read through... I think they actually have really strong chances here of succeeding in toppling the Binance empire.
— Adam Cochran (adamscochran.eth) (@adamscochran) March 27, 2023
Though Binance, Zhao, and other employees at the exchange knew they were required to register Binance with the CFTC after soliciting customers in the U.S., the lawsuit claims they have all “chosen to ignore those requirements and undermined Binance’s ineffective compliance program.”
One of the ways that Binance undermined its compliance program was by having its officers, employees, and agents assist users in using a virtual private network (VPN) to obscure their location. CNBC reported last week that the exchange played a role in helping people bypass restrictions in China to access the exchange.
The lawsuit went on to claim that Binance’s reluctance to disclose the location of its executive offices is reflective of the exchange’s attempts to avoid regulation. It states that Binance failed to comply with laws designed to detect and prevent money laundering and terrorist financing.
“Binance has never been registered with the CFTC in any capacity and has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets,” the lawsuit states. “Unless restrained and enjoined by this Court, Defendants are likely to continue to engage in the acts and practices alleged in this Complaint.”
The lawsuit includes messages sent via the encrypted messaging app Signal that were collected from Zhao’s telephone. It added that Zhao instructed Binance representatives to use Signal to communicate with customers based in the U.S.
“The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose—over and over—to place profits over following the law,” acting director of the division of enforcement at the CFTC Gretchen Lowe said in a press release. “The CFTC and its Enforcement Division will pursue those digital asset platforms and individuals who flout and actively attempt to circumvent CFTC regulatory requirements.”
As part of its lawsuit, the CFTC seeks to compel Binance to repay allegedly ill-gotten gains that stem from the misconduct it is accused of. It also wants Binance to pay civil penalties and accept bans on trading as well as its ability to register within the U.S.