Over the past few years, US regulatory bodies have adopted a stringent approach towards cryptocurrency businesses in relation to illegal offerings and non-compliance with regulatory frameworks. Binance, a prominent global cryptocurrency exchange established in Shanghai in 2017, has been accused by the Commodity Futures Trading Commission (CFTC) of intentionally circumventing US regulatory guidelines.
The CFTC filed a lawsuit against the cryptocurrency firm, its founder Changpeng Zhao, and its former top compliance executive for willfully evading US laws while pursuing a deliberate strategy of regulatory arbitrage for their commercial gain.
Zhao, a billionaire originally from China who relocated to Canada at the age of 12, characterized the CFTC's complaint as 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," Zhao stated.
The CFTC also alleged that Samuel Lim, Binance's former Chief Compliance Officer, aided and abetted the company's violations. Lim did not respond to messages and calls.
Transparency issues
Binance is one of the world's largest cryptocurrency exchanges where users can buy, sell, and trade various cryptocurrencies, including Bitcoin.
The trading activity on Binance.com, its primary platform, reached a colossal figure of $23 trillion in transactions last, according to data from CryptoCompare. Meanwhile, the trading volumes on the platform experienced an unprecedented surge, with a record-breaking $34 trillion transacted in 2021. That's according to Changpeng Zhao's statement from the previous year. This marked a substantial increase compared to the $23 trillion worth of trades processed in 2020.
Operating under a holding company headquartered in the Cayman Islands, the cryptocurrency firm has never disclosed the location of its primary exchange. The CFTC filed charges against the holding company and two other Binance subsidiaries.
According to the government agency, the crypto exchange firm did not mandate customers to submit identity verification before trading and neglected to establish fundamental compliance protocols aimed at preventing and detecting terrorist financing and money laundering.
The complaint detailed how Binance actively sought to keep US customers, even after the company had partnered with a purportedly independent American firm to launch a US exchange in 2019, ostensibly to comply with US regulations.
Compliance control breach
Despite Binance's public statement restricting customers from the United States from trading on its platform, the CFTC claimed that Binance instructed its high-value US-based "VIP customers" on methods to bypass its compliance controls.
Moreover, the exchange maintained a clandestine US customer base that was concealed from certain upper echelons of management. The complaint claimed that in October 2020, Zhao directed the digital asset platform's staff to change the US value in certain data fields within its internal database to UNKWN.
According to the government agency, Binance conducted trades on its own platform through approximately 300 "house accounts" owned directly or indirectly by Zhao. This activity was not disclosed in the firm's public terms of use or elsewhere. The CFTC also noted that these house accounts were exempt from Binance's "insider trading" policy.
A company executive informed the Wall Street Journal in February that the crypto trading platform was preparing to settle the US investigations with fines.
The CFTC is seeking financial penalties, the forfeiture of gains acquired through improper means, and permanent bans on trading and registration.
The ongoing crackdown on cryptocurrency firms by US regulatory authorities for non-compliance with guidelines and illegal offerings underscores the significance of adhering to regulatory requirements in the crypto industry. Binance's situation serves as a stark reminder of this importance and the potential repercussions for those who fail to comply.