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Regulator accuses Binance of flouting commodity trading rules

The secretive company operates the world's largest cryptocurrency exchange in terms of daily trade volume.

CHICAGO (CN) — The U.S. Commodity Futures Trading Commission filed a federal lawsuit Monday against cryptocurrency exchange operator Binance and its founder and CEO, accusing them of several regulatory violations.

The 74-page suit in Chicago federal court claims that Changpeng Zhao, a Canadian citizen currently living in Dubai, has directed three Binance entities to repeatedly violate U.S. commodity trading regulations since at least 2019. Binance's former chief compliance officer, Samuel Lim, also named as a defendant, allegedly aided Zhao in dodging the regulations.

Their supposed infractions include deliberately choosing not to enforce anti-money laundering controls on trades, instructing customers on how to circumvent U.S. exchange law, and failing to register with the CFTC, just to name a few. The complaint even alleges that Binance helped facilitate transactions by terrorist organizations, although it offers no definition of "terrorist" in context.

Binance did all this, and facilitated normal derivatives transactions, without ever officially registering with the CFTC, the agency claims.

“Today’s enforcement action demonstrates that there is no location, or claimed lack of location, that will prevent the CFTC from protecting American investors. I have been clear that the CFTC will continue to use all of its authority to find and stop misconduct in the volatile and risky digital asset market,” CFTC Chairman Rostin Behnam said in a press release accompanying the lawsuit.

Binance claims to operate the world's largest cryptocurrency exchange by volume of daily trades, with its annual revenue hitting about $12 billion by the end of 2022. Though Zhao founded the company in Shanghai in 2017, it moved out of China ahead of the Chinese government banning cryptocurrency exchanges in September of that year. Its primary servers are now located in Tokyo, but the company keeps the exact location of all its global servers confidential. Its ties to the U.S. crypto market are similarly murky.

The company has not officially operated in the U.S. since November 2019, when it stopped providing access to U.S. customers amid increased scrutiny from American market regulators. However, an affiliate crypto exchange called Binance.US still operates in all but six states, and the CFTC claims that as of August 2020, 16% of Binance accounts were still held by U.S. customers. A Reuters investigation last month also alleged that in the first quarter of 2021, Binance moved $400 million from a Binance.US account at the California-based Silvergate Bank to Merit Peak Ltd., a trading firm owned by Zhao in the Cayman Islands.

This inscrutability lies at the base of the CFTC's complaint against Zhao, Lim and Binance. Despite Binance's official barring of U.S. customers in 2019, the suit alleges that the company has since instructed U.S. accountholders to use virtual private networks, or VPNs, to mask their geographical location while using the platform. In February 2022, the company also reported that it had only verified 30–40% of its users with industry-standard "know your customer" procedures.

"In September 2019, Binance claimed it had begun to block [U.S.] customers based on their internet protocol address," the complaint states. "In reality, Binance simply added a pop-up window on its website that appeared when customers attempted to log in from an IP address associated with the United States. The pop-up did not block customers... it just asked them to self-certify that they were not a U.S. person before accessing the platform by clicking a button on the pop-up."

The suit is also colored by international politics, besides a lack of transparency and an alleged effort to duck financial regulations. Over the last several years Binance has faced legal trouble not only in the U.S, but in several countries that are politically and commercially aligned with the U.S., including the United Kingdom, Japan and the Netherlands. At the same time, the company has allegedly built ties with the Russian government, with which the U.S. and its NATO allies are currently engaged in a proxy war over Ukraine. The suit filed in Chicago on Monday claims Binance has turned a blind eye to Russian customers who have used cryptocurrency to commit unspecified crimes.

"Like come on. They are here for crime,” the suit alleges Lim said of Russian users in an internal chat in February 2020. It also claims that Binance’s money laundering reporting officer agreed at the time that, “we see the bad, but we close 2 eyes.”

“[I] need to write a fake annual MLRO report to Binance board of directors wtf,” the suit claims the unnamed MLRO officer wrote to Lim in October 2020.

In a prepared statement, Binance said the lawsuit was "unexpected and disappointing," but that it would continue to work with global regulators to ensure users' security.

"The complaint filed by the CFTC is unexpected and disappointing as we have been working collaboratively with the CFTC for more than two years," The statement read. "Nevertheless, we intend to continue to collaborate with regulators in the U.S. and around the world."

In his own reaction to the suit on Monday morning, Zhao simply tweeted the number 4. In a tweet he put out in January, Zhao told his Twitter followers that a "4" tweet would reference his continued focus on "1. Education 2. Compliance 3. Product & Service 4. Ignor[ing] FUD, fake news, attacks, etc."

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