- The CFTC alleged that Binance violated federal law to solicit U.S. users for millions in revenue, a potentially existential threat to the exchange.
- Binance, its CEO Changpeng Zhao, and its former compliance officer, Samuel Lim, are all named in the complaint.
- CNBC previously reported on how Binance engages in similar activity to solicit mainland Chinese users.
The Commodity Futures and Trading Commission filed a complaint against crypto exchange Binance, its co-founder, Changpeng Zhao, and its former chief compliance officer, Samuel Lim, alleging that Binance actively solicited U.S. users and subverted the exchanges own "ineffective compliance program," according to a filing in Illinois federal court Monday.
The filing has the potential to upend the exchange's operations and is potentially just the first salvo in a regulatory crackdown on the world's largest crypto exchange. Beyond disgorgement and any monetary costs, the CFTC filing asked the court to impose further relief, including trading and registration bans.
The regulator alleged that Binance, Zhao, and Lim violated eight core provisions of the Commodity Exchange Act, including laws that require controls "designed to prevent and detect money laundering and terrorism financing."
Get Boston local news, weather forecasts, lifestyle and entertainment stories to your inbox. Sign up for NBC Boston’s newsletters.
Just days prior to the CFTC filing, CNBC reported on how Binance employees worked to subvert the exchange's compliance controls in China, using some of the same techniques that the CFTC alleges Binance to solicit U.S. users.
Zhao and Lim allegedly "actively cultivated lucrative and commercially important 'VIP' customers, including institutional customers, located in the United States," the complaint said.
"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 chair Rostin Benham said in a statement.
Binance and Zhao took steps to purposefully obscure where the exchange's subsidiaries were located, the regulator said. This was part of a larger strategy that Zhao said was an effort to "keep countries clean," the regulator alleged in the filing.
A key part of Binance's alleged effort to generate fees and solicit U.S. users was the exchange's VIP program, for high net worth individuals, the CFTC filing said.
"Binance is aware of its VIPs' identities and geographic locations because Binance monitors its sources of transaction volume and fee-based revenue as a matter of course in conducting its operations," the CFTC complaint alleges.
Binance's VIPs were offered special privileges when law enforcement agencies pursued them or froze their assets, the CFTC alleged, claiming Binance gave VIPs a heads up or suggested they take their assets off the platform.
"Do not directly tell the user to run," Binance instructed its VIP team, the filing alleged. "If the user is a big trader, or a smart one, he/she will get the hint."
Hours after the filing, Zhao released a statement, saying that he found the allegation didn't offer a complete representation of the facts, saying that Binance cooperated with international and U.S. law enforcement queries and had frozen $160 million at the direction of law enforcement year-to-date.
CNBC previously reported on how Binance's customer service and VIP representatives counseled users in mainland China on how to evade Binance's compliance systems. The use of virtual private networks and alternative non-state documents was advised by some volunteers and employees to mainland Chinese traders. The CFTC filing alleges that Binance engaged in similar activity for its U.S. users.
"But as best we can we try to ask our users to use VPN or ask them to provide (if there are an entity) non-US documents. On the surface we cannot be seen to have US users but in reality we should get them through other creative means," Lim told a Binance employee in 2020 according to the filing.
Lim allegedly advised against outright fraud but encouraged "creative means" to sidestep regulations. Binance "can encourage them to be a non kyc account," Lim. KYC stands for know-your-customer, a set of principles that guide anti-money laundering programs for financial institutions and are a key part of fighting terrorist and illicit financing.
"We have made significant investments over the past two years to ensure we do not have US users active on our platform," a Binance spokesperson said in a statement, calling the complaint "unexpected and disappointing."
Earlier in the day, Zhao posted a tweet that said "4" in an apparent response to the CFTC filing.
The number four is a call to Binance's devoted international userbase to dismiss negative publicity about the exchange as "fake news."
"The best path forward is to protect our users and to collaborate with regulators to develop a clear, thoughtful regulatory regime," the Binance statement continued.
Zhao's individual response echoed that. "We intend to continue to respect and collaborate with US and other regulators around the world," the Binance CEO wrote.