The top U.S. derivatives regulator’s lawsuit against crypto giant Binance Holdings Ltd. and Chief Executive Officer Changpeng Zhao hammers at the company’s alleged concealment of rules violations in a breakneck pursuit of growth.
As the Commodity Futures Trading Commission goes after the world’s biggest cryptocurrency exchange — in the wake of FTX’s collapse and amid a banking crisis in which crypto figures — here are some of the most striking allegations and details from its suit, which also includes claims of willfully ignoring potential criminal activity.
Representatives of Binance and Zhao didn’t respond to requests for comment.
The allegations, in short:
Since the launch of its platform in 2017, 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.
The CFTC claims Binance eagerly pursued U.S. customers despite claiming otherwise and says the exchange’s own internal emails and chats show that its compliance efforts “have been a sham,” as the CFTC’s Gretchen Lowe said in a statement.
According to the agency, Binance instructed U.S. customers to use VPNs — virtual private networks, which hide a computer’s identity — to obscure their locations and trade on the exchange without submitting proof of identity and location.
At least as early as April 2019, Binance published a guide on the “Binance Academy” section of its website titled “A Beginner’s Guide to VPNs.” Binance’s VPN guide explained to Binance customers that “[i]f you want to be private about the websites you visit – and your location – you should use a VPN.” Binance’s VPN guide also hints: “you might want to use a VPN to unlock sites that are restricted in your country.”
The CFTC says in the suit that Binance’s efforts to mask its customers — and juice its growth — worked all too well.
“By May 2021, Binance’s monthly revenue earned from derivatives transactions increased to $1.14 billion,” the regulator says. It cites Samuel Lim, Binance’s former chief compliance officer, as aiding the alleged violations. It says putting “commercial success over compliance with U.S. law” was far from a mere consequence of its growth, but rather, “as Lim paraphrased Zhao’s position on the matter, a ‘biz decision.’ ”
Attempts to locate Lim to seek comment weren’t immediately successful.
The CFTC accused Binance of knowingly engaging in ineffective “geofencing,” the use of IP addresses to identify customers from restricted jurisdictions like the U.S. According to the suit, Binance’s money-laundering risk officer complained to Lim about having to write a “fake” report on the issue to the board of directors. Lim allegedly told her he could get management to sign off on the report. According to the CFTC, the officer again expressed her concern to Lim in a November 2020 chat:
“I HAZ NO CONFIDENCE IN OUR GEOFENCING.”
According to the regulator, board oversight wasn’t really an issue at Binance.
Zhao answers to no one but himself. Binance does not have a board of directors.
Zhao personally directed an effort to advise top U.S. customers on how to circumvent “know your customer” compliance controls by opening up accounts under the names of offshore shell companies, the CFTC claims. It cites three unidentified trading firms in its complaint.
Binance personnel began assisting U.S. VIP customers in creating “new” accounts using “new” KYC documentation as early as June 2019, and reported directly to Zhao on their efforts. For example, in a Binance group chat dated June 12, 2019, a Binance employee directed the following message to “@czhao,” which is a handle used by Zhao:
“Today our VIP team talked with three VIP8 users, we didn’t talk too much details and they all satisfied that we can help them onboarding their new non-U.S. corporate accounts. That’s a good start, we’ll contact more VIPs tmr.”
Zhao responded in the same chat: “cool.”
To hear the CFTC tell it, it gets worse. Binance looked the other way, with a casual whistle, as militant groups and terrorists helped power its rapid expansion, according to the lawsuit.
Internally, Binance officers, employees, and agents have acknowledged that the Binance platform has facilitated potentially illegal activities. For example, in February 2019, after receiving information “regarding HAMAS transactions” on Binance, Lim explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering.” Lim’s colleague replied: “can barely buy an AK47 with 600 bucks.”
And with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: “Like come on. They are here for crime.”
The CFTC claims Binance failed to implement an effective anti-money-laundering program and to set up a robust means of learning the true identity of its customers, noting that as of at least May 2022, it hadn’t filed a single suspicious-activity report in the U.S.
According to the complaint, the exchange’s money-laundering reporting officer summed it all up:
“We see the bad, but we close 2 eyes.”
The case is Commodity Futures Trading Commission v. Changpeng Zhao, Binance Holdings Ltd. et al., 23-cv-01887, U.S. District Court, Northern District of Illinois.
(With assistance from Allyson Versprille, Lydia Beyoud and Tom Schoenberg.)
