CFTC Sues Binance, CZ Over ‘Willful Evasion’ of U.S. Laws, Unregistered Crypto Derivatives Products

The U.S. Commodity Futures Trading Commission (CFTC) sued crypto exchange Binance and founder Changpeng “CZ” Zhao Monday on allegations the company knowingly offered unregistered crypto derivatives products in the U.S. against federal law.

The lawsuit, filed in the U.S. District Court for the Northern District of Illinois on Monday, alleged that Binance operated a derivatives trading operation in the U.S., offering trades for cryptocurrencies including bitcoin (BTC), ether (ETH), litecoin (LTC), tether (USDT) and Binance USD (BUSD), which the suit referred to as commodities. The suit also alleged that the company, under CZ’s leadership, directed its employees to spoof their locations through the use of virtual private networks.

The price of bitcoin fell around $1,000 after the suit was first filed, while Binance’s exchange token BNB fell about 3%. Crypto-related stocks also fell after the suit was published.

According to the CFTC, the global exchange, which has a U.S. affiliate in Binance.US, created a system to hide its true reach and operations.

“Binance’s reliance on a maze of corporate entities to operate the Binance platform is deliberate; it is designed to obscure the ownership, control, and location of the Binance platform,” the filing said, adding that “Zhao answers to no one but himself.”

In a press release, CFTC Chief Counsel Gretchen Lowe called Binance’s actions “willful evasion of U.S. law,” pointing to internal chats and emails.

Moreover, the suit alleged, Binance directed customers in the U.S. to use a variety of methods to evade restrictions on U.S-based customers.

“Binance has instructed U.S. customers to evade such controls by using VPNs to conceal their true location,” the suit alleged. “VPNs have the effect of masking an internet user’s true IP address. VPN use by customers to access and trade on the Binance platform has been an open secret, and Binance has consistently been aware of and encouraged the use of VPNs by U.S. customers.”

The company directed important customers such as trading firms to set up shell companies in places such as Jersey, the British Virgin Islands and the Netherlands to avoid restrictions, the filing said to escape restrictions, and was fully aware of the scale of its U.S. business, the filing said.

“Binance knew that U.S. customers continued to comprise a substantial proportion of Binance’s customer base,” the filing said, citing internal monthly reports sent to Zhao which said that, even as of June 2020 after controls had supposedly been implemented, 17.8% of customers were based in the U.S.

The filing pointed to internal chats between Binance employees, including Samuel Lim, the exchange’s Chief Compliance Officer through January 2022 (who is also a defendant), where Lim appeared to direct an employee to ask U.S. customers to hide their location.

“On the surface we cannot be seen to have US users but in reality we should get them through other creative means,” Lim allegedly said.

The CFTC is asking the court to enjoin Binance from further violations of the Commodity Exchange Act, as well as civil monetary penalties, trading and registration bans, and disgorgement.

The suit was likely expected by Binance. In February, the exchange’s Chief Strategy Officer admitted Binance was being investigated by multiple regulators and expected to pay fines to “make amends” for past regulatory violations.

Earlier this month, U.S. senators including Sen. Elizabeth Warren (D-Mass.) sent a letter to CZ calling his company “a hotbed of illegal financial activity that has facilitated over $10 billion in payments to criminals and sanctions evaders,” and saying it’s been marked by “increasingly disturbing allegations regarding the legality of its operations.” The lawmakers demanded information about the company, its structure and its balance sheets.

UPDATE (March 27, 2023, 15:30 UTC): Adds detail throughout.

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