Binance and CEO Changping Zhao (CZ) have been sued by the US Commodity Futures Trading Commission (CFTC) for violating derivatives trading regulations.
The charges stem from the fact that the exchange, which was not registered with the CFTC, failed to effectively prevent US residents from buying and selling cryptocurrency derivatives. According to CFTC rules, the platform must first register with the regulator in order to allow Americans to trade from there.
The problem is not just procedural. According to Bloomberg, the Internal Revenue Service (IRS) is involved in the investigation, as are federal prosecutors. CZ himself is accused of tax evasion and illegal trading tactics. He is also accused of having his employees, at his direction, urge customers to avoid compliance checks via VPN.
To prove its allegations, the CFTC is in possession of chat logs as evidence against Binance. The material to be examined is 70 pages long and concerns conversations that allegedly facilitated illegal activities, including those of the radical Islamic terrorist organization Hamas, in 2019. And that’s not all. It has internal monthly reports showing that 17.8% of its clients are based in the US.
As stated in the lawsuit, Binance executives used the Signal app and took advantage of the “auto-delete feature” to communicate with each other. In doing so, they deleted conversations that could potentially incriminate them. But some were saved and found in their possession. It is reported that incriminating conversations from CZ’s own phone also survived.
In the lawsuit, the CFTC accuses Binance of creating a complex maze of corporate entities to confuse regulators. As a reminder, there is a recent pending CFTC lawsuit involving the BUSD stablecoin issued by Binance.
According to Sheila Warren, CEO of the Crypto Council for Innovation, the CFTC doesn’t waste time on small hits. It goes straight for the knockout! Not only is Binance being targeted, but the SEC is also being targeted as it seeks to become the most powerful regulator in the industry.
Binance’s response
A short while ago, CZ responded from the exchange’s blog. It states that despite working with the CFTC for more than two years, the agency filed a complaint, which it called unexpected and disappointing. He went on to claim that the information presented was incomplete and that full answers would be provided in due course.
He did, however, provide a sketchy response to the allegations. As he states, they have developed the best technology among their competitors to ensure compliance.
Binance was the first global exchange (outside of the US) to implement a mandatory KYC program and has one of the highest standards in KYC and AML. No other company uses more comprehensive or effective systems than Binance, the company claims.
Binance currently employs more than 750 people in its compliance teams, many of whom have prior experience in similar regulatory matters. To date, they have handled more than 55,000 requests from legal services and helped U.S. authorities freeze/confiscate more than $125 million in funds in 2022 alone and $160 million so far in 2023.
As for trading, they claim that it is not done for profit, nor is there any attempt to manipulate the market. They only occasionally convert crypto into fiat to cover their expenses. Their revenue comes solely from legitimate transaction fees.
To prevent Binance employees from engaging in improper trading, their company has a 90-day rule. This means that they are not allowed to sell a cryptocurrency within 90 days of their last purchase or vice versa. Binance employees are also prohibited from engaging in leveraged trading. Adherence to these policies is also strictly enforced by CZ himself.
He concludes, “At Binance, we seek amicable solutions to all problems. We work with regulators and government agencies around the world. While we are not perfect, we maintain a high standard, often higher than what existing regulations require. Above all, we believe in always doing the right thing for our users. We don’t expect this journey to money freedom to be easy. But we do not shy away from challenges.”
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