Owner CZ of Binance in trouble

The U.S. Commodity Futures Trading Commission (CFTC) has sued Binance, the largest cryptocurrency exchange in the world, and its founder and CEO Changpeng Zhao for “willful violation of federal laws and operating an illegal digital asset derivatives exchange.” The CFTC accuses Binance of “numerous violations of the Commodity Exchange Act and CFTC regulations.” In the lawsuit, the CFTC demands restitution, civil penalties, permanent trading and registration bans, and an injunction against further violations of the Commodity Exchange Act and CFTC regulations.

According to the CFTC, Binance, led by Zhao and former chief compliance officer Samuel Lim, operated the trading platform through a deliberately opaque joint venture that engaged in a calculated strategy of regulatory arbitrage for commercial advantage. Binance allegedly encouraged U.S. customers to use Virtual Private Networks (VPNs) to hide their location and allowed customers to access the platform without proof of identity or location. The company also reportedly urged VIP customers and key employees in the U.S. to open accounts with Binance under the names of newly-formed shell companies to circumvent compliance checks.

In a Twitter thread, Peter Slagter discussed several other claims against Binance, such as:

– Binance may be trading against its customers and gaining an unfair advantage through its “quant desk.”
– Binance may be violating financial fundamentals to increase revenue, despite claims that its compliance program meets all requirements.
– Binance may have falsified data to pass an audit for the issuance of BUSD (Binance USD).
– Binance may conceal internal communications by moving messages at CZ’s (the CEO) request to Signal, where the “auto-delete” feature was active.

In response to the CFTC lawsuit, Zhao described the allegations as “unexpected and disappointing.” Binance claims it employs the best technology to ensure compliance, including Know Your Customer (KYC) and anti-money laundering systems. Zhao also emphasized Binance’s commitment to transparency and collaboration with regulators and law enforcement.

CFTC Commissioner Kristin Johnson noted, however, that Binance has never registered with the CFTC, even though the company is subject to registration and regulation under U.S. law. Johnson also criticized Zhao’s claim that Binance has its headquarters wherever he may be physically located, as this reflects a deliberate attempt to limit jurisdiction and evade regulatory oversight.

This scandal comes at a particularly unfortunate time, and it remains unclear what the repercussions of these allegations against the largest centralized crypto exchange will be for the broader crypto market.

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