The U.S. Commodity Futures Trading Commission (CFTC) announced it had filed a civil enforcement action against Changpeng Zhao and Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited(together, Binance) with numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations. The complaint also charges Samuel Lim, Binance’s former chief compliance officer, with aiding and abetting Binance’s violations.
The CFTC claims that Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited (together, Binance) operate the Binance centralized digital asset trading platform along with numerous other corporate vehicles through an intentionally opaque common enterprise, with CZ at the helm as Binance’s owner and chief executive officer. The defendants allegedly chose to knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.
Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.
CHANGPENG ZHAO STATEMENT
In its continuing litigation against the defendants, the agency seeks disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations, as charged.
“For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance. This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of U.S. law.
CFTC CHAIRMAN ROSTIN BEHNAM
According to the complaint, Binance has offered and executed commodity derivatives transactions to and for U.S. persons. As alleged, Binance’s compliance program has been ineffective, and, at CZ’s direction, Binance has instructed its employees and customers to circumvent compliance controls to maximize corporate profits.
The complaint charges that for much of the relevant period, Binance did not require its customers to provide any identity-verifying information before trading on the platform, despite the legal duty that entities like Binancefunctioning as futures commission merchants (FCMs) collect such information, and failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering.
The complaint further alleges that even after Binance purported to restrict U.S. customers from trading on its platform, Binance instructed its customers – particularly its commercially valuable U.S.-based VIP customers – on the best methods for evading Binance’s compliance controls. In addition, the complaint charges Binance with acting as a designated contract market or swap execution facility based on its role in facilitating derivatives transactions without registering with the CFTC, as required.
The complaint further charges Binance, CZ, and Samuel Lim with willful evasion of the requirements of the CEA. As alleged, the defendants conducted activities outside the U.S. designed to avoid CFTC regulation, such as intentionally structuring their entities and transactions to avoid registration requirements and instructing customers on evading Binance’s compliance controls.
CFTC alleges that CZ is liable for Binance’s violations based on his control over Binance and his long-running failure to act in good faith concerning Binance’s misconduct. According to the complaint, CZ owned and controlled dozens of entities that operate the Binance platform as a common enterprise. CZ allegedly made all major strategic decisions at Binance, including devising the secret plot to instruct U.S.-based VIP customers to evade Binance’s compliance controls and instructing Binance employees to ensure all communications about their control subversion took place over applications that facilitated the automatic destruction of evidence.
Samuel Lim, Binance’s CCO from 2018 through 2022, is charged with willfully aiding and abetting Binance’s violations through intentional conduct that undermined Binance’s compliance program.