On Monday, the United States Commodity Futures Trading Commission (CFTC) sued the world’s largest crypto exchange, Binance, and its founder Changpeng Zhao alleging that the company intentionally offered unregistered crypto derivatives products in the U.S. against federal law.
Sources reveal that the lawsuit was filed in the U.S. District Court for the Northern District of Illinois. The commodities’ regulator 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.
Additionally, the suit alleged that Binance under Zhao’s leadership suggested its employees forge their locations through the use of virtual private networks (VPNs).
The CFTC has charged several cases against Binance for violating federal laws related to offering futures transactions, illegal off-exchange commodity options, failing to register as a futures commissions merchant, designated contract market or swap execution facility, poorly supervising its business, not implementing know-your-customer or anti-money laundering processes and having a poor anti-evasion program.
Gretchen Lowe, CFTC Chief Counsel, called Binance’s actions “willful evasion of U.S. law,” directing attention to some internal chats and emails. Additionally, the suit accused Binance directed customers in the U.S. to use a variety of methods to evade restrictions on native customers.
As per the filing, 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 to escape restrictions and was fully aware of the scale of its U.S. business.
A few hours after the news of the suit surfaced, Zhao responded to the allegations terming it an “unexpected and disappointing civil complaint.” He pointed out that the firm has been in constant touch with the regulators regarding crypto regulations, and that these accusations are making him more disappointed. Quoting him:
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.
Responding to the accusation Binance has traded on its platform and has “approximately 300 house accounts that are all directly or indirectly owned by Zhao,” the CEO said that the company “does not trade for profit or “manipulate” the market under any circumstances.” He added that the revenues of Binance are in crypto, so it needs to frequently convert them to cover expenses in fiat or other cryptocurrencies. He said:
I have two accounts at Binance: one for my Binance Card and one for my crypto holdings. I eat our dog food and store my crypto on Binance.com. I also need to convert crypto from time to time to pay for my expenses or the Card.
Zhao also said that the company has a strict 90-day no-day-trading rule for employees. This rule prevents them from selling a coin within 90 days of their most recent purchase or vice versa.
Responding to the allegations that the firm evaded KYC controls, he highlighted that Binance was the first global exchange for implementing a mandatory KYC program. Additionally, he said that the platform blocks American users by nationality and IP address. However, the CFTC accused the exchange of encouraging U.S. traders to use VPNs (virtual private networks) to evade the block.
While the regulators in the US have been cracking down on crypto entities, it is important to note the tussle and lack of clarity between the regulators. Last month, the Securities and Exchange Commission(SEC) targeted Paxos and accused it of selling unregistered security referring to the stablecoin BUSD. Now, the same BUSD has come under CFTC’s radar claiming it to be a commodity.
There is a dire need for clarity in the crypto regulations in the US as highlighted by lawmakers, investors, and regulators. In the DC Blockchain Summit, Summer Mersinger, CFTC commissioner, highlighted the importance of interference from Congress to ensure cooperation with the CFTC when drafting crypto legislation.