- CFTC filed lawsuit against Binance and its founder for violating federal law.
- Binance allegedly offered unregistered crypto derivatives and used VPN to fake locations.
- Bitcoin price dropped by $1,000 and crypto-related stocks fell after the lawsuit was filed.
On Monday, the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against Binance, a cryptocurrency exchange, and its founder Changpeng Zhao, accusing them of violating federal law by knowingly providing unregistered crypto derivative products in the United States.
According to the lawsuit, which was filed on Monday in the U.S. District Court for the Northern District of Illinois, Binance is accused of running a derivatives trading service in the U.S. that provided trading options for commodities like bitcoin (BTC), ether (ETH), litecoin (LTC), tether (USDT), and Binance USD (BUSD).
The lawsuit also claims that Binance and its founder, Changpeng Zhao, instructed their employees to use virtual private networks to fake their locations. The CFTC is accusing Binance of breaking laws related to offering futures transactions, providing “illegal off-exchange commodity options,” failing to register as a futures commissions merchant, designated contract market, or swap execution facility, failing to properly supervise its business operations, not implementing proper know-your-customer or anti-money laundering processes, and having an inadequate anti-evasion program.
Meanwhile, the CFTC is charging Binance with violating laws around 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
After news of the lawsuit first broke, the price of bitcoin dropped by approximately $1,000, while Binance’s exchange token BNB decreased by about 3%. Additionally, stocks related to the cryptocurrency industry also decreased following the announcement of the suit.
As per the CFTC, Binance, which has a U.S. affiliate in Binance.US, developed a system to conceal its true operations and reach. Additionally, the filing highlighted,
CFTC
“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. Zhao answers to no one but himself.
CFTC Chief Counsel Gretchen Lowe stated in a press release that Binance’s actions were a “deliberate evasion of U.S. law,” citing internal chats and emails. Additionally, the lawsuit claims that Binance directed its U.S. customers to use various methods to evade restrictions on U.S.-based customers.
The suit alleges that Binance instructed U.S. customers to use virtual private networks (VPNs) to hide their true location. VPNs are tools that mask a user’s true IP address, allowing them to access content that may be restricted in their location. The lawsuit claims that Binance was aware of and encouraged the use of VPNs by its U.S. customers.
According to the lawsuit, Binance directed significant customers, including trading firms, to establish shell companies in locations such as Jersey, the British Virgin Islands, and the Netherlands to bypass restrictions and escape detection. The filing further alleges that Binance was fully aware of the extent of its U.S. business despite attempting to hide its operations through deceptive means.
The lawsuit alleges that Binance was fully aware that a significant portion of its customer base consisted of U.S.-based users, with internal monthly reports sent to Changpeng Zhao, which reportedly showed that 17.8% of its customers were from the U.S. as of June 2020, even after implementing controls.
In response to the allegations, a Binance spokesperson did not address the specifics of the lawsuit but stated that the company has made significant investments in compliance measures over the past two years to prevent U.S. users from accessing its platform. This includes increasing its compliance team from 100 to 750 members and spending $80 million on compliance vendors and tools.
The spokesperson further stated that Binance has implemented country blocks to prevent U.S. residents and citizens from accessing the platform, and blocks U.S. cell phone providers, IP addresses, and bank accounts. The spokesperson also expressed disappointment in the CFTC’s lawsuit and stated that Binance intends to collaborate with regulators worldwide to develop a clear regulatory framework.
