The Commodity Futures Trading Commission (CFTC) has filed a lawsuit against Binance chief Changpeng Zhao (CZ), Binance, and Samuel Lim, alleging serious compliance breaches including failure to register, allowing US persons to trade products they shouldn’t be able to, KYC and AML failures, and offering illegal derivatives.
Specifically, the CFTC alleges that Binance deliberately attracted and maintained relationships with US customers despite prohibitions.
A Binance spokesperson told Protos, “This filing is unexpected and disappointing as we have been working collaboratively with the CFTC for more than two years. Nevertheless, we intend to continue to collaborate with regulators in the US and around the world. The best path forward is to protect our users and to collaborate with regulators to develop a clear, thoughtful regulatory regime.”
Binance trading on Binance
The CFTC alleges that Zhao is the owner of over 300 separate Binance accounts which trade on the platform, including some controlled by entities he owns like Merit Peak Limited and Sigma Chain AG. Merit Peak was implicated in irregular transfers from Binance US to Binance. Zhao also had two personal accounts that he used to trade on the platform.
Merit Peak was also responsible for entering into OTC trades with customers. The lawsuit also alleges that at multiple periods Binance was the sole seller of Binance Options.
The lawsuit further alleges that Binance runs a ‘quant desk’ which directs its proprietary trading.
Furthermore, the CFTC alleges that these more than 300 accounts have been exempted from anti-fraud and anti-manipulation surveillance and have been exempted from the Binance ‘insider trading’ policy.
Cory Klippsten, CEO of Swan Bitcoin told Protos: “Rumors have been rampant for years about Changpeng Zhao trading against his customers on his Binance exchange. Today with the CFTC action detailing their charges, we’re one step closer to reining in one of the most rampant and obvious patterns of abuse in the crypto ecosystem.”
Binance in the US
Binance employs at least 60 people in the United States according to the lawsuit. These include employees working in Binance’s investment firm Binance Labs, employees working on their wallets, compliance professionals, and the company’s chief strategy officer, Patrick Hillman.
Binance recruited volunteers in the US who it referred to as ‘Angels’ to interact with US-based customers.
An internal financial reporting package described in the lawsuit discussed how 16% of Binance trading revenue came from customers in the US.
The lawsuit further alleges that for the first two years of its existence, the firm took no steps to prevent US customers from trading on the platform, and even when it started restricting access in 2019, it maintained no-KYC access provided users didn’t withdraw more than two bitcoin.
At one point in 2018, after acknowledging to his team that the company served traders in the USA, Lim insisted, “there is no f’king way in hell I am signing off as the CCO for the OFAC shit.”
Later in 2019, Binance US was announced and a pop-up began greeting users connecting from a US-based IP address. However, users could still self-certify they were not a US citizen.
Also in 2019, Binance Academy contained ‘A beginner’s Guide to VPNs’ which explained to users and prospective users of Binance how VPNs can be used to ‘unlock sites that are restricted in your country.’ Zhao himself has previously tweeted, “VPNs is a necessity, not optional.” Lim also once explained to a colleague, “They can use VPN but we are not supposed to tell them that.”
In October 2020, Lim tried to describe different US regulatory agencies and their potential consequences to a colleague saying, “US users = CFTC = civil case can pay fine and settle” and continuing “no KYC = BSA act = criminal case, have to go jail.”
Furthermore, Zhao personally directed employees at Binance to change some users who were flagged as being located in the US to ‘UNKWN’ in order to obscure the portion of Binance revenue that came from the United States.
This was a known practice internally for Binance with its director of operations at one point saying, “The keyword US for internal information is also a sensitive word, so you have to use Unknow [sic] to mark the country.”
Binance allowed several brokers to use the platform to trade and made no steps to prevent those brokers from effectively offering access to Binance to people in restricted jurisdictions, including trading firms and individuals in the US.
One of these, identified as ‘Trading Firm B,’ once accidentally connected from a US-based IP and so allegedly moved all their trading activity to the account of an individual at the firm who opened up a personal account until the firm was able to set up a new offshore entity.
A Binance spokesperson told Protos, “We have made significant investments over the past two years to ensure we do not have US users active on our platform. During that period, we went from approximately 100 people in our compliance team to around 750 core and supporting compliance personnel today, including almost 80 personnel with prior law enforcement or regulatory agency experience and approximately 260 personnel with professional certificates in compliance.”
Lim, at one point, worried that “if Binance forces mandatory KYC” then other exchanges “will be VERY VERY happy.”
Furthermore, the lawsuit alleges that Binance US is “under common ownership and control with Binance.”
Finally, in August 2021, Binance announced that all users would be required to verify their accounts. The lawsuit alleges that contrary to that representation, Binance didn’t make users verify their identity and as of February 2022, fewer than half of its users had verified their identity.
Binance’s money laundering reporting officer (MLRO) once complained to Lim that she needed “to write a fake annual MLRO report to Binance board of directors wtf.” This same MLRO once said in a chat with Lim that “I HAZ NO CONFIDENCE IN OUR GEOFENCING.”
Lim, the Chief Compliance Officer, once said, “They are here for crime” when describing certain Binance customers from Russia. The MlRO responded, “we see the bad, but we close 2 eyes.” Similarly, Lim when discussing a customer who appeared to be associated with illicit activity said, “let him know to be careful with his flow of funds, especially from darknet like Hydra. He can come back with a new account, but this current one has to go it’s tainted.”
In a separate chat, when discussing with Binance employees about offloading clients, Lim said, “Don’t need to be so strict. Offboarding = bad in CZ’s eyes.”
A Binance Spokesperson told Protos, “We have spent an additional $80,000,000 on external partners, including KYC vendors, transaction monitoring, market surveillance, and investigative tools who support our compliance programs.
“Consistent with regulatory expectations globally, we have implemented a robust ‘three lines of defense’ approach to risk and compliance, which includes, but is not limited, to:
- Ensuring mandatory KYC for all users worldwide
- Maintaining country blocks for anyone who is a resident of the US
- Blocking anyone who is identified as a US citizen regardless of where they live in the world
- Blocking for any devices using a US cellular provider
- Blocking log-ins from any US IP address
- Preventing deposits and withdrawals from US banks for credit cards”
Binance reportedly has a VIP program for large traders which gives them reduced transaction fees and improved customer service. One special service that the company reportedly provides to its VIP customers is a warning if law enforcement asks about their account. Binance told their VIP team to make sure that they unfreeze the account 24 hours after the notification, and make sure to contact the VIP through all available means to let them know it is now unfrozen and is being investigated.
Allegedly, Binance would also willingly remove the withdrawal limit on non-KYC accounts when they are associated with ‘VIPs.’ Lim said at one point, “we always have a way for whales.” One way was allegedly encouraging US-based VIPs to submit ‘new’ documentation which would allow them to continue trading on the platform, even encouraging some firms to open up new offshore entities to aid in the process.
One Chicago-based VIP who was a ‘top 5 client’ and represented 12% of Binance volume connected through a US IP, which led to Zhao telling one of the VIP team members to, “Give them a heads-up to ensure they don’t connect from a US IP. Don’t leave anything in writing.”
Potential for other cases
The CFTC also said it was able to collect several Signal chats from Zhao’s telephone, though it’s not clear how it gained access to that. These chats are potentially useful as part of other ongoing probes of Binance and Zhao.
The Western District of Washington in Seattle reportedly believed it had sufficient evidence to bring criminal charges against Zhao and Binance, but has so far been stymied by the Department of Justice.
Previous Protos Freedom of Information Act requests to the SEC regarding Binance and Binance US have been rejected citing an exemption protecting records compiled for law enforcement purposes.
Zhao has tweeted “4” today in response to this lawsuit, which he has previously said indicates: “Ignore FUD, fake news, attacks, etc.”
Update 1:40 PM UTC, March 28: Clarified allegations in headline.