Changpeng Zhao’s digital-asset market, the world’s largest, is being sued by a US watchdog over several stunning allegations, mere months after the collapse of FTX.
With 128 million customers and daily trades of $65bn, Binance is the world’s biggest cryptocurrency exchange, and a major player in the $1tn digital asset market. Its high-profile partners include Khaby Lame, Italy’s Lazio football team, and Cristiano Ronaldo. The recent announcement by a US regulator that it is suing Binance, alleging “wilful evasion of US law,” marks a significant moment for an industry still recovering from the FTX collapse. The Commodity Futures Trading Commission (CFTC) has filed a civil enforcement action in a Chicago federal court against Binance’s founder and CEO, Changpeng Zhao, and three entities operating the Binance global trading platform, seeking fines and permanent trading bans for numerous alleged violations of regulations and the Commodity Exchange Act. The former chief compliance officer of Binance, Samuel Lim, is also named in the suit.
Confidential discussions exposed.
The evidence presented suggests that the CFTC has obtained access to sensitive information, including the contents of Changpeng Zhao’s phone. According to Howard Fischer, a partner at Moses & Singer law firm in New York, Binance may have provided the material, another government agency might be sharing the evidence, or an insider within the company may have disclosed it. Fischer states that the CFTC’s allegations are already serious, but if an insider could provide further context and communication details, the situation would be even worse for Binance and Changpeng Zhao. These are currently allegations, but if true, they could pose a significant risk for Binance.
Avoidance of customer verification.
According to the complaint, Binance had a loophole for avoiding Know Your Customer (KYC) procedures, wherein customers could withdraw less than two bitcoins in a day (worth $22,000 in July 2019) without going through KYC. The CFTC cites a 2020 chat between Binance’s former chief compliance officer, Samuel Lim, and a colleague discussing the removal of the loophole, stating that rival digital asset exchanges would be pleased if mandatory KYC was implemented by Binance. The complaint also quotes Lim’s message in October 2020, stating that Binance’s compliance environment involved “email sending and no action” for media coverage. The CFTC further cites a Lim message in December 2019 indicating that Binance did not conduct anti-money laundering (AML) name screening or sanctions screening. The complaint also cites a money laundering reporting officer at Binance who expressed frustration at having to write a fake annual report to the Binance board of directors, after a company that partnered with Binance requested a compliance audit.
Engaging in trades against its own clients.
The CFTC alleges that Changpeng Zhao, either directly or indirectly, owns 300 Binance “house accounts” that engage in proprietary trading using Binance’s own funds. The complaint also mentions companies owned by Zhao, which trade on Binance, along with two individual accounts. The CFTC claims that Binance does not disclose in its terms of use that it trades in its own markets or against its own clients.
Exclusive benefits for VIP clients.
According to the CFTC, Binance provides timely alerts to its VIP clients or customers who generate substantial revenue through trading fees, about any law enforcement actions related to their accounts. The VIP team was instructed by Zhao to use “all available means” to inform users if their accounts were frozen or unfrozen at the request of law enforcement. An internal policy regarding law enforcement requests, authored by Lim but overseen by Zhao, reportedly reads:
