Today the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against crypto exchange Binance, its CEO Changpeng Zhao (CZ) and former Chief Compliance Officer Samuel Lim. It alleges that Binance deliberately targets U.S. customers for derivatives transactions, despite not registering with the CFTC. It also accuses the group of violating anti-money laundering rules.
Binance is the world’s largest cryptocurrency exchange, with global daily derivatives transactions at almost $50 billion, around five times its spot volumes.
“The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law,” said Gretchen Lowe, CFTC’s Enforcement Division Principal Deputy Director and Chief Counsel.
The complaint alleges that Binance staff were instructed to communicate with U.S. customers via a messaging app with instructions on evading its compliance controls, and the communications were automatically deleted to cover their tracks.
Two years ago, Bloomberg reported that the CFTC was investigating Binance. Then last year, the Wall Street Journal wrote that the Securities and Exchange Commission (SEC) was investigating Sigma Chain and Merit Peak, two market makers that are active on Binance.US and allegedly associated with CZ. The CFTC filing also states that CZ is the owner of these firms.
Our research showed CZ was the founding Chairman of Sigma Chain but records indicate he stepped down a few months after formation, handing the reigns to Guangying Chen, a Binance employee.
Last year we speculated that bad blood between CZ and FTX’s CEO Sam Bankman-Fried might relate to CZ believing the SEC was tipped off about this. Particularly given SBF’s knowledge of the market-making space. In a September blog post before the demise of FTX, CZ references Guangying Chen and misdeeds by competitors.
Meanwhile, last month, New York regulator, the NYDFS, instructed Paxos to stop allowing new Binance stablecoin Binance USD (BUSD) issuances. Since then, the market capitalization has halved to $8 billion with orderly redemptions.