This is very bad news for the crypto industry.
More than four months after the fall of Sam Bankman-Fried, one of its most famous faces, another king of the young decentralized financial services industry is in the crosshairs of regulators.
Changpeng Zhao, who was Bankman-Fried's main rival, is now facing legal scrutiny. Like the latter, Zhao is known in the crypto space by his initials. Bankman-Fried was called "SBF." Zhao is called "CZ." The 40-year-old, who is also a billionaire, is the founder and CEO of Binance, the world's largest exchange for cryptocurrencies and other crypto-related products.
The U.S. Commodity Future Trading Commission (CFTC) has just filed a lawsuit with the U.S. District Court for the Northern District of Illinois against Zhao and Binance entities. Another former Binance top executive is also being sued.
Evading U.S Laws
Regulator accuses Zhao and Binance of circumventing US laws by offering and executing commodity derivatives transactions to and for U.S. persons from July 2019 through the present.
Binance is not licensed in the United States. The platform, however, has a subsidiary, Binance.US, which caters to investors living on American soil.
"Binance did not require its customers to provide any identity-verifying information before trading on the platform, despite the legal duty that entities like Binance functioning as futures commission merchants (FCMs) collect such information, and failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering," the CFTC alleged in its complaint.
The regulator also accused the platform for instructing its customers, in particular its commercially valuable U.S.-based VIP customers, "on the best methods for evading Binance’s compliance controls."
Binance is also sued as a designated contract market or swap execution facility because it allegedly facilitated derivatives transactions without registering with the CFTC, as required.
In addition, the company is charged of allegedly instructing its employees" to communicate with U.S.-based customers concerning control evasion through a messaging application that was set to automatically delete written communications."
Binance used that communication method, the CFTC said, to avoid leaving any evidence of their efforts to retain U.S.-based customers.
"This filing is unexpected and disappointing as we have been working collaboratively with the CFTC for more than two years," the platform said in an emailed statement. "Nevertheless, we intend to continue to collaborate with regulators in the US and around the world."
It added that it has made "significant" investments over the past two years to ensure U.S. users do not use its platform. Binance said it grew its compliance team from approximately 100 people to around 750 compliance personnel today.
"Zhao is liable for Binance’s violations based on his control over Binance and his long-running failure to act in good faith concerning Binance’s misconduct," the CFTC said of Zhao.
The CEO is alleged to have been responsible for all major strategic decisions at Binance, "including devising the secret plot to instruct U.S.-based VIP customers to evade Binance’s compliance controls and instructing Binance employees to ensure all communications about their control subversion took place over applications that facilitated the automatic destruction of evidence."
Zhao has yet to comment but tweeted the number "4," which seems to refer to his 2023 promises: "4," he said on January means "ignore FUD [fear, uncertainty and doubt] fake news, attacks, etc."
The CFTC started its investigation of Binance in at least 2021. The regulator is not alone in taking an interest in the platform and its CEO. The Internal Revenue Service, the Department of Justice and the Securities and Exchange Commission are also closely scrutinizing the firm's activities.
Last month, Reuters reported that Binance had access to a bank account belonging to Binance.US. Binance executives reportedly transferred hundreds of millions from this account to a trading platform, Merit Peak. The manager of Merit Peak was none other than Changpeng Zhao, the founder of Binance and great rival of Sam Bankman-Fried.
Binance.US executives at the time were unaware of these money movements and learned about them after they were made, according to Reuters which cited text messages between the CEO of Binance.US and a Binance executive.
Binance.US has dismissed this information, saying, in a tweet, that there is "only Binance.US employees have access to Binance.US bank accounts. Period."
The DoJ began an investigation over Binance in 2018 and is focused on Binance’s compliance with U.S. anti-money-laundering laws and sanctions. At the end of 2020, the DoJ asked Binance to submit internal documents relating to how the firm ensured that users of its platform do not launder money.
The federal prosecutors are reportedly considering filing money-laundering charges against Binance and some of its executives, including the CEO.
