U.S. CFTC sues Binance and its founder Zhao Changpeng

On March 27, 2023, the U.S. Commodity Futures Trading Commission (CFTC) announced that it had filed a civil lawsuit in the U.S. District Court for the Northern District of Illinois, accusing Changpeng Zhao and three persons operating the Binance platform of multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations. The complaint also accuses Samuel Lim, the former chief compliance officer of Binance, of aiding and abetting Binance's violations.

The lawsuit alleges that Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited (collectively, Binance) operated the Binance centralized digital asset trading platform and numerous other corporate vehicles through a deliberately opaque joint enterprise, with Zhao in control as the owner and CEO of Binance . The defendants allegedly chose to willfully disregard the applicable provisions of the CEA while engaging in calculated regulatory arbitrage strategies for commercial gain.

In its ongoing litigation against the defendants, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations.

“Today’s enforcement action demonstrates that there is no place, or claim of no place, that prevents the CFTC from protecting American investors. I have made clear that the CFTC will continue to use all of its authorities to detect and stop misconduct in the highly volatile and high-risk digital asset markets,” said CFTC Chairman Rostin Behnam. “For years, Binance worked actively to keep funds flowing and avoid compliance, knowing they were violating CFTC rules. This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful circumvention of U.S. law. I applaud the CFTC enforcement team for their diligence and dedication in bringing this action and their hard work in addressing illegal operations in the digital asset space.”

“ The defendants’ alleged willful evasion of U.S. law is at the heart of the Commission’s lawsuit against Binance. The defendants’ own emails and chat logs demonstrate that Binance’s compliance efforts were a sham and that Binance time and again deliberately chose to prioritize profits over compliance with the law ,” said Gretchen Lowe, Principal Deputy Director and Chief Counsel of the CFTC’s Division of Enforcement. “Today’s enforcement action reflects that the CFTC and its Enforcement Division will pursue digital asset platforms and individuals who flout and actively attempt to circumvent the CFTC’s regulatory requirements. I thank the enforcement team for their dedication and hard work in bringing this action.”

Case Background

According to the lawsuit, Binance offered and executed commodity derivatives transactions to U.S. persons from July 2019 to the present. Binance’s compliance program was allegedly ineffective and, at Zhao’s direction, Binance directed its employees and customers to circumvent compliance controls in order to maximize corporate profits.

The lawsuit alleges that during much of the relevant period, Binance did not require its customers to provide any identity verification information before trading on the platform, despite entities like Binance having a legal obligation as futures commission merchants (FCMs) to collect such information, and failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering.

The lawsuit further alleges that even after Binance purportedly restricted U.S. customers from trading on its platform, Binance provided its customers, especially its commercially valuable U.S. VIP customers, with the best way to evade Binance's compliance controls. In addition, the lawsuit alleges that Binance failed to register with the CFTC as required based on its role in facilitating derivatives trading as a designated contract market or swap execution organization.

The lawsuit also alleges that the entity defendants failed to diligently monitor Binance’s activities as an FCM. Among the numerous supervisory failures detailed in the lawsuit, Binance instructed employees to communicate with U.S. customers about evading controls via a messaging application that was set to automatically delete written communications. According to the lawsuit, Binance used this method of communication to avoid leaving any evidence of their efforts to retain U.S. customers.

The lawsuit further alleges that Binance, Zhao, and Lim intentionally evaded the requirements of the CEA. The defendants allegedly conducted certain activities outside the United States designed to circumvent CFTC regulation, such as intentionally structuring their entities and transactions to circumvent registration requirements and instructing U.S. and other customers on how to circumvent Binance’s compliance controls.

Zhao is allegedly responsible for Binance’s violations based on his control of Binance and his long-term failure to act in good faith with respect to Binance’s misconduct. According to the indictment, Zhao owns and controls dozens of entities that operate the Binance platform as ordinary businesses. Zhao is accused of being responsible for all major strategic decisions at Binance, including designing a secret conspiracy to instruct U.S. VIP customers to evade Binance’s compliance controls and directing Binance employees to ensure that all communications regarding his subversion of control were conducted through applications that facilitated the automatic destruction of evidence.

Lim, who served as Binance’s chief commercial officer (CCO) from 2018 to 2022, is charged with intentionally aiding and abetting Binance’s violations through willful conduct that undermined Binance’s compliance program. Lim is also charged with engaging in activities that intentionally circumvented or attempted to circumvent applicable provisions of the CEA, including promoting the use of “creative means” to assist customers in circumventing Binance’s compliance controls and implementing a company policy that directed Binance’s U.S. customers to access trading facilities through virtual private networks to avoid Binance’s IP address-based controls, or to create “new” accounts through offshore shell companies to evade Binance’s KYC-based controls.