CFTC Sues Binance: World's Largest Crypto Exchange Accused of Violating U.S. Law
On March 27th, 2023, news broke that the Commodity Futures Trading Commission (CFTC) had filed a lawsuit against Binance, the world's largest cryptocurrency exchange, and its founder, Changpeng Zhao. The regulator claimed that Binance operated a derivatives trading operation that enabled U.S. residents to trade futures, swaps, and options on cryptocurrencies in violation of federal law since at least July 2019
According to the lawsuit, Binance directed U.S. customers to use VPNs to conceal their true location, and the company was aware of and encouraged the use of VPNs by U.S. customers. Binance allegedly instructed trading firms to set up shell companies in places such as Jersey, the British Virgin Islands, and the Netherlands to evade restrictions and avoid regulatory oversight.
The regulator claims that Binance had a poor anti-evasion program, directing customers to use a variety of methods to evade restrictions on U.S.-based customers, poorly supervising its business, and not implementing know-your-customer or anti-money laundering processes.
In a press release, CFTC Chief Counsel Gretchen Lowe called Binance's actions "willful evasion of U.S. law," pointing to internal chats and emails.
The CFTC seeks to prohibit Binance and CZ from engaging in any case-related activity, including trading on registered entities or directing trading of digital assets. In addition, the CFTC is demanding that Binance return all profits, revenues, salaries, commissions, loans, and fees derived from U.S. citizens, as well as pay civil penalties for the violations.
In response, Binance rejected many of the allegations, stating that it had made significant investments over the past two years to ensure that it did not have U.S. users on its platform. The company claimed to have grown its compliance team from 100 to 750 people and to have spent $80 million on know-your-customer and other compliance vendors and tools. Binance's spokesperson stated that the company had maintained country blocks for U.S. residents, and that it blocked anyone identified as a U.S. citizen, regardless of where they lived in the world.
Following this announcement, nearly a billion dollars in cryptocurrency reportedly left the exchange platform's wallets. According to data research by Thanefield Capital, an unusually large amount of cryptocurrency was withdrawn from centralized exchanges, including Binance, Kraken, Coinbase, and Bitfinex, in the 12 hours preceding the CFTC indictment at 3 pm UTC on Monday, March 27. Almost $1.5 billion was withdrawn, with more than half of it ($850 million) coming from Binance alone. One hour after the announcement, an additional $240 million was withdrawn from Binance. In the past 24 hours, more than $400 million in Ethereum-based funds were also reportedly withdrawn, according to data from Nansen.
