The Commodity Futures Trading Commission (CFTC) has filed a lawsuit against Changpeng Zhao (CZ), Binance entities, and former Chief Compliance Officer Samuel Lim.
The CFTC alleges that in August 2020, Binance earned $63 million in fees from derivatives transactions, with 16% of its accounts belonging to US customers. By May 2021, Binance’s revenue from derivatives transactions increased to $1.14 billion.
The CFTC acquires information about an internal meeting from June 2019 in which CZ discusses Binance’s strategy of operating through various entities in multiple jurisdictions to avoid legal issues by not linking to a specific “.com” domain.
Binance, along with its officers, employees, and agents, has instructed US clients to use VPNs to hide their location and has allowed customers without proper identity and location verification to trade on the platform.
CZ manages the Binance platform and is the direct or indirect owner of both Merit Peak Limited and Sigma Chain AG, both of which are involved in proprietary trading activities.
Binance Services functions as a holding company that either directly or indirectly possesses ownership in at least 43 distinct corporate entities. These entities are involved in providing technology and operational services for Binance, maintaining the intellectual property related to Binance’s matching engines and financial products, and engaging in contracts with vendors. One of these entities is Ality Technologies DE LLC, which serves as Binance’s “U.S. Tech/Ops Hub.”
Merit Peak Limited, incorporated in the Cayman Islands, primarily participates in over-the-counter (OTC) transactions with institutional counterparts. Sigma Chain AG, based in Switzerland, partakes in proprietary trading across various Binance markets, including digital asset derivatives markets.
BAM Trading Services Inc., a Delaware-based company with its main address in Palo Alto, California, operates Binance.US. This digital asset trading platform caters to U.S. residents and relies on Binance’s services and technology through intercompany agreements.
The CFTC states that virtual currencies are commodities, and digital assets encompass anything that can be electronically stored and transmitted with associated ownership or usage rights.
Binance’s VIP program offers valuable clients incentives such as discounted transaction fees, premium customer support, and exceptions to trading rules like order messaging limits. VIPs with higher status also gain priority access to Binance’s matching engines and other perks. The program consists of nine levels, with VIP 9 being the highest and reserved for the most significant clients. Factors like 30-day trading volume and BNB holdings determine a customer’s VIP level. For instance, in December 2021, a client could achieve VIP 9 status by engaging in 25,000,000,000 BUSD worth of futures trading volume and maintaining a 5,500 BNB balance over a 30-day period.
In a blog post from August 2020, Binance announced the introduction of BTC-margined perpetuals with up to 125x leverage. The company stated that its perpetual futures typically hold the largest trading volume, averaging a 37% monthly market share. The post also emphasized the competitive leverage of up to 125x, and CEO Zhao celebrated reaching an all-time high of $13 billion in daily futures volume the previous month, as well as surpassing the $1 billion mark in open interest.
Binance fails to inform its users that it engages in proprietary trading within its own markets, neither in its Terms of Use nor elsewhere. In line with its seemingly deliberate effort to keep this activity under wraps, Binance has declined to answer investigative subpoenas from the Commission, which sought details about its proprietary trading activities, including transaction data and internal communications from the Binance “quant desk.”
Based on available information, it appears that Binance has not implemented any anti-fraud or anti-manipulation measures for the trading activities of Merit Peak, Sigma Chain, or its roughly 300 internal accounts. Furthermore, while Binance claims to enforce a relatively recent “insider trading” policy for its officers, employees, and agents, these 300 internal accounts seem to be exempt from this policy.
As the founder and CEO of Binance, Zhao is responsible for all significant strategic decisions, business growth, and overall management of the company. He also takes an active role in the company’s daily operations. For instance, Zhao personally approved a $60 office furniture expense in January 2021, a month when Binance generated over $700 million in revenue.
The CFTC discovered a private conversation from February 2019 between Zhao and Lim, where Lim told Zhao that a significant number of Binance’s TIER 1 customers (those trading through the two BTC-no KYC loophole) might be US citizens. Lim advised them to use VPNs with non-US IP addresses. In a June 2019 management meeting, Zhao acknowledged that these customers made up a large part of their trading volume and didn’t want to lose them, despite realizing it wasn’t possible to allow such transactions without KYC in the US due to clear precedents.
Zhao used Signal to communicate with various Binance personnel, enabling the auto-delete feature. In October 2020, Lim told a coworker in a chat that they were unlikely to remove the no-KYC (email registration) policy because it would be too detrimental to the company. Lim believed Zhao was aware of the risks but prioritized the company’s survival. If Binance enforced mandatory KYC, their competitors would greatly benefit.
On June 9, 2019, the CFO of Binance emphasized during a meeting with top executives, including Zhao, that instead of stating they were blocking US customers, the focus should be on the launch of Binance US. They would never publicly or privately admit to serving US clients, as they claim not to do so. Instead, their website is available to those who sign up, with no control over access by US customers. Zhao concurred that their “PR messaging” was crucial, explaining that the message should never be about Binance blocking US users since they never targeted the US or had US users in the first place.
For instance, in October 2018, Lim reminded Zhao that they had not mentioned sanctions or support for sanctions on their platform, and questioned whether they would block IPs from sanctioned countries, since they currently had users from such locations on their website. Lim warned of potential risks if OFAC found evidence of sanctioned users, as they could investigate or create an international scandal.
Two months later, in a December 2018 conversation, Lim admitted that Binance was operating “in the USA” and declared he wouldn’t sign off as the CCO for OFAC-related matters. In the same conversation, he acknowledged that Binance’s customer support was instructing people on how to bypass sanctions. In an October 2019 chat, Lim stated that doing business with OFAC-regulated individuals was wrong, but Zhao prioritized a competitive edge over compliance, agreeing to block US customers on the main site only once the US exchange obtained
During a management meeting on June 9, 2019, Zhao explained that US laws prevent transactions with terrorists, and to comply with these laws when serving the US or its sanctioned countries, companies must submit relevant documentation for review. However, this is not suitable for their company structure, so they chose not to serve American users. Zhao believes that it is unreasonable for the US to impose these restrictions, and they can’t expect special treatment from US regulators given their noncompliance.
A February 12, 2020 conversation documented an employee asking Samuel Lim about the requirement to block US IP addresses from registering on Binance.com. Lim confirmed the requirement, explaining that allowing US users would subject them to US regulators like FinCEN, OFAC, and SEC. Instead, they encourage users to use VPNs or provide non-US documents. Although they must appear not to have US users, they can pursue alternative methods to serve them.
In a July 17, 2020 chat, Lim explained that they cannot change a user’s status to non-US if they are US citizens, as it would be fraudulent. However, they can encourage the use of non-KYC accounts or VPNs. They can also bypass certain limitations on non-KYC accounts, but this special treatment is reserved for their most significant traders and VIPs.
Lim employed Binance.US to pinpoint key American clients who could be given priority for accelerated integration onto the Binance platform. In a conversation on July 15, 2020, Lim advised a Binance employee to first have potential clients sign up with the U.S. platform and, if their trading volume was significantly large, they would push for exceptional acceptance on Binance.com. Lim emphasized that these clients needed to generate exceptional volumes, mentioning that they always have a way for high-value clients. Lim repeated this process in a conversation on July 27, 2020, stating that joining Binance.com would be problematic for potential clients with U.S. beneficial owners. However, if their volumes were substantial, a backdoor could be arranged after signing up on Binance US.
After meeting with Lim, Zhao shared the compliance guidelines with other high-ranking managers. One of them responded, pointing out that the area where they would face issues is with U.S. users who have non-international KYC. The manager inquired if Binance needed to enforce the proposed block on U.S. API users identified through KYC within the matching engine to ensure no issues arose. Zhao replied that enforcement concerns should be addressed later and that it might need to be done on a user-by-user basis.
On October 9, 2020, around the time Binance started emailing U.S. clients regarding the policy, Zhao had a conversation with an employee who would later become the head of institutional sales at Binance. The employee informed Zhao about the significant accounts, including a top client contributing to 12% of their trading volume, that would be impacted. Zhao advised giving them a warning to avoid using a U.S. IP
A permanent injunction order that prevents the Defendants and any associated individuals, such as their affiliates, officers, agents, employees, successors, assigns, lawyers, and those actively working with Defendants, from directly or indirectly engaging in:
Participating in trading that is subject to the regulations of any registered entity
Participating in transactions involving “commodity interests”
An order requiring Defendants and any third-party recipients or successors to forfeit all benefits obtained, including, but not limited to, trading profits, revenues, salaries, commissions, loans, or fees that are a result of actions or practices in violation of the Act described in this document, including interest before and after the judgment
An order instructing Defendants to pay civil monetary penalties, as determined by the Court.
On March 27, CZ addressed the CFTC complaint via Twitter and the company website, stating that the complaint seems to present an incomplete account of facts and they disagree with many of the allegations. Binance.com has established top-notch technology for compliance and is the first global (non-US) exchange to enforce mandatory KYC protocols, maintaining high KYC and AML standards.
Binance is devoted to transparency and collaborating with regulators and law enforcement agencies worldwide. Their compliance teams consist of over 750 members, many with prior experience in law enforcement and regulatory agencies. They have handled 55,000+ LE requests, helping US LE freeze/seize over $125 million in 2022 and $160 million in 2023 so far.
Binance.com possesses the highest number of global licenses/registrations, with 16 and counting, and enjoys a positive reputation among users.
Regarding trading, Binance.com does not trade for profit or manipulate the market under any circumstances. They do trade in certain situations, such as converting their crypto revenues to cover fiat or other crypto expenses. Binance also has affiliates that provide liquidity for less liquid pairs, ensuring they do not generate substantial profits.