March 29, 2023: The Commodity Futures and Trading Commission has stated a complaint regarding crypto exchange Binance, its co-founder, Changpeng Zhao, and its retired chief compliance officer, Samuel Lim, which alleges that Binance actively solicited U.S. users and subverted the exchange’s own “ineffective compliance program,” a filing in Illinois federal court stated on Monday.
The report has the potential to upend the exchange’s operations and is the first salvo in a regulatory crackdown on the largest crypto exchange in the world. Beyond disgorgement and all monetary costs, the CFTC filing questioned the court to impose further relief, which includes trading and registration bans.
The regulator has scheduled that Binance, Zhao, and Lim violated eight core Commodity Exchange Act provisions, including laws that needed controls “created to prevent and detect money laundering and terrorism financing.”
Just days before the CFTC filing, it stated how Binance employees worked to subvert the transfer’s compliance controls in China, using a few similar techniques that the CFTC alleges Binance used to solicit U.S. users.
Zhao and Lim allegedly “cultivating lucrative and commercially important ‘VIP’ customers, which include institutional customers, located in the U.S.,” the complaint said.
“Today’s enforcement action shows that there is no location, or claimed lack of location, preventing the CFTC from protecting American investors. I have been transparent that the CFTC will keep using all its authority to search and stop wrongdoing in the volatile and risky digital asset business,” CFTC chair Rostin Benham stated.
Binance and Zhao took steps to obscure where the exchange’s subsidiaries were located purposefully, the regulator said. This was part of a significant strategy that Zhao stated was to “keep countries all clear,” the regulator alleged in the filing.
A crucial part of Binance’s alleged effort to produce fees and solicit U.S. users was the exchange’s VIP program for high-net-worth individuals, the CFTC filing said.
“Binance is aware of its VIPs’ model and geographic locations because Binance monitors its origin of transaction volume and fee-based earnings as a matter makes its operations,” the CFTC complaint alleges.
Binance’s VIPs offered special privileges when law enforcement agencies got them or froze their assets, the CFTC alleged, arguing Binance gave VIPs a heads up or stated that they take their assets off the platform.
“Do not directly tell the user to operate,” Binance instructed its VIP team, the filing stated. “If the user is a significant trader, or a smart one, they will get the hint,” it further stated.
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