The Commodity Futures and Trading Commission filed a complaint against crypto exchange Binance, its co-founder, Changpeng Zhao, and its former chief compliance officer, Samuel Lim, alleging that Binance actively solicited U.S. users and subverted the exchanges own "ineffective compliance program," according to a filing in Illinois federal court Monday.
The filing has the potential to upend the exchange's operations and is potentially just the first salvo in a regulatory crackdown on the world's largest crypto exchange. Beyond disgorgement and any monetary costs, the CFTC filing asked the court to impose further relief, including trading and registration bans.
The regulator alleged that Binance, Zhao, and Lim violated eight core provisions of the Commodity Exchange Act, including laws that require controls "designed to prevent and detect money laundering and terrorism financing."
Just days prior to the CFTC filing, CNBC reported on how Binance employees worked to subvert the exchange's compliance controls in China, using some of the same techniques that the CFTC alleges Binance to solicit U.S. users.
Zhao and Lim allegedly "actively cultivated lucrative and commercially important 'VIP' customers, including institutional customers, located in the United States," the complaint said.
"Today's enforcement action demonstrates that there is no location, or claimed lack of location, that will prevent the CFTC from protecting American investors. I have been clear that the CFTC will continue to use all of its authority to find and stop misconduct in the volatile and risky digital asset market," CFTC chair Rostin Benham said in a statement.
Binance and Zhao took steps to purposefully obscure where the exchange's subsidiaries were located, the regulator said. This was part of a larger strategy that Zhao said was an effort to "keep countries clean," the regulator alleged in the filing.
A key part of Binance's alleged effort to generate 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' identities and geographic locations because Binance monitors its sources of transaction volume and fee-based revenue as a matter of course in conducting its operations," the CFTC complaint alleges.
Binance's VIPs were offered special privileges when law enforcement agencies pursued them or froze their assets, the CFTC alleged, claiming Binance gave VIPs a heads up or suggested they take their assets off the platform.
"Do not directly tell the user to run," Binance instructed its VIP team, the filing alleged. "If the user is a big trader, or a smart one, he/she will get the hint."
CNBC previously reported on how Binance's customer service and VIP representatives counseled users in mainland China on how to evade Binance's compliance systems. The use of virtual private networks and alternative non-state documents was advised by some volunteers and employees to mainland Chinese traders. The CFTC filing alleges that Binance engaged in similar activity for its U.S. users.
"But as best we can we try to ask our users to use VPN or ask them to provide (if there are an entity) non-US documents. On the surface we cannot be seen to have US users but in reality we should get them through other creative means," Lim told a Binance employee in 2020 according to the filing.
Lim allegedly advised against outright fraud but encouraged "creative means" to sidestep regulations. Binance "can encourage them to be a non kyc account," Lim. KYC stands for know-your-customer, a set of principles that guide anti-money laundering programs for financial institutions and are a key part of fighting terrorist and illicit financing.
Neither Binance nor Zhao's attorney immediately responded to a request for comment. But, Zhao posted a tweet that said "4" in an apparent response to the CFTC filing.
The number four is a call to Binance's devoted international userbase to dismiss negative publicity about the exchange as "fake news."
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