Federal regulators sued Binance, the world’s largest cryptocurrency exchange, and two of its senior executives on Monday, alleging that in wooing business from American investors, they had chosen to “knowingly disregard” laws governing certain US
Binance is hiding US crypto trading activity, regulator says
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A Binance spokesman did not immediately respond to a request for comment.
The CFTC is seeking fines, according to Monday’s filing, though no amounts have been specified. The regulator wants to ban the company, as well as Zhao and Lim and any direct associates, from participating in the trading of commodities in markets governed by US exchange laws.
The civil suit against Binance is the latest in a string of blows to the cryptocurrency industry over the past year, including the collapse of what was the second largest cryptocurrency exchange, FTX, in November. Its founder, Sam Bankman-Fried, now faces securities fraud charges by federal prosecutors and regulators.
Though Zhao and Bankman-Fried were considered rivals, there was no real contest for business between the two companies. Binance dwarfed FTX. Yet Zhao was long seen as the more elusive foil to Bankman-Fried, who actively courted US politicians and regulators. Federal authorities have been investigating apparent lapses in Binance’s anti-money laundering controls as part of a wider inquiry of the cryptocurrency industry.
In its complaint, the CFTC cited significant holes in Binance’s “know your customer” protections — a set of protocols, known as KYC, designed to stop bad actors from using a platform. Inside Binance, employees acknowledged that the company “facilitated potentially illegal activities,” the complaint said.
And even after the exchange began restricting access, the complaint said, certain customers were able to bypass those critical background checks. The complaint quoted text messages showing that Zhao was aware of the loophole.
The CFTC, in its complaint, also said that Binance had actively sought to grow its business by soliciting US customers without ever being “registered with the CFTC. in any capacity.” The company “has disregarded federal laws essential to the integrity and vitality of the US financial markets,” the complaint said.
The filing noted that Zhao had avoided designating a corporate headquarters for Binance and cited an internal presentation that had been given by Zhao explaining that his refusal to say where Binance was based helped it avoid scrutiny from any particular country’s legal authorities.
The lawsuit appears to be an attempt by the CFTC. to assert its authority over the crypto trading world at a time that the regulator has found itself in something of a competition with the Securities and Exchange Commission. The SEC. has particularly been active in bringing enforcement actions against crypto firms for not registering digital assets as investment products before offering them to sale to the public.
Just the other day, Coinbase, a US-regulated crypto exchange, said it had received an official notification from the SEC. that the agency was planning on bringing an enforcement action against the company.
The SEC declined to comment on Binance.
The CFTC said that Binance had 60 employees in the United States and was continuing to hire. It said the exchange had recruited US customers by relying on what the company called “Binance Angels” to do its bidding. The lawsuit said the company’s US recruiters were compensated for their efforts by receiving benefits “such as invitations to events and Binance swag.”
The regulator said that about 19 per cent of Binance’s trading revenue had come from US customers.
Written by: Emily Flitter and Matthew Goldstein. David Yaffe-Bellany contributed reporting.
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