CFTC sues Binance: The Scandalous Inside Story of the World’s Largest Crypto Exchange


The CFTC is suing Binance, and the lawsuit paints an ugly glimpse into the world’s largest crypto exchange. The fact that the CFTC feels responsible could at least be a favorable regulatory signal for the market.

After the US Securities and Exchange Commission (SEC) has been driving the crypto industry in front of it in recent months, the CFTC, the “Commodity Futures Trading Commission”, which monitors and regulates trading in commodity derivatives, is now also taking action. And the CFTC does not hesitate, but immediately takes on the biggest fish: the crypto exchange Binance.

The CFTC is charging Binance and its founder Chengpeng Zhao with willfully violating US federal law and operating an illegal derivatives trading platform. The lawsuit was filed in the US District Court of Northern Illinois. In addition to Chengpeng Zhao, Brose’s former compliance officer, Samuel Lim, is also being charged.

Even the press release indicates how extensive the lawsuit is. “Binance has, for years, deliberately violated CFTC rules and actively helped circumvent them to keep the money flowing,” summarizes CFTC Chairman Rostin Behnam. At the core of the indictment, says CFTC Director Gretchen Lowe, is “willful subversion of US law.” This was shown by the defendants’ emails and chats, which form the evidence of the lawsuit.

“Futures, swaps and leverage of digital assets that are commodities”

A look at the complaint itself goes much deeper . These are always made public by US authorities. In them you can find out to the max how scandalous things were at the world’s largest crypto exchange.

Significant parts of the complaint are based on messages about the messenger signal. This allows messages to be automatically deleted after they have been read. Although Zhao and the staff he communicated with use this feature, the CFTC is aware of numerous conversations. Either employees took screenshots, or the government somehow hacked or broke Signal.

Of course, we can only reproduce the extensive lawsuit in part. Under Zhao’s “chair and control” and with Lim’s “willing and substantial support,” Binance has permitted and enabled individuals in the United States to “use futures, swaps, and leverage to trade digital assets that are commodities.”

This is an extremely interesting point. The CFTC defines “certain digital assets” as commodities, including “BTC, ETH, LTC and at least two fiat-backed stablecoins, Tether (USDT) and the Binance USD (BUSD).” This is a hot statement from a regulatory point of view, since the SEC believes that all crypto assets except Bitcoin are securities , i.e. securities, and are therefore currently launching lawsuits in all directions, including against Paxos , because they have illegally issued a security with BUSD.

What are ETH and stablecoins now? Security or Commodity? Or both, depending on which agency you’re dealing with? That the two main regulators in the US are so at odds should be stressful for the industry, as there are no clear rules to rely on – but it should also provide grounds for fighting in court for your own interests fight.

But back to the lawsuit.

The 2 BTC loophole

The CFCT therefore accuses Binance of willfully ignoring the rules in the USA in order to make sales and profits from US customers.

The regulators in the US basically require that everyone who has US citizens as customers play by their rules. It doesn’t matter where the company is based. So if, like Binance, you offer derivatives – futures, options, swaps, leveraged trades – then you have to register this with the responsible US authorities and implement the relevant requirements. And since the CFTC considers cryptocurrencies to be commodities, it feels responsible.

In order to give the impression that it is at least taking these requirements seriously, Binance has allegedly blocked customers who wanted to register with an IP address from the USA from mid-2019. However, according to the CFTC, Binance did not actually block access, but only had a pop-up appear that customers had to confirm that they were not US citizens. This roughly corresponds to the practice of European banks, which require you to confirm that you are not a US citizen.

After this short step, you could trade at Binance without further testing. In itself, Binance also requires a KYC check, during which the exchange would inevitably find out which customers are US citizens. But the “two-BTC loophole” allows you to register with just one email if you debit cryptocurrencies with a maximum value of two bitcoins per day. It is only (or was) necessary to verify your identity with an ID document for larger payments.

Lim informed his boss Zhao that this loophole has allowed US citizens to continue using the platform. That was probably quite desirable. As recently as the beginning and middle of 2020, almost 20 percent of Binance customers came from the USA, including not only private individuals but also companies such as market makers or brokers.

You can hardly buy a machine gun for 600 dollars?

Binance apparently accepted that the 2-BTC loophole not only attracted legal users who were unlucky enough to live in the wrong jurisdiction. This is where it gets scandalous.

Chats and emails show again and again that the employees knew about the criminal activities of the users. In February 2019, Lim commented on a transaction related to the Palestinian terrorist organization Hamas. The sum is small at $600, with that amount you can “hardly buy an AK47”. He later admitted that criminals were among the customers and that you could see that “but close two eyes”.

There was a system to it, even for larger amounts. When an employee informed Lim in mid-2020 that a transaction worth more than $5 million was linked to the Hydra dark web marketplace, Lim instructed him to inform the customer to be more careful with their money flows. The account must be closed, but the customer should know that he can create a new one. As if it wasn’t about drug money in the millions, but about a troll in an Internet forum.

Bypass VPN blocks

Perhaps one of the most irritating things for the CFTC is that Binance staff themselves worked to circumvent the lax controls and bans. Binance has set up “IP-based compliance controls” that limit access for customers from certain countries, including the United States. Here the complaint is somewhat contradictory. Was it just a pop-up – or a real blockage? Or has Binance tightened the blockade over time?

Either way, the measures have not been enough, says the CFTC. Above all, however, Binance itself instructed customers to circumvent the controls through virtual private networks (VPNs). That had at Binance System. For example, Binance Academy published a guide explaining VPNs, even stating that they “allow you to access sites that are blocked in your country.” A rogue who is there —

This is probably the moment when Lim and Zhao can no longer talk themselves into negligence.

Trade against your own customers

While many in the crypto scene have a certain understanding of not taking regulatory requirements quite so seriously, an allegation that the CFTC mentions in passing should be more outrageous: “Binance has been involved on its own platform for the relevant period of time traded around 300 ‘house accounts’, all of which belonged directly or indirectly to Zhao.”

The CFTC is now suing that Binance kept this proprietary trading secret instead of informing customers about it. The lawsuit does not cite evidence that Binance cheated with them or engaged in insider trading. Still, it should be clear that Binance has made a large amount of money trading against its own customers. One’s gain is another’s loss. Trading doesn’t work any other way. In addition, 300 accounts is an ideal basis for doing wash trading – to fake a trading volume that makes Binance appear larger than the exchange actually is.

This could explain how Binance managed to reduce trading fees so much while still raising enough money that founder Chengpeng Zhao became the (temporarily) richest Asian in the world. Above all, there is a good reason to give the stock exchange a wide berth even as a non-US citizen.

And now?

Where the lawsuit goes geographically is not an easy question. Because the stock exchange, which appears monolothic on the Internet, is actually a network of numerous companies that are in different jurisdictions – Ireland, the Cayman Islands, Singapore, Malta, Dubai, Tokyo, the USA and others – and are largely under the control of Zhao : Binance Holdings, Binance Serices, Binance UAB, Merit Peak, Sigma Chain, BAM Trading, and many others.

The CFTC complains that this network of companies intentionally obscures the identity and place of jurisdiction of the trading platform. Although the stock exchange operates transparent offices and departments at many locations, it keeps the leading offices, where the officers and the C-squad work, secret. “Instead, Zhao has repeatedly stated that Binance’s headquarters are where he is.” And that’s presumably Dubai right now, a place that doesn’t have an extradition treaty with the US.

Therefore, Zhao and Lim should not be taken to court immediately. Instead, Binance US employees or other top executives could be indicted by extradition warrant. US companies that are still working with Binance – such as blockchain analysts, cloud hosters and trading companies – are also likely to end the cooperation quickly in view of the lawsuit.

Binance itself will probably continue to operate happily despite these restrictions – and will also serve US customers undauntedly. Only a law that seriously prohibits the use of VPNs by customers could prevent this in the long term – as Congress is allegedly currently planning .

Until then, the CFTC’s lawsuit will primarily have the effect of driving Binance, like Bitfinex, into the underground and thus further removing the influence of regulation. Because even if Binance opposes many rules that the exchange perceives as damaging to business, it also tries to implement the blacklists of the US Treasury Department and at least partially act as a partner of prosecutors and regulators.

Therefore, it remains to be seen who will be harmed more by the CFTC’s lawsuit – the Binance exchange or the regulators themselves.


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