Long reads

The tip of the iceberg: Assessing the CFTC’s lawsuit against Binance

Arvin Abraham

Arvin Abraham

Partner, Goodwin Procter

On 27 March 2023, the Commodities Futures Trading Commission (CFTC) filed a lawsuit against Binance in the United States District Court for the Northern District of Illinois. Binance, as of the time of writing, remains the world’s largest crypto exchange by a large margin. Binance’s international exchange dwarfs its closest rivals having more than eleven times the 24-hour spot trading volume of Coinbase and more than four times the 24-hour derivatives trading volumes of Bybit.[1]

At a high-level, the CFTC’s complaint alleges that Binance was wilfully evading U.S. federal law and operating an illegal digital asset derivatives exchange. In addition to charging three Binance entities, Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited, the CFTC also filed charges against Changpeng Zhao, Binance’s owner and CEO, and Samuel Lim, Binance’s former chief compliance officer.

The lawsuit focuses on the time period from July 2019 through the present day during which Binance had been providing commodity derivatives transactions to U.S. persons. Among other things, the CFTC’s lawsuit alleges that (i) Binance compliance programme was ineffective and it instructed its employees and customers to circumvent compliance controls in order to maximise corporate profits, including by promoting trading by US customers who were supposed to have been prohibited from trading on Binance’s international platform; (ii) failure to require its clients to provide identity verification (Know Your Client or KYC) information; (iii) failure to implement basic compliance procedures to prevent and detect terrorist financing and money laundering; and (iv) a pattern of wilful evasion of the requirements of the Commodities Exchange Act (CEA) and CFTC regulation, including by structuring entities and transactions to avoid registration requirements and the aforementioned instructions to employees and customers to avoid compliance controls.

The allegations that the CFTC lawsuit makes against Binance are the latest in a series of regulatory actions taken against the crypto exchange and perhaps the strongest and most well documented salvo to date. My 9 August 2021 article discussed Binance’s earlier compliance troubles and a series of global regulators who had required it to cease or suspend operations in their jurisdictions, including regulators in the UK and Japan, for similar reasons to the allegations made in the CFTC complaint. My prior article also cited to Micheal del Castillo’s excellent piece in Forbes, which describes a leaked document purportedly reviewed by senior Binance executives that presents an alleged scheme dating back to 2018 “designed to intentionally deceive regulators and surreptitiously profit from crypto investors in the United States.”

The CFTC’s lawsuit is notable in that it is the most comprehensive recitation of alleged compliance and systems and controls failures by Binance to date. Further, it amplifies the potential for punitive measures by naming Changpeng Zhao and Samuel Lim in their individual capacities as defendants. Among other claims, the lawsuit alleges that:

  • Since the launch of its platform in 2017, Binance has taken a calculated, phased approach to increase its United States presence despite publicly stating its purported intent to “block” or “restrict” customers located in the United States from accessing its platform.
  • Defendants have disregarded applicable federal laws while fostering Binance’s U.S. customer base because it has been profitable for them to do so.
  • Binance purposefully obscures the identities and locations of the entities operating the trading platform.
  • Zhao, Lim, and other members of Binance’s senior management have failed to properly supervise Binance’s activities and, indeed, have actively facilitated violations of U.S. law, including by assisting and instructing customers located in the United States to evade the compliance controls Binance purported to implement to prevent and detect violations of U.S. law.
  • Despite Binance’s solicitation of and reliance on customers located in the United States to generate revenue and provide liquidity for its various markets, Binance has never been registered with the CFTC in any capacity and has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets, including laws that require the implementation of controls designed to prevent and detect money laundering and terrorism financing.

The CFTC complaint goes further in detailing what it alleges to be a culture that facilitated violations in connection with the foregoing. In particular, it alleges that Binance executives used the Signal messaging app with auto-delete functionality enabled to engage in business communication even after receiving document requests from the CFTC and even after Binance itself had sent document preservation notices to its personnel. The complaint further alleges that Binance senior management received reports that showed the nature and geographic location of Binance’s customers as well as the sources of Binance’s revenue, including in the U.S., and were making efforts to target such customers, including via Binance hosted networking and social events in the U.S.  

The complaint also describes various alleged loopholes in Binance’s governance and controls, including a “loophole for customers to sign up, deposit assets,

trade, and make withdrawals without submitting to any KYC procedures as long as the customer withdrew less than the value of two Bitcoin (BTC) in one day.” The two BTC no KYC loophole would, at the height of Bitcoin prices have allowed more than $130,000 to be transacted without appropriate controls.

There are a variety of interesting quotes and anecdotes in the CFTC’s complaint. Perhaps the most prescient is an excerpt of a chat message between Lim and a colleague from October 2020:

US users = CFTC = civil case can pay fine and settle

no kyc = BSA act [sic] = criminal case have to go [to] jail

Lim’s statement was clearly foreshadowing the future as we are seeing the CFTC case now playing out.

The redress the CFTC seeks goes beyond merely putting a stop to any non-compliant behaviour going forward and includes injunctive relief that could be interpreted to require Binance to cease acting as digital asset exchange in the U.S. altogether. The CFTC also seeks extensive monetary damages, including a disgorgement of any revenues and profits made by Binance from these activities, which given the volume of business it does with U.S. customers would be significant.

The extent of the civil penalties sought by the CFTC indicates it is trying to make a statement with this case and the outcome will be highly relevant for the crypto industry overall given Binance’s role as the dominant global exchange. This lawsuit also follows a trend in the U.S. of increasing action by regulatory agencies to set new standards and enforce compliance with existing guidelines. What remains to be seen is whether criminal charges will be brought against Binance or any of its executives for violations of the Bank Secrecy Act or other laws. The CFTC case could prove to be just the tip of the iceberg if other regulators also choose to take action against Binance and particularly if any criminal charges are filed.

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