US CFTC sues Binance. What does this mean for Binance?

The U.S. Commodity Futures Trading Commission (CFTC) filed a civil lawsuit against Binance in court on Monday local time, accusing Zhao Changpeng and three entities operating the Binance platform of multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations. Binance's former chief compliance officer Samuel Lim was also accused of aiding and abetting Binance's violations.

In the indictment, Binance is described as a maze-like corporate entity designed to confuse the real controller of the company to evade punishment and supervision of the real controller. And its compliance work is a scam. For Binance, this civil lawsuit may have been expected by it, and it can handle it with ease. The real concern of the US regulatory hunt is not here.

Litigation highlights

According to the indictment, the charges against Binance mainly focus on the following aspects:

1. For most of the relevant period, Binance did not have strict KYC requirements for its customers and failed to implement anti-money laundering.

2. After claiming to restrict US customers from trading on its platform, it still provided its customers with the best methods to evade its compliance control, such as using "VPN" to cover up their true geographical location and instructing VIP customers in the United States to open Binance accounts in the name of newly established shell companies to evade Binance's compliance control. It even set up an automatic application to destroy written evidence of communication with US customers on how to evade regulation.

3. Zhao Changpeng is the actual controller of ten companies that operate Binance as ordinary enterprises and should be held accountable for major decisions of Binance, such as designing a secret conspiracy to instruct US VIP customers to evade Binance's compliance controls. Binance's senior management, including Zhao Changpeng and Lim, failed to properly supervise Binance's activities.

4. Setting up insider trading accounts by directly or indirectly owning approximately 300 “insider accounts” to trade on its own platform, but Binance did not disclose this activity in its public terms of use or elsewhere.

In terms of evidence, the CFTC provided internal employee chat records and some internal documents, including chat records between Chief Compliance Officer Samuel Lim and employees. These chat records show that Lim was well aware of some of the illegal acts committed by the institution and even instructed employees on how to guide customers to circumvent the platform's compliance controls.

In response to the above allegations, Zhao Changpeng published an article saying: Binance has cooperated with the CFTC for more than two years. After preliminary review, the lawsuit seems to contain incomplete statements of facts. We disagree with the description of many issues, including compliance technology and prohibition of access by US users, cooperation and transparency with law enforcement agencies, transactions, etc. In response to the fourth accusation, Zhao Changpeng himself stated that he only has two accounts on Binance.

What does this civil lawsuit mean for Binance?

The U.S. Department of Justice began investigating Binance as early as 2018. This year marks the sixth year of Binance's game with U.S. regulators. Binance may have expected this CFTC civil lawsuit. In February this year, Binance's Chief Strategy Officer Patrick Hillman admitted that Binance was under investigation by multiple regulators and expected to pay a fine to "make up" for past regulatory violations.

In the past five years, Binance has been busy dealing with investigations at various regulatory and government levels, including the judicial department, tax department, drug enforcement department, etc. To this end, Zhao Changpeng made a major change in the team and recruited talents from various government departments who could deal with US supervision.

What is the impact of this civil lawsuit on Binance? Judging from the price of the currency, the crypto market stopped falling and rose after a brief panic. Judging from the market reaction, this crisis is not serious.

The US regulation can only regulate Binance's US entity, and it is difficult to regulate its global business. For Binance, the most important thing is that after the US regulation is implemented step by step, it should not affect the company's main figures and main business. This is also the intention of Binance to use multiple corporate entities in the United States to avoid regulatory risks and allow the company's real controller Zhao Changpeng to escape regulation.

Therefore, what really worries Binance is the criminal charges that it will face from the U.S. Department of Justice. Some prosecutors involved in the investigation by the Department of Justice have indicated that they can criminally prosecute Zhao Changpeng and some of his executives under the Anti-Money Laundering Act. Once the criminal charges are established, the core figures will be imprisoned, which will undoubtedly be a huge blow to Binance.