7 details to quickly understand: Why is CFTC suing Binance?

Source: The Block

Translation:

The Commodity Futures Trading Commission (CFTC) filed a lawsuit on Monday in a US federal court against the cryptocurrency trading platform Binance, its founder and CEO Changpeng Zhao "CZ", and Chief Compliance Officer Samuel Lim, alleging that Binance violated several US commodity laws and regulations, including failing to crack down on money laundering activities on its platform. Although the lawsuit primarily focuses on the charge of not registering commodity trades in the US, it could have broader implications for Binance and the cryptocurrency industry.

As part of its lawsuit, CFTC seeks an injunction to effectively prohibit Binance and its affiliates, as well as CZ and Lim, from entering the US commodity industry and surrendering profits.

As a response to CFTC, CZ disagrees with the accusation and subsequently issued a statement on Binance's website to refute it.

Binance spokesperson stated in another statement: "The complaint filed by CFTC was unexpected and disappointing, as we have been working with CFTC for over two years. We have made significant investments over the past two years to ensure that there are no active US users on our platform, including increasing our compliance staff from approximately 100 to 750 today."

The US Securities and Exchange Commission (SEC) is investigating a stablecoin called Binance USD (BUSD), which was developed in collaboration between Binance and cryptocurrency service provider Paxos. It is currently unclear whether the SEC will bring its own charges.

The US Department of Justice may also bring criminal charges against Binance. A person familiar with the CFTC investigation said that Binance is also under scrutiny by the US Department of Justice.

Here are the seven main points of the lawsuit filed by CFTC against Binance.  

Binance may know it facilitates illegal trades - but doesn't care  

The CFTC's documents contain some of the most destructive allegations against Binance: Binance may have intentionally facilitated transactions for organized crime and terrorist organizations. The CFTC cited Binance's internal chat records, including conversations between the then Chief Compliance Officer Lim and an anti-money laundering reporting officer.  

"Binance's management and employees acknowledge that the platform has facilitated potential illegal activities," the report said.

"For example, in February 2019, after receiving information about 'HAMAS transactions' on Binance, Lim explained to a colleague that terrorists often send 'small amounts of money' because 'large amounts of money constitute money laundering'."

The money laundering report official replied, "600 dollars can barely buy an AK 47."

In another example, a Binance employee wrote a letter to Lim and another colleague, inquiring whether a customer's recent $5 million transaction was closely related to illegal activities and whether the account should be closed or if they should suggest the customer create a new account? 

Lim suggested through internal chat: "He can be informed to be cautious about his fund flow, especially paying attention to the dark web like hydra... He can abandon the current account and create a new one."

"I have no confidence in our geographical fence."

Binance updated its terms of service in 2019, stating that it cannot "provide services to any US person". That same year, Binance began blocking customers based on their IP address. 

"In fact, Binance simply added a pop-up window on its website, which appears when customers attempt to log in from an IP address associated with the United States," said CFTC. 

However, the pop-up window did not prevent customers from logging into their accounts, making deposits or trades, but instead required them to "self-certify" that they are not in the United States.  

CFTC stated that Binance's IP address compliance control (also known as "geofencing") is also ineffective in preventing customers from "restricted jurisdictions", including the United States. This may be because Binance tells US customers that they can hide their location by using VPN to evade control. 

Binance released a "Beginner's Guide to VPN" in 2019, explaining to customers how to use VPN. 

Once, when Paxos requested Binance to undergo a compliance audit, a Binance anti-money laundering officer sent a message to Lim saying, "I have no confidence in our geofencing."

The CFTC also reported that at least three US-based trading firms are using Binance, indicating that the misconduct has gone beyond normal consumer accounts.

VIP Plan

The CFTC stated that Binance offers a "VIP" program for its large clients, which includes faster trading and timely notification and advice when questioned or targeted by law enforcement regarding their funds.  

"Binance knows the identity and geographic location of its VIPs because it naturally monitors their trading volume and income sources when conducting business," the report said. 

One "important benefit" of this plan is "prompt notification of any law enforcement investigations related to their accounts."

The CFTC stated that the plan was created by Lim under CZ's instruction.

Once funds are frozen or unfrozen, Binance's VIP team will "contact users via SMS, phone, etc. to notify them that their account has been frozen or unfrozen." "They won't directly tell users to run away, but will directly tell them that their account has been unfrozen and is being investigated by XXX. If the user is a big trader or a smart trader, he/she will get the hint."

Binance employees also use Signal for communication, and the organization states that CZ and other employees use the "auto-delete function" for business communication, which may allow employees to "destroy evidence after discussing guilty issues, even after Binance has received a document request from the CFTC and allegedly distributed a notice to its employees to save files."  

CFTC does not believe that Binance.US and Binance operate separately

BAM Trading, headquartered in California, operates Binance.US. According to CFTC, BAM Trading is also owned and controlled by CZ, and has never been registered with CFTC. 

"When he hired the first CEO of BAM Trading, CZ described Binance as a pirate ship, and he hopes Binance.US will become a navy ship," said CFTC. 

CFTC added that Binance.US has a similar marketing and branding as Binance. 

Binance still relies on the "corporate entity cloak", which seems similar to the complex international structure of FTX. After FTX collapsed, people were surprised that FTX had many related corporate entities. The CFTC believes that Binance's many corporate entities deliberately hide the platform's location and confuse the outside world.   

"Binance has been very effective in obfuscating its location and the identity of its operating company, even confusing Lim," said CFTC. 

When the CFTC attempted to locate Lim's address to serve him with a subpoena, the location was chaotic. 

Trading with customers 

Binance has retained approximately 300 "internal accounts" that are traded on the platform and are "directly or indirectly owned" by CZ. In addition, there are two other entities controlled by him, Merit Peak and Sigma Chain, as well as two other accounts managed by CZ.

CFTC stated that "Binance did not disclose to its customers in its terms of use or elsewhere that Binance engages in trading on its own market...consistent with its apparent practice of keeping its proprietary trading activities on its own market confidential, Binance refused to respond to the CFTC's investigative subpoena seeking information about its proprietary trading activities, including trading data and communications among employees."

In a statement released on Monday evening, CZ said: "Binance does not operate with the goal of profit or 'manipulating' the market under any circumstances. Binance 'trades' in many cases because our revenue comes from cryptocurrencies. We do need to convert them from time to time to pay for other expenses. We have affiliated institutions that provide liquidity for currency pairs with lower liquidity. These affiliated institutions are closely monitored and do not generate large profits."

Regarding his personal activities, he added: "As for myself, I have two accounts on Binance: one for Binance Card and one for my personal cryptocurrency assets. I also store my own cryptocurrency on Binance. I also need to convert cryptocurrency from time to time to pay for my personal expenses."

CZ is directly implicated in multiple ways 

CZ is listed as a defendant and is repeatedly mentioned throughout the entire litigation report. 

CFTC stated that CZ directly or indirectly owns all corporate entities of Binance and "is solely responsible for himself" because Binance does not have a board of directors.  

CFTC stated that among the 120 entities, some entities including Binance Holding, Binance IE, and Binance Services have commingled funds and shared infrastructure. In addition to controlling the Binance network, CZ also "directly approves products". 

With the development of Binance, CZ hired a senior management team, but he continues to participate and control "all key decisions of the company", including which products to offer and how to implement and enforce AML and KYC.

"CZ is also responsible for evaluating legal and regulatory risks related to Binance's business activities, including risks related to Binance.US, and directly participates in discussions with compliance advisors and lawyers regarding legal and regulatory issues related to Binance's business," said CFTC. 

CZ, Lim and other members of Binance management will receive regular updates, including information about Binance.US customers and "the effectiveness of Binance's efforts to capture the US market". 

CFTC states that BUSD and Litecoin are commodities 

CFTC will refer to several cryptocurrencies traded on Binance as commodities, including LTC, ETH, USDT, and BUSD.

Over a month ago, BUSD came under scrutiny after Paxos received a notice regarding its joint issuance with Binance.  

In the CFTC's allegations, Paxos was also mentioned. The CFTC stated that Binance attempted to conceal the inefficiency of its BUSD compliance plan from business partners, including Paxos.

In 2020, in order to meet Paxos' requirements, Binance conducted a compliance audit on BUSD.  

"However, according to Lim, Binance intentionally hired a compliance auditor who conducted 'individual audits only evaluating geography' in order to 'buy us more time'," the CFTC wrote in the lawsuit report. 

Regarding whether it is a security or a commodity, LTC has not received much attention, but CFTC seems to have concluded that it is a commodity. 

Especially for ETH, other regulatory agencies hold different opinions on this. SEC Chairman Gary Gensler and New York Attorney General Letitia James both hinted that ETH is a security. James stated earlier this month in a lawsuit against the cryptocurrency trading platform KuCoin that ETH is a security. However, CFTC Chairman Rostin Behnam believes it is a commodity.  

Original source

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