After essentially being the catalyst behind FTX’s fraudulence uncovering, Binance CEO and Founder Changpeng Zhao (a.k.a. CZ) is now facing his own lawsuit linked to the Binance crypto exchange.
The world’s largest crypto exchange was sued on Monday (March 27th) by the Commodity Futures Trading Commission (CTFC), under the premise that the company has violated trading and derivative rules.
Intuitively CZ is the one facing most of the legal scrutiny, as well as the platform’s ex-chief compliance officer Samuel Lim.
The 74-page complaint relates to allegations that CZ and other Binance employees chose to ignore regulations which were designed to block American users from accessing services and trading unregistered crypto derivatives products.
Such violations include not being appropriately registered to offer derivatives to American clients, as well as not supervising activity on the platform sufficiently. Here, the latter relates to CFTC’s claim that the platform’s anti-money laundering (AML) controls aren’t up to scratch, nor those tied to its know-your-customer (KYC) process.
“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.”Commodity Futures Trading Commission
In other words, the platform has allegedly failed to thoroughly comply with regulations, with the plaintiffs claiming that Binance helped ineligible US clients evade regulations (whist also trading against its own customers).
It also claims that CZ used ‘300 house accounts’- from his own companies that is- to conduct proprietary trades that were never disclosed. Despite Binance recently launching an ‘insider trading’ policy, the CTFC claims that these trades are exempt from this.
The investigation has in-fact been over two years in the making, as the CFTC first began investigating Binance in early 2021 under the premise that it was engaging in unlawful trading practices across US markets. By September of the same year, the allegations then expanded to include insider trading.
If the case succeeds and regulation penalties are enforced, experts forecast Binance’s US business — and even worldwide — to take a substantial hit. Here, the lawsuit wants to issue hefty fines to both CZ and Lim, whilst it’s also interested in the prospect of banning them from trading altogether.
Claiming that lawsuit is nothing more than attempt to spread more FUD across the crypto space (or more specifically, the crypto exchange space), CZ responded to the ‘CTFC Complaint’ on the same day in which the suing came to surface.
In the response, CZ firstly makes it known that Binance has been ‘working cooperatively with the CTFC for over two years’.
He then goes on to describe the complaint as an ‘incomplete recitation of facts,’ and that the company doesn’t agree with ‘the characterization of many of the issues alleged’.
Whilst Binance sets out to ‘give full responses in due time,’ CZ was still able to address what he deems as ’a few key points’ in the statement. Such topics include:
Technology for Compliance & US Blocks — where he states that ‘Binance.com has developed best-in-class technology to ensure compliance,’ as well as that the platform’s KYC program is one of high standards (amongst other claims).
In conclusion here, CZ stated that ‘we are aware of no other company using systems more comprehensive or more effective than Binance’.
Cooperation and Transparency with Law Enforcement- Amongst other claims, CZ states that Binance currently has more than 750 people across its compliance teams, with many having law enforcement and regulatory agency backgrounds. He also claims that to date, the platform has handled over 55,000 E requests, and has assisted in ‘US LE freeze/seize more than $125 million in funds in 2022 alone and $160 million in 2023 so far’.
Registrations and Licenses — Simply put, CZ here claims that ‘Binance.com holds the highest number of licenses/registrations globally, 16 and counting, and is well regarded by our user community’.
Trading- In the final area of discussion, CZ states that the platform doesn’t ‘trade for profit or “manipulate” the market under any circumstances’ (amongst other platform trading-related claims).
He also states that he has two accounts on Binance — one for Binance Card, and one for his crypto holdings — where he then goes on to state that he ‘eats our [the platform’s] own dog food,’ and that he also stores his crypto on Binance and coverts it ‘from time-to-time’ to pay for ‘personal expenses or for the Card’.
With regards to insider trading, CZ explains how the platform has a ’90 no-day-trading rule for employees,’ which, as its name suggests, prohibits employees from making coin sales for 90 days after making their most recent purchase (and vice versa).
In addition, employees are also prohibited from trading in Futures, whilst those with access to private information face many trading restrictions.
Whilst onlooking users can only wait in anticipation to see what unfolds here, many may receive comfort from Binance’s relatively unphased reaction to the accusations. This is because in wake of the complaint being made public, the platform has continued to publish and promote several of its crypto-bullish endeavours.