Or issue huge fines? What does the industry think of CFTC suing Binance and CZ?

Original author: Mary Liu, BitpushNews

On March 27, the U.S. Commodity Futures Trading Commission (CFTC) announced the prosecution of the world's largest cryptocurrency exchange Binance (Binance) and its CEO and founder Changpeng Zhao (CZ), which the regulator said was deliberately evading federal law and operating " Illegal" digital asset derivatives exchange. In addition to indicting CZ and several Binance affiliates, the CFTC charged Binance’s former chief compliance officer, Samuel Lim, with aiding and abetting Binance’s violations.

The CFTC is a civil government agency, so it cannot bring criminal charges against companies or seek prison terms for individuals. However, the regulator's case could lead to substantial fines and other penalties for companies and individuals. “In its ongoing proceedings against the defendants, the agency seeks forfeiture of disgorgement, civil monetary penalties, permanent trading and registration injunctions, and permanent injunctions against further allegations of violations of the Commodity Exchange Act (CEA) and CFTC regulations,” the CFTC said.

The lawsuit is the latest regulatory blow to the crypto industry over the past year as the CFTC and other federal agencies, including the Justice Department, have been investigating Binance for years, The Wall Street Journal previously reported. Adam Cochran, a partner at Cinneamhain Ventures, commented on Twitter that the CFTC is trying to deliver a "killer blow" to Binance, writing: "First responders...I think they have a good chance of successfully toppling the Binance empire with this move ".

The two major cryptocurrencies, Bitcoin and Ethereum, fell rapidly after the news came out. Bitcoin fell 3.3% to $26,800 within an hour, and Ethereum fell 2.9% to below $1,700.

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What happened to Binance? Doing business illegally in the United States

According to the CFTC, Binance has operated a digital asset derivatives trading facility in the United States since at least July 2019, allowing U.S. residents to trade futures, swaps and options on cryptocurrencies such as Bitcoin, Ethereum and Litecoin. Binance also sought to expand its U.S. footprint despite the exchange’s claim that it would prevent U.S. residents from accessing Binance’s platform, the lawsuit said.

"Despite publicly stating its intention to 'block' or 'restrict' US-based customers from accessing its platform, Binance has taken a deliberate, phased approach to increasing its presence in the US," the CFTC said.

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lax compliance controls

The CFTC lawsuit describes Binance’s corporate structure as a “labyrinth of corporate entities” designed to confuse who owns and controls the exchange. CFTC Senior Enforcement Official Gretchen Lowe called Binance’s compliance efforts a “sham.”

The suit alleges that CZ founded Binance in 2017 and traded on his platform by directly or indirectly owning approximately 300 "internal accounts," though the exchange did not disclose this in its public terms of use or elsewhere. Activity. These internal accounts are not subject to Binance’s “insider trading” policy, the CFTC said.

In addition to offering illegal transactions in the U.S., the lax approach to compliance could lead to more serious repercussions, such as the potential for U.S. and EU-designated terrorist groups to trade on the platform, according to internal communications reviewed by the CFTC.

The document mentions multiple chats about Binance’s use of the Signal chat app, including chats between CZ and Binance employees, U.S. customers, and more. The chat records also mentioned instructions issued to employees asking them to use Signal to communicate about the "U.S. ban."

"Internally, Binance officers, employees, and agents acknowledged that the Binance platform facilitated potentially illegal activities...For example, in February 2019, after receiving a statement about Binance's 'Regarding the HAMAS Transaction'," the complaint reads After the information, former chief compliance officer Samuel Lim explained to a colleague that terrorists usually send 'small amounts of money' because 'larger amounts constitute money laundering'". For some Binance customers, including those from Russia, Lim admitted in a February 2020 chat: “They come here to commit crimes.” Turn a blind eye. '"

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Failed Anti-Money Laundering Program

The CFTC also alleged that Binance failed to implement an effective anti-money laundering program. The agency said it also failed to establish the necessary safeguards to determine the true identity of customers. The company has not filed any suspicious activity reports in the United States as of at least May 2022, the complaint said.

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How does the crypto industry view the lawsuit?

Some industry players said U.S. regulators are trying to enforce regulation in the absence of a comprehensive framework for the crypto industry.

Meltem Demirors, chief strategy officer at crypto investment firm CoinShares, said in a tweet that all eyes are on the lawsuit. She noted that the case is similar to the CFTC case against BitMEX — “albeit less focused on OFAC violations and more focused on marketing and product access for U.S. retail operations.”

Bittweet previously reported that in August 2021 BitMEX entered into an agreement with the CFTC and the Financial Crimes Enforcement Network (FinCEN) after U.S. regulators accused BitMEX of illegally accepting orders and funds from U.S. customers to trade derivatives of Bitcoin, Ethereum, and Litecoin. ) settled for $100 million.

Demirors added that the CFTC’s claim in its latest lawsuit against Binance that bitcoin and ethereum are commodities runs counter to the SEC’s stance. SEC Chairman Gary Gensler has said repeatedly in interviews over the past year that while he views bitcoin as a commodity, most other crypto tokens are securities.

The CFTC complaint on Monday also referred to litecoin, stablecoins USDT and BUSD as commodities. Yankun Guo, a partner at Chicago-based law firm Ice Miller, said the distinction showed "the confusion created by the lack of clarity in the U.S.".

Dave Weisberger, CEO and co-founder of CoinRoutes, an algorithmic trading platform for the digital asset industry, believes that the case could completely damage the Binance.US platform. “Binance may soon see the complete end of its operations in the U.S. There are many quality exchanges operating in the U.S. that have higher liquidity than BinanceUS,” Weisberger said.

Jeffrey Blockinger, chief legal counsel of Vertex Protocol, a decentralized exchange, believes that Binance may reach a settlement or file a lawsuit.

“Any settlement would certainly include Binance agreeing to cease and desist from any further violations related to derivatives sales and violations of bank secrecy laws,” Blockinger said. If a lawsuit is filed, it could take years to resolve. During this time, Binance will Seek to correct any deficiencies that exist to avoid any further charges and show good faith to the CFTC."

Primitive Ventures CEO @DoveyWan said in a tweet that if the settlement between Binance and CFTC is $1 billion, this is only one month of Binance’s revenue. Dovey Wan wrote: "JP Morgan Chase paid the largest ever CFTC fine of $920 million for misconduct and market manipulation, I think binance can exceed, $1 billion is a hypothetical number". DoveyWan believes that the possible results of this lawsuit include: Binance spent billions of dollars to reach a settlement with the CFTC; CEX in the United States kept spending money to polish, cut business and products; offshore CEX flourished in green regulatory areas; DeFi flourished Grow; non-US founders thrive; more founders join the anonymous game.

At press time, the crypto market remained largely flat, with Bitcoin back above $27,000 and Ethereum bouncing back above $1,700.