On March 27, 2023, the CFTC filed a civil complaint in the US District Court for the Northern District of Illinois charging three entities that operate the Binance crypto-asset trading platform – Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited (collectively, Binance) – and its founder and CEO, Changpeng Zhao (collectively, with Binance, defendants), with violations of the Commodity Exchange Act (CEA) and CFTC regulations for allegedly operating the Binance platform along with numerous other corporate vehicles through an intentionally opaque common enterprise, with Zhao at the helm (CFTC v. Zhao, No. 23-01887 (N.D. Ill. Filed Mar. 27, 2023).

The CFTC alleges that defendants chose to knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit. The CFTC complaint also charges Samuel Lim, Binance’s former chief compliance officer, with aiding and abetting Binance’s violations. The US activity of Binance has come under scrutiny at both the state and federal levels (see Legal Updates, NYDFS and SEC Take Action Against Paxos for Issuance of Binance Stablecoin and Digital Asset Platforms Binance and Gemini Face New Legal and Regulatory Challenges).

According to the CFTC, Binance has solicited and accepted orders, accepted property to margin, and operated a facility for the trading of futures, options, swaps, and leveraged retail commodity transactions involving digital assets that are commodities, including bitcoin (BTC), ether (ETH), and litecoin (LTC), to and for US persons from July 2019 through the present (the relevant period). The complaint alleges that since 2017, defendants have taken a calculated, phased approach to increasing its US presence despite publicly stating its purported intent to "block" or "restrict" customers located in the US from accessing the Binance platform. The complaint asserts that Binance's compliance program has been ineffective and, at Zhao’s direction, Binance has instructed its employees and customers to circumvent compliance controls to maximize corporate profits.

The complaint charges that for much of the relevant period, Binance did not require its customers to provide any identity-verifying information before trading on the platform, despite functioning as a futures commission merchant (FCM), which is required to collect such information and to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering.

The complaint also charges defendants with failing to diligently supervise Binance’s activities as an FCM. Among numerous supervisory failures detailed in the complaint is Binance’s instruction to employees to communicate with US-based customers on control evasion through a messaging application that was set to automatically delete communications to avoid leaving any evidence of their efforts to retain US-based customers.

The CFTC alleges that even after Binance purported to restrict US customers from trading on its platform, Binance instructed its customers – in particular its commercially valuable US-based VIP customers – on the best methods for evading Binance’s own compliance controls. The complaint also charges Binance with acting as an unregistered designated contract market (DCM) or swap execution facility (SEF) based on its role in facilitating crypto derivatives transactions. The complaint asserts that the CEA and CFTC regulations make it illegal for a person to operate a facility for the trading or processing of swaps unless the facility is registered with the CFTC as a SEF or DCM.

Despite Binance’s solicitation of and reliance on US-based customers to generate revenue and provide liquidity for its various markets, the complaint alleges Binance has never been registered with the CFTC in any capacity and defendants have disregarded federal laws essential to the integrity and vitality of the US financial markets. The complaint further alleges Binance failed to implement an effective anti-money laundering (AML) program, know your customer (KYC) procedures, and other customer protection rules as required under applicable law. The CFTC alleges further that Binance conducted certain activities outside the US designed to avoid CFTC regulation, such as intentionally structuring Binance entities and transactions to avoid registration requirements.

The complaint charges Zhao and Lim with willful evasion of the requirements of the CEA. The CFTC seeks disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations by the Binance defendants.