The Commodity Futures Trading Commission has initiated a civil enforcement action against Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited, which together operate one of the largest digital asset trading platforms in the world. The CFTC has also charged Changpeng Zhao, the chief executive officer of Binance, and Samuel Lim, the company’s chief compliance officer from April 2018 until at least January 2022.
The complaint alleges that Zhao controls Binance and operates the various Binance entities as a common enterprise, and that he and the company deliberately use a tangle of corporate entities to manage the platform in order to obscure its ownership, control, and location. Zhao and the company are also alleged to have conducted trades on the Binance platform through approximately 300 “house accounts” that are directly or indirectly owned by Zhao, as well as accounts owned by two offshore entities owned by Zhao, and two individual accounts held by Zhao. Lim is implicated, according to the complaint, for failing to implement an effective compliance program and for helping Binance employees and customers circumvent compliance controls.
The complaint lays out the jurisdictional and regulatory foundation of the enforcement action, explaining that the Commodity Exchange Act (“CEA”) requires that most commodity derivative transactions be conducted on exchanges registered with, or designated by, the CFTC. The complaint further notes that the virtual currencies and fiat-backed stablecoins — such as Tether and Binance USD — that are relevant to the enforcement action are “commodities” within the meaning of the CEA, and that, with limited exceptions, the CEA and the regulations promulgated thereunder make it illegal to operate a facility for the trading or processing of swaps unless the facility is registered with the CFTC as a Swap Execution Facility or Designated Contract Market.
As alleged, none of the Binance entities, nor Zhao nor Lim, has ever registered with the CFTC in any capacity. The complaint asserts that they have willfully evaded US law and regulations by conducting activities outside of the United States and obscuring transactions conducted with in the United States and with US persons, while employing sixty people within the United States, soliciting and tracking US customers’ trading activity on Binance, using third-party brokers to trade on behalf of customers located in the United States, and concealing the presence of US customers in the company’s public statements. In a public statement issued in support of the complaint, CFTC Commissioner Kristin Johnson reiterated, “Evidence suggests that Zhao and former Binance CCO Lim were aware that Binance’s activities in the United States were subject to registration and regulatory requirements under U.S. law and that they deliberately disregarded these requirements. While Binance’s compliance program was ineffective in complying with the law, evidence suggests that it was quite effective at directing U.S. customers on how best to evade Binance’s access controls.”
The seven-count complaint alleges violations of:
- Section 4(a) or 4(b) of the CEA, 7 USC § 6(a) or 6(b) and Regulation 48.3, 17 CFR 48.3 (2022), for conducting commodities transactions and offering commodity futures contracts without doing so on a board of trade that was designated or registered by the CFTC as a contract market, or without registering with the CFTC as a foreign board of trade;
- Section 4c(b) of the CEA, 7 USC § 6c(b) and Regulation 32.2, 17 CFR 32.2 (2022), for conducting commodities transactions outside of a registered board of trade and not being registered with the CFTC as an exempt foreign board of trade;
- Section 4d of the CEA, 7 USC § 6d, by operating as a Futures Commission Merchant (“FCM”) but not registering with the CFTC as an FCM;
- Section 5h(a)(1) of the CEA, 7 USC § 7b-3(1), and Regulation 37.3(a)(1), 17 CFR § 37.3(a)(1) (2022), for failing to register as a designated contract market or swap execution facility while operating a facility for the trading of swaps on digital assets such as Bitcoin, Litecoin, and Ethereum;
- Regulation 166.3, 17 CFR § 166.3 (2022), for failing to implement an adequate supervisory system, and for failing to apply diligence in the performance of supervisory duties;
Regulation 42.2, 17 CFR § 42.2 (2022), for failing to implement a customer information program, adequate anti-money laundering procedures, appropriate Know Your Customer policies and procedures, or mechanisms for determining whether a customer appears on lists of known or suspected terrorists or terrorist organizations such as the Specially Designated Nationals and Blocked Persons list issued by the US Department of the Treasury’s Office of Foreign Assets Control, and; - Regulation 1.6, 17 CFR § 1.6 (2022), for willfully evading US laws and regulations by conducting activities outside of the United States.
The complaint seeks injunctive and monetary relief, including civil monetary penalties and restitution.