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Binance and CEO CZ Sued by U.S. CFTC Over Alleged Compliance Violations

The US Commodity Futures and Trading Commission alleges that Binance willfully violated federal law to encourage US investors to subvert its own “ineffective” compliance program. The exchange is also accused of offering unregistered crypto derivatives products.

CZ Binance CFTC

Binance, CEO Changpeng Zhao, and former compliance officer Samuel Lim have all been named in a complaint filed against the cryptocurrency exchange by the U.S. Commodity Futures and Trading Commission (CFTC).

The complaint alleges that from at least July 2019 up to the present day, Binance "offered and executed commodity derivatives transactions on behalf of U.S. persons” despite this being prohibited by federal law.

It details the company’s purported efforts to retain valuable and VIP customers on the main platform, even after the company launched its Binance.US exchange to service U.S. customers in compliance with local regulators.

The filing alleges that this was achieved by directing high-value users, including U.S.-based institutional investors, to mask their true location using virtual private network (VPN) software and submit non-U.S. documents, to pass know-your-customer (KYC) processes.

The CFTC accuses Binance, Zhao and Lim of violating several core provisions of the Commodity Exchange Act, including those “designed to prevent and detect money laundering and terrorism financing.”

In addition to the disgorgement of profits derived from U.S. citizens and payment of civil penalties for the infringements, the complaint also requests that Binance and CZ be banned from engaging in any of the conduct contained within. This would include trading on registered entities, holding any commodity interest or directing any trading of digital assets.

In his response, CZ called the filing “unexpected and disappointing”, it having occurred despite Binance “working cooperatively with the CFTC for over two years.”

He claimed that the complaint appeared to contain “an incomplete recitation of facts,” and that has one of the industry’s highest standards in KYC and AML (anti-money laundering). Users from the U.S. were blocked by nationality (via KYC documentation), IP location (including popular VPN endpoints), device fingerprints, bank deposits/withdrawals and more, according to Zhao.

The exchange cooperates with regulators and law enforcement, with over 750 people employed in compliance teams, and the firm has assisted U.S. law enforcement to freeze and/or seize $160 million in assets so far this year.

Just a week ago SEC charged Justin Sun for unregistered crypto security offerings, so it is rather starting to look like this is all part of a concerted anti-crypto push by U.S. authorities, whereby SEC is going after the crypto founders while CFTC is blocking access to 'unmanned' crypto through exchanges.

If true, such a position of U.S. authorities would appear to be a rather short-sighted policy. As many other global jurisdictions work with the industry to develop suitable regulatory frameworks and promote innovation, the unilateral continuation of this heavy-handed approach is likely to leave the country with a blockchain ‘brain-drain’.

Unless it can somehow convince the rest of the world to follow its ill-advised ‘War on Crypto’ it is a battle which is virtually impossible to win. The U.S. just stands to be left behind in this important technology industry.

As usual, we will continue to Observe.