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Binance CEO Addresses Four Key Issues In His Response To CFTC’s “Disappointing” Complaint

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Binance Changpeng Zhao responds to the CFTC's complaint
Binance Changpeng Zhao responds to the CFTC's complaint

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Binance, the largest cryptocurrency exchange by trading volume, is in trouble. The US Commodity Futures Trading Commission (CFTC) just slammed it with a “civil enforcement action.

This cannot be good news for the Changpeng Zhao-led company as the CFTC alleges that Binance and its Chief Executive Officer (CEO), violated federal laws. The charges were placed on three persons, Binance (Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited), Changpeng Zhao a.k.a CZ, the CEO of Binance, and Samuel Lim, the former Chief Compliance Officer (CCO) of Binance between 2019-2022. 

This is not a mild charge by the CFTC as the over 1000-word civil enforcement action complaint against the exchange stated “For years Binance knew they were violating CFTC rules.” and its efforts to comply with futures and derivatives trading laws “have been a sham.” The regulator also accused Zhao of his “long-running failure to act in good faith” while at the helm of the company. 

Regulators Go After Binance’s Crypto Derivatives Business

The filing revealed that CFTC was not after Binance’s spot trading services. It was after its cryptocurrency derivatives business. 

Note that crypto derivatives, in the US, are treated as commodities and hence are under the CFTC’s jurisdiction, while spot cryptos are treated as securities when sold. 

Therefore, the regulator is going after Binance for five main reasons: 

    • Issues with registration: According to CFTC, Binance is not registered in the US, however, it has continued to offer derivatives services to people in the US between 2019 – 2022.
    • Lack of proper KYC procedures: Binance did not follow the proper procedures to verify the identity of the people using its platform. According to the government agency, the exchange did not follow KYC, terrorist financing, or anti-money laundering (AML) guidelines.
    • Trading against customers: The crypto firm has two in-house trading companies: Merit Peak and Sigma Chain. These two companies, the CFTC claims, have been trading on Binance using 300 in-house accounts and they traded against Binance’s own users in the over-the-counter (OTC) markets.
    • Only for the rich: When the US government asked Binance to restrict US users from accessing services on its platform. The exchange restricted ordinary customers while allowing wealthy ones to continue accessing the platform. These were VIP customers and High-net-worth individuals (HNWIs). CFTC alleges that even Binance employees advised these customers on the “best methods for evading Binance’s compliance controls.
    • Erasing Evidence: The lawsuit also claims that Binance’s employees used a messaging application that automatically deleted messages when dealing with the said US customers. This was done because Binance wanted to avoid “leaving any evidence” that they were working with customers from the US.

Binance CEO’s Response To The CFTC Lawsuit

Initially, Binance CEO Changpeng Zhao responded to these allegations with just one word (or rather one number) – 4.

Later, he penned an official response in a blog, referring to the CFTC complaint as “unexpected and disappointing” as the company has been cooperating with the CFTC for over two years. Zhao added:

Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.

He tweeted:

Zhao went on to address issues featured in the complaint as the crypto community connected it to his “4” tweet earlier. The first item on his list was Technology for Compliance & US Blocks with the executive noting that the exchange has the “best-in-class technology to ensure compliance. He said that Binance was the “first global (non-US) exchange to implement a mandatory KYC program” and has maintained “one of the highest standards in KYC and AML.” 

We block US users by nationality (KYC), IP (including commonly used VPN endpoints outside of the US), mobile carrier, device fingerprints, bank deposit and withdrawals, blockchain deposits and withdrawals, credit card bin numbers, and more – Zhao added.

The second item CZ responded to was on Cooperation and Transparency with Law Enforcement, explaining that Binance is committed to transparency and cooperation with regulators and law enforcement in the US and worldwide. Pointing out that the exchange has over “750 people in our Compliance teams” most of whom are experienced in “law enforcement and regulatory agency”, Zhao explained that his company has handled at least 55,000 law enforcement requests and collaborated with US authorities to freeze/seize over $125 million in funds in 2022 alone and $160 million in 2023 to date. 

On this issue, he notes:

We intend to continue to respect and collaborate with US and other regulators worldwide.

The third issue that the Binance CEO addressed was Registrations and Licenses to which he said the exchange “holds the highest number of licenses/registrations globally, 16 and counting,” and is well-regarded by the exchange’s user base.

Trading was the last issue Zhao pronounced himself emphasizing that “Binance.com does not trade for profit or “manipulate” the market under any circumstances.”  Instead, CZ explained, the exchange “trades in a number of situations”, with most of its revenues coming in the form of crypto. As such, “[the exchange] need[s] to convert them from time-to-time to cover expenses in fiat or other cryptocurrencies.”

To counter CFTC’s allegations, the crypto mogul said: 

We have affiliates that provide liquidity for less liquid pairs. These affiliates are monitored specifically not to have large profits.”

“I have two accounts at Binance” – Changpeng Zhao

The crypto top man also revealed that he has two “personal” accounts at Binance: “one for Binance Card and one for my crypto holdings.”

I eat our own dog food and store my crypto on Binance.com. I also need to convert crypto from time-to-time to pay for my personal expenses or for the Card.

CZ further claims that the exchange has a “90-day no-day trading rule” for its employees, “preventing them from selling a coin within 90 days of their latest buy or vice versa.” Alongside other measures, the exchange ensures employees do not trade actively. These extra measures include a “no-futures trading” policy and stark regulations against buying or selling into listings and launchpads.

After news of the CFTC’s lawsuit hit news wires, the price of Binance Coin (BNB) slumped as much as 8% from highs of about $330 to $306 on Monday. At the time of writing, BNB was going for $309, down 5.91% on the day and 7.65% in the last seven days. 

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