Read the CFTC’s lawsuit against Binance

Has the CFTC finally grown some teeth?

The regulator has filed a civil suit against Binance in Illinois federal court. It is calling (alleged) bullshit on the crypto platform’s assurances that it doesn’t market to or trade with Americans:

Since the launch of its platform in 2017, Binance has taken a calculated, phased approach to increase its United States presence despite publicly stating its purported intent to “block” or “restrict” customers located in the United States from accessing its platform. Binance’s initial phase of strategically targeting the United States focused on soliciting retail customers. In a later phase, Binance increasingly relied on personnel and vendors in the United States and actively cultivated lucrative and commercially important “VIP” customers, including institutional customers, located in the United States. All the while, Binance, Zhao, and Lim, the platform’s former Chief Compliance Officer (“CCO”), have each known that Binance’s solicitation of customers located in the United States subjected Binance to registration and regulatory requirements under US law. But Binance, Zhao, and Lim have all chosen to ignore those requirements and undermined Binance’s ineffective compliance program by taking steps to help customers evade Binance’s access controls.

The regulator claims it has three examples of US-based firms dodging the ban by directing their Bitcoin-derivatives trading through other countries or jurisdictions. In a couple of cases, firms traded through employees’ personal accounts on Binance before shifting them to offshore locations, it claims.

At first glance, a regulator lawsuit may not seem especially exciting, given US regulators’ notorious proclivity for settling without their targets admitting guilt.

But then we get to the i-word. With our emphasis:

B. An order of permanent injunction prohibiting Defendants and any other person or entity associated with them, from engaging in conduct described above . . . 

C. An order of permanent injunction prohibiting Defendants and any of their affiliates, officers, agents, employees, successors, assigns, attorneys, and persons in active concert or participation with Defendants, from directly or indirectly:

(i) trading on or subject to the rules of any registered entity . . . ;
(ii) entering into any transactions involving “commodity interests” . . . and/or digital asset commodities as defined herein, for Defendants’ own accounts or for any account in which they have a direct or indirect interest;
(iii) having any commodity interests and/or digital asset commodities as defined herein traded on Defendants’ behalf;
(iv) controlling or directing the trading for or on behalf of any other person or entity, whether by power of attorney or otherwise, in any account involving commodity interests and/or digital asset commodities as defined herein;
(v) soliciting, receiving, or accepting any funds from any person for the purpose of purchasing or selling any commodity interests and/or digital asset commodities as defined herein;
(vi) applying for registration or claiming exemption from registration with the Commission in any capacity, and engaging in any activity requiring such registration or exemption from registration with the Commission . . .
and (vii) acting as a principal . . . agent or any other officer or employee of any person registered, exempted from registration or required to be registered with the Commission . . . 

In other words, the CFTC wants a judge to order Binance to quit working with US-based investors, apparently even if they’re directing trading through offshore accounts. The regulator makes a request for “disgorgement” of “benefits” too.

Some other notable services were allegedly provided by Binance to its VIP users, from page 17 of the lawsuit:

Another important benefit that Binance has provided its VIP customers is prompt notification of any law enforcement inquiry concerning their account.

According to a policy titled “For management of LE requests for information and funds transfer,” created by Lim based on directions from Zhao, Binance instructed its VIP team to notify a customer [A]t point of [account] freeze [based on a request from a law enforcement agency] and immediately after the unfreeze [which would occur 24 hours after the account freeze]. VIP team is to contact the user through all available means (text, phone) to inform him/her that his account has been frozen or unfrozen. Do not directly tell the user to run, just tell them their account has been unfrozen and it was investigated by XXX. If the user is a big trader, or a smart one, he/she will get the hint.

Find the full lawsuit here.

Further reading:
— We need to talk about the CFTC