The surprise lawsuit from the Commodity Futures Trading Commission (CFTC) against crypto exchange Binance sent shock waves across the markets today.
In addition to allegations of market manipulation and a lack of compliance effort, the regulator has also accused the exchange of not cooperating with investigative subpoenas and obscuring the location of its executive offices. Binance has rejected many of the allegations.
However, the devil is in the details when it comes to the 74-page complaint. Here are a few interesting snippets you may have missed.
Tokens labeled as commodities
Contrary to assertions by the United States Securities and Exchange Commission chief Gary Gensler on crypto assets, the latest CFTC lawsuit has labeled Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Tether (USDT) and Binance USD (BUSD) as commodities.
Earlier this year, the SEC argued that BUSD is an “unregistered security” in its Wells notice against Paxos. Gensler on many occasions has also argued that virtually all crypto assets are securities, with the exception of Bitcoin.
BTC: commodity
ETH: commodity
LTC: commodity
USDT: commodity
BUSD: commodity
– the CFTC pic.twitter.com/Y3qi6vDmTA
— scott➕ (@scott_lew_is) March 27, 2023
Sheila Warren, CEO of the Crypto Council for Innovation said the statement is a “powerful shot across the bow of the SEC” and could have significant implications for the industry and for which regulator will have ultimate authority.
Meanwhile, Coinbase Chief Legal Officer Paul Grewal criticized the lack of agreement between the two U.S. regulators, stating:
“A security can apparently also be a commodity, except when it’s not. And it depends on which regulator you ask, and when. If you’re confused, you are not alone. Is this really the best American law has to offer?”
CZ’s phone was accessed
Binance CEO Changpeng Zhao has been named as a defendant and has been repeatedly singled out throughout the complaint.
Interestingly, the CFTC stated it was been able to gather evidence by collecting Signal text chains and group chats from “Zhao’s telephone.” Many are now wondering how this was possible.
How do they have acces to CZ phone? pic.twitter.com/FWMeKVCGSZ
— Martin Krung (@martinkrung) March 27, 2023
“Zhao has communicated over Signal with the auto-delete functionality enabled with numerous Binance officers, employees, and agents for widely varying purposes,” said the CFTC.
Terrorist activity accusations
Another startling allegation from the commodities regulator accuses the firm’s employees of knowing that its platform had facilitated “illegal activities.”
“Internally, Binance officers, employees, and agents have acknowledged that the Binance platform has facilitated potentially illegal activities.”
It specifically referred to a February 2019 incident in which former compliance chief Samuel Lim received information “regarding HAMAS transactions.” According to the filing, Lim explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering.”
Excerpt from CFTC lawsuit. Source: District Court of Northern District of Illinois
One man at the top
According to the complaint, the CFTC has alleged Zhao owned and controlled dozens of entities that operate the Binance platform as a “common enterprise.”
It cited an example of the CEO personally approving minor office expenses and paying for company services such as Amazon Web Services with his own personal credit card.
Excerpt from CFTC lawsuit. Source: District Court of Northern District of Illinois
VIP program perks
Meanwhile, a Binance “VIP” program with preferential rates and perks has also been scrutinized by the regulator.
In addition to allegedly encouraging customers to use virtual private networks (VPNs) to access the platform, the CFTC also alleged that part of the perks for VIP customers was that they were given “prompt notification” of any law enforcement inquiry about their account.
Excerpt from CFTC lawsuit. Source: District Court of Northern District of Illinois
“Zhao wanted U.S. customers, including VIP customers, to transact on Binance because it was profitable for Binance to retain those customers,” it alleged.
Ignoring U.S. regulatory requirements
The CFTC also accused Binance of being aware of U.S. regulatory requirements but ignoring them and making “deliberate, strategic decisions to evade federal law.”
The filing goes back to internal messages between Binance executives in 2018 regarding its strategy for the U.S. exchange and complying with sanctions imposed by regulators for the global exchange.
Excerpt from CFTC lawsuit. Source: District Court of Northern District of Illinois
Fines and injunctions
Towards the end of the document, the commodities regulator said it is seeking monetary penalties, disgorgement of any trading profits, salaries, commissions, loans, or fees gained from their purportedly wrongful actions, along with paying penalties to resolve the investigations.
It also orders a permanent injunction against further violations.
15/ The CFTC is also asking for clear action including disgorgement, civil monetary penalties and permanent trading and registration bans.
Following such a complaint, will Binance be permitted to operate again in the US or have US clients again?
— Henri Arslanian (@HenriArslanian) March 27, 2023
Related: Binance CEO CZ rejects allegations of market manipulation
The CFTC “doesn’t waste its time on jabs — it goes straight for the knockout,” said Warren from the Crypto Council for Innovation.
Binance has already rejected a number of allegations and claims from the commodities regulator, hinting that a more in-depth response is incoming.
On March 28, CZ responded to what he termed an “unexpected and disappointing civil complaint,” stating that the company has cooperated with the CFTC for the past two years.
In comments to Cointelegraph, a spokesperson from Binance has maintained that the exchange maintains country blocks for U.S. citizens, regardless of where they live in the world.
“Consistent with regulatory expectations globally, we have implemented a robust ‘three lines of defense’ approach to risk and compliance, which includes, but is not limited, to:
Ensuring mandatory KYC for all users worldwideMaintaining country blocks for anyone who is a resident of the USBlocking anyone who is identified as a US citizen regardless of where they live in the worldBlocking for any devices using a US cellular providerBlocking log-ins from any US IP addressPreventing deposits and withdrawals from US banks for credit cards”
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