“Decoding CFTC’s Lawsuit Against Binance and CZ: Uncovering Inadequate Compliance Measures and Unlawful Profit Gain through Illicit Recruitment of US Customers”

Just yesterday (27) night, the exchange Binance (Binance) and its CEO Zhao Changpeng (CZ) were sued by the US Futures Commodity Trading Commission (CFTC). The following is a summary of the key points of the CFTC prosecution documents for readers to help you understand the whole picture of the case.
(Recap:Binance is rumored to be investigated by the US CFTC! BNB crashed 10%, CZ criticized “FUD”, government relations consultant: considering registering with it
(background supplement:Binance crashed! Spot transactions, deposits and withdrawals “completely suspended” Bitcoin plunged 2%

CompleteThe world’s largest cryptocurrency exchange Binance (Binance) and its CEO Changpeng Zhao (CZ) were sued by the U.S. Futures Commodity Trading Commission (CFTC) last night, accused of illegally providing derivatives transactions and violating regulatory rules.

The CFTC stated that it will seek to implement a permanent trading and registration ban on Binance and its related entities, prohibiting transactions, controls, etc. involving commodity interests and cryptocurrency commodities. Affected by this news, Bitcoin once fell below 27,000, Ethereum fell below $1,700, and Binance platform currency fell more than 5%, to a minimum of $306.45.

In the CFTC’s 74-pageprosecution documentsIn the middle, has it really caught evidence of Binance’s violation of law? What is the basis for initiating a lawsuit? According to the summary description provided by the regulation, the dynamic zone is organized and compiled as follows:

1 )Binance operates the world’s largest centralized digital asset trading platform, appearing in an opaque network of corporate entities, all of which are ultimately controlled by CZ to form a common enterprise called “Binance” or “Binance Ecosystem” .

Most of Binance’s reported trading volume and profitability comes from its extensive solicitation and access to customers located in the United States (including the region), who conduct many different types of digital asset spot and derivative transactions involving cross-state commerce on the Binance platform commodity transactions.

2 )From July 2019 to the present (the “Relevant Period”), under the direction and control of CZ, and with the willful and substantial assistance of Lim, Binance has promoted and accepted orders, property as collateral, and operated a venue for To provide digital asset commodities to individuals in the United States, including Bitcoin (BTC), Ethereum (ETH) and Litecoin (LTC) futures, options, swaps and leveraged retail commodity trading services.

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3 )Since launching its platform in 2017, Binance has taken a calculated, phased approach to increasing its presence in the US, despite publicly stating its intention to “block” or “limit” access to its platform for US-based customers .

Binance’s initial strategic positioning was to solicit retail customers. In later stages, Binance increasingly relied on US-based personnel and suppliers, and actively cultivated lucrative and commercially important “VIP” clients, including institutional clients, based in the US.

At the same time, Binance, CZ, and the current Chief Compliance Officer, Lim, all know that Binance’s solicitation of clients located in the US will subject it to registration and regulatory requirements under US law. However, Binance, CZ, Lim all chose to ignore these requirements and undermine Binance’s ineffective compliance program by taking steps to help customers circumvent Binance’s access controls.

4 )Defendants ignored applicable federal law while promoting Binance’s U.S. customer base because it was profitable for them. For example, according to Binance’s August 2020 filing, the platform generated $63 million in revenue from derivatives trading, with about 16% of accounts held by customers that Binance identified as being based in the United States.

By May 2021, Binance’s monthly revenue from derivatives trading has increased to $1.14 billion. Binance chose to prioritize commercial success over the decision to comply with US law, as Lim outlined CZ’s position, “It’s a business decision.”

5 )Binance deliberately obscured the identity and location of the entity that operates the trading platform. For example, Binance’s customer-facing “Terms of Use” purport to be a contract between the customer and an entity called “Binance operators,” a term with no specific meaning.

While at various times during the relevant period, Binance maintained offices in a number of locations, including Singapore, Malta, Dubai, and Tokyo, Binance deliberately did not disclose the location of its administrative offices.

Instead, CZ said that Binance’s headquarters were located where he was at all times, reflecting a deliberate strategy to evade regulation. CZ explained this strategy in an internal meeting in June 2019, saying that Binance operates through various entities established in multiple jurisdictions to “keep the country clean (without breaking the law)” by “not landing anywhere.” ”, which is the main reason why .com can’t land anywhere.

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6 )CZ, Lim, and other members of Binance’s senior management failed to properly oversee Binance’s activities and, in fact, actively facilitated violations of U.S. law, including assisting and directing U.S.-based customers to circumvent compliance controls that Binance purports to have in place in order to Prevent and detect violations of U.S. law.

Binance and its officers, employees, and agents directed U.S. customers to use technology to mask their location; to allow customers who did not submit proof of identity and location to continue trading on the platform after such practices were announced to be prohibited; and to instruct ultimate beneficial owners, Key employees who control trading decisions, trading algorithms, and other assets are all based in the United States. VIP customers open Binance accounts in the name of newly formed shell companies to circumvent Binance’s compliance controls.

7 )While Binance solicits and relies on U.S.-based clients to generate revenue and provide liquidity for its various markets, Binance has never registered with the Commodity Futures Trading Commission (CFTC) in any way and disregards the importance of the integrity and vibrancy of U.S. financial markets. Important federal laws, including laws requiring controls designed to prevent and detect money laundering and terrorist financing, in violation of the Commodity Exchange Act“Act” or “CEA”), 7 U.S.C. §§ 1–26,and the CFTC Regulations (“Regulations”), 17 C.F.R. pts. 1–190 (2022).

8 )During the relevant period, through the operation of the Binance platform, the defendants Binance, with the assistance of Lim, and CZ violated the core provisions of the CEA and the Statute, including:

  • i. Offers, enters, confirms execution, or otherwise deals in off-exchange commodity futures transactions in violation of Section 4(a) of the CEA, or selectively in violation of Section 4(b) of the CEA and Regulation 48.3, 17 CFR § 48.3 (2022);
  • ii. Offer, enter, confirm the exercise, or trade in OTC commodity options in violation of CEA Section 4c(b) and Regulation 32.2, 17 CFR § 32.2 (2022);
  • iii. Soliciting and accepting orders for commodity futures, options, swaps, and retail commodity transactions, or as a counterparty in an agreement, contract, or transaction; in these activities, accepting money, securities, or property (or in lieu of credit) for Guaranteeing or guaranteeing transactions on the Binance platform, in violation of Article 4d of the CEA and 7 USC § 6d;
  • iv. Operating a swap trading or processing facility without being registered as a swap execution facility (SEF) or designated as a contract market (DCM), contrary to Article 5h(a)(1) of the CEA and Regulation 37.3(a )(1), 17 CFR § 37.3(a)(1) (2022);
  • v. Failure to diligently monitor Binance’s activities related to the Commission’s registration requirements, in violation of Regulation 166.3, 17 CFR § 166.3 (2022);
  • vi. Failure to implement effective customer information procedures, or otherwise comply with applicable provisions of the Bank Secrecy Act, in violation of Regulation 42.2, 17 CFR § 42.2 (2022);
  • vii. knowingly conducting activities outside the United States, including entering into agreements, contracts, and transactions, and structuring entities to knowingly circumvent or attempt to circumvent any provision of the CEA promulgated under Appendix A of the Wall Street Transparency and Accountability Act of 2010, in violation of Regulation 1.6 , 17 CFR § 1.6 (2022).
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9 )Except as limited and prohibited by this Court, Defendants will likely continue to engage in the conduct described in this lawsuit and similar acts and practices.

10 )Accordingly, the CFTC brought this action pursuant to Section 6c of the CEA, 7 USC § 13a-l, to enjoin the defendants’ unlawful acts and practices and compel them to comply with the Act. In addition, the CFTC seeks civil monetary penalties and remedial incidental relief, including but not limited to trading and registration injunctions, forfeiture, pre-judgment and post-judgment interest, and other relief the court deems necessary and appropriate.

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