TL;DR:
- The Commodities Futures Trading Commission (CFTC) has filed a lawsuit against Binance
- The CFTC also accused Binance of insufficient anti-money laundering (AML) and know-your-customer (KYC) controls, knowingly evading or helping U.S. clients evade regulators
- While FTX and Binance are both cryptocurrency exchanges, the circumstances surrounding their respective falls and lawsuits are distinct.
The Commodities Futures Trading Commission (CFTC) has filed a lawsuit against Binance, alleging multiple trading derivatives violations, including not being properly registered to offer derivatives to U.S. clients, insufficient anti-money laundering (AML) and know-your-customer (KYC) controls, and trading against its own customers.
The penalties could be business-ending for Binance. The CFTC’s lawsuit against Binance is more thorough than previous lawsuits against the company, and hundreds of internal messages, conversations, and documents were shared with the commission.
The CFTC also called Binance’s bluff on its elusive headquarters, and the lawsuit mentions Bitcoin and Ethereum as commodities. Binance CEO Changpeng “CZ” Zhao dismissed the lawsuit as FUD (fear, uncertainty, and doubt) and said that he never participated in Binance Launchpad, Earn Margin, or Futures.
Binance, the world’s largest cryptocurrency exchange, has been sued by the Commodities Futures Trading Commission (CFTC) for multiple trading derivatives violations. The lawsuit alleges that Binance was not properly registered to offer derivatives to U.S. clients, and the exchange did not adequately supervise the activity on its platform.
The CFTC also accused Binance of insufficient anti-money laundering (AML) and know-your-customer (KYC) controls, knowingly evading or helping U.S. clients evade regulators, and trading against its own customers. The CFTC named Binance CEO Changpeng “CZ” Zhao and ex-chief compliance officer Samuel Lim as defendants in the lawsuit. The penalties could be business-ending for Binance if the regulator’s requests for injunctive relief and penalties stick.
Binance responded to the lawsuit by saying that it was unexpected and disappointing, and the company invested heavily in its compliance team to ensure it does not have U.S. users active on its platform.
Zhao dismissed the lawsuit as FUD and said that he observed compliance policies strictly. However, the CFTC’s lawsuit is more thorough than previous lawsuits against Binance, and hundreds of internal messages, conversations, and documents were shared with the commission as part of its investigation.
The CFTC’s lawsuit also called Binance’s bluff on its elusive headquarters. For years, Binance avoided naming an executive headquarters and conducted operations through various business entities registered in different jurisdictions. The CFTC alleged that Zhao said during an internal meeting in 2019 that the company’s strategy was to “keep countries clean [of violations of law]” by “not landing .com anywhere.” This is the main reason .com does not land anywhere.”
The lawsuit also mentions Bitcoin and Ethereum as commodities. The CFTC explicitly calling BTC and ETH commodities could wind up being very significant for the industry. The CFTC’s commitment to ETH as a commodity is based on the SEC’s recent view that ETH’s move from proof-of-work to proof-of-stake was akin to security. However, there won’t be much real clarity around how U.S. regulators classify ETH until there’s a statutory definition or judicial ruling.
Binance’s relationship with FTX
The collapse of FTX, the third-largest cryptocurrency exchange by volume, was one of the most significant events in the short history of cryptocurrencies. The sequence of events that led to the exchange’s failure, bankruptcy filing, and the arrest and extradition of its former CEO, Sam Bankman-Fried, are well-documented. The catalyst was a report by CoinDesk, which revealed that Bankman-Fried’s quantitative trading firm, Alameda Research, held a $5 billion position in FTX’s native token, FTT.
The report prompted concern across the cryptocurrency industry about Bankman-Fried’s companies’ undisclosed leverage and solvency. FTX faced a liquidity crisis, and Bankman-Fried searched for additional money from venture capitalists before turning to rival Binance. Binance initially agreed to buy FTX’s non-U.S. business but backed out of the deal after conducting due diligence, raising concerns about the mishandling of customer funds, among other issues.
The collapse of FTX led to the freezing of its assets in The Bahamas, a class-action lawsuit filed in a Florida federal court, and investigations by the California Department of Financial Protection and Innovation and the U.S. Securities and Exchange Commission. FTX alleged that it was hacked, with “unauthorized transactions” that may have stolen close to $500 million in assets. Bankman-Fried was arrested, indicted on eight criminal charges, and released on a $250 million bond, the largest ever.
While FTX and Binance are both cryptocurrency exchanges, the circumstances surrounding their respective falls and lawsuits are distinct.
FTX filed for bankruptcy in November 2022 after a series of events that included a report by CoinDesk that raised concerns about potential leverage and solvency issues involving FTX-affiliated trading firm Alameda Research. FTX attempted to negotiate a bailout with rival Binance, but the deal fell through, and FTX ultimately filed for bankruptcy [1].
In contrast, Binance faces a lawsuit filed by the U.S. Commodity Futures Trading Commission (CFTC) in March 2021, alleging that the company violated U.S. regulations by allowing U.S. citizens to trade cryptocurrency derivatives [2]. In addition, the U.S. Department of Justice (DOJ) is reportedly investigating Binance for potential money laundering and tax evasion [3].
While both FTX and Binance have faced legal and financial challenges, their specific circumstances and legal issues are different.
The CFTC’s lawsuit against Binance is a serious matter, and the penalties could be significant for the world’s largest cryptocurrency exchange. Binance’s response has been to dismiss the lawsuit as FUD, but the CFTC’s lawsuit is more thorough than previous lawsuits against the company. The CFTC has also called Binance’s bluff on its elusive headquarters, and the lawsuit mentions Bitcoin and Ethereum as commodities.
