Binance US could be shut down even with CFTC settlement

In his first interview after FTX crashed in November, Binance chief Changpeng Zhao (CZ) insisted that Binance is a clean exchange — that it matches trades but doesn’t trade futures or act like a trading shop.

“We are a very clean and very simple business,” CZ said in an ask me anything (AMA) Twitter Spaces on November 15 — just a day after FTX fell. “We also don’t do futures trading ourselves. We don’t have a pawn-trading firm. So we aren’t trying to make money from trading ourselves…

“Lastly, we do have market makers and rely very heavily on third-party market-makers that provide liquidity,” he said. “There is one market-maker which I’m an investor and shareholder of, and that liquidity provider doesn’t make profits. So we try to just not lose money, so they just provide liquidity in the market and aren’t profit-driven.”

During the same interview, CZ admitted that one of Binance’s auditors was also an auditor for FTX, but didn’t mention the name. The FTX auditors who vetted its proof of reserves was Armanino LLP, but since the FTX implosion it has stopped offering crypto exchanges its vetting services.

However, yesterday’s complaint filed by the US Commodity Futures Trading Commission (CFTC) against Binance, CZ, and chief compliance officer, Samuel Lim, suggests that the firm most definitely is a trading shop. According to the suit filed in Chicago federal court, Binance has its own unregistered trading operation through its “quant desk.”

CFTC lawsuit against Binance reveals CZ traded against users

Read more: Multi-million dollar transfers to CZ firms confused Catherine Coley

The CFTC says Binance traded on its own platform with 300 accounts which were all linked to CZ, and with US-based trading firms Merit Peak and Sigma Chain. CZ also traded with his own two personal accounts while Merit Peak entered into OTC transactions with Binance’s clients. Sigma Chain traded derivatives. Binance never disclosed it was trading its own markets against its own clients.

Additionally, the CFTC alleges that Binance and CZ routinely offered illegal derivatives and failed to uphold adequate know-your-customer (KYC) and anti-money laundering (AML) checks for US customers. The commission sources messages sent by top executives at the firm as acknowledgement that decision makers were more than aware of its shady operations – they were actively encouraging it.

CZ says CFTC suit is nonsense — but it could force Binance US to shutter

CZ hit back at the CFTC’s claims. In a Binance blog post published the same day as the commission’s complaint, he said “Binance.com does not trade for profit or “manipulate” the market under any circumstances.”

While CZ admitted that Binance “trades” in a number of situations, they are all necessary business activities intended to convert crypto revenues into fiat to cover expenses, or “trading” with affiliates that provide liquidity for less liquid pairs, he claimed.

“These affiliates are monitored specifically not to have large profits,” the statement read.

CZ went on to say that employees aren’t allowed to trade in futures, including himself. “I also never participated in Binance Launchpad, Earn, Margin, or Futures,” he wrote.

Additionally, the CFTC’s claims that Binance failed to implement proper KYC and AML checks were dismissed by CZ. “We block US users by nationality (KYC), IP (including commonly used VPN endpoints outside of the US), mobile carrier, device fingerprints, bank deposits and withdrawals, blockchain deposits and withdrawals, credit card bin numbers, and more.

“We are aware of no other company using systems more comprehensive or more effective than Binance.”

Binance KYC be liek pic.twitter.com/wJUQuFruFQ

— poordart (@poordart) March 27, 2023

It’s become harder and harder for the crypto community to take Binance’s claims of KYC compliance seriously.

Read more: Chinese users bypassed Binance KYC thanks to help from Binance

A Binance spokesperson told Protos, “We have made significant investments over the past two years to ensure we do not have US users active on our platform. During that period, we went from approximately 100 people in our compliance team to around 750 core and supporting compliance personnel today, including almost 80 personnel with prior law enforcement or regulatory agency experience and approximately 260 personnel with professional certificates in compliance.”

However, the CFTC is far from the only entity to claim that Binance has encouraged users to bypass KYC and AML checks. A report by the CNBC published last week shows strong evidence that users in mainland China were told by Binance employees to use VPNs to register as if they were in Taiwan. They were specifically told to not use VPNs originating from the US, Singapore, or Hong Kong, since Binance restricts users from those countries.

In July 2022, a Reuters report suggested that Binance swerved US sanctions by serving Iran-based users. It provided evidence showing that top execs were aware of the loophole and even bragged about it internally.

According to a report by broker Bernstein, Binance US currently makes up less than 5% of the exchange’s global operations. However, the CFTC suit cites an internal financial reporting package that claims Binance US contributes 16% of Binance’s trading revenue.

If the CFTC’s claims are proved in federal court, the commission couldn’t bring criminal charges against CZ. However, it does have the power to slap Binance with hefty fines and penalties, or shut down Binance US altogether in a settlement. According to Bernstein, this wouldn’t have a significant impact on crypto markets since it’s not material to the overall revenues of Binance.

But the same can’t be said for its impact on Binance’s survival. This is far from the only regulatory scrutiny the exchange is facing — both in the US and globally. Shutting down the largest crypto exchange’s foothold in the US could have trickle down effects on regulatory scrutiny in other jurisdictions. And the more CZ denies a growing mountain of rather striking allegations, the harder it becomes to believe they don’t have merit.

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