The Bonkers Allegations Against Binance

You may have heard by now that earlier this week, regulators filed a lawsuit against cryptocurrency trading platform Binance. I just read the complaint, and have good news: however whacko your own company’s bad habits might be, the allegations against Binance are way more crazy.

The regulator responsible for this bombshell of bizarreness is the Commodity Futures Trading Commission, which filed a 74-page complaint on Monday against Binance, its founder and CEO Changpeng Zhao, and former chief compliance officer Samuel Lim. The CFTC accuses Binance of operating as an unregistered trading platform and deliberately evading U.S. law while courting U.S. customers, all with the full knowledge and participation of Zhao and Lim. 



For anyone unfamiliar with Binance, (a) lucky you; and (b) the backstory is as follows. Zhao founded Binance in 2017, and progressively built it into one of the largest trading platforms for cryptocurrency assets in the world. Lim joined the company in April 2018 as its first chief compliance officer, and remained in that role until early 2022. 

Under the Commodity Exchange Act and CFTC rules, trading platforms such as Binance are supposed to register with the agency and implement rigorous customer due diligence procedures. Binance didn’t do that, and in 2019 financial regulators forced the platform to cease doing business with U.S. persons. So the company then launched a “partner” platform, Binance.US, to operate here under proper regulatory approval.

Except, according to the CFTC’s complaint, Binance did keep working with U.S. persons as customers, generating huge volumes of revenue for the company along the way. To keep that gravy train running, the complaint says, Zhao, Lim, and others devised numerous ways to ignore Binance’s compliance procedures. 

Which brings us to this week’s CFTC complaint, with allegations that range from astonishing to asinine. In no particular order… 

Binance claims to have no corporate headquarters

Instead, the complaint says, Zhao has stated that Binance’s headquarters “are wherever he is located at any point in time, reflecting a deliberate approach to attempt to avoid regulation.” Its contract with customers doesn’t mention any specific corporate entity, either. Instead, the terms of service describe entities called “Binance operators,” who apparently could be anywhere in the world.

Even better: during a June 2019 executive meeting, Zhao said that Binance conducts its operations through legal entities incorporated in numerous jurisdictions to “keep countries clean [of violations of law].” 

We don’t know where Lim, the former chief compliance officer, resides. 

The complaint says Lim was CCO from 2018 until early 2022, and he went on administrative leave in May of that year. The CFTC believes Lim lives in Singapore, where Binance does have offices — but when the agency requested his home address as part of a CFTC subpoena, Binance refused to provide it. So we’re not actually sure where Lim is. 

Binance had a policy to tip off VIPs who were the subject of law enforcement investigations. 

Big spenders on the Binance platform were classified as VIPs, who then received all sorts of personalized service. One such service: warning the VIP whenever law enforcement was sniffing around his or her account. The policy (created by Lim, at the direction of Zhao) instructed the VIP team to inform customers “at the point of freeze and immediately after the unfreeze.” Moreover: 

“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.” 

A chief compliance officer wrote those words, according to the CFTC. Wow. 

Executives used auto-deleting messaging apps for business communications even after receiving document hold requests

Binance executives used Telegram, WeChat, Signal, and other messaging apps to conduct company business, with their auto-delete functions going at full strength. Zhao in particular seemed to be a fan of Signal; he used it to manage communications with his  subordinates, and told his subordinates to use it when communicating to U.S. customers. 

“Zhao and others acting on behalf of Binance have used Signal — with its auto-delete functionality enabled — to engage in business communications, even after Binance received document requests from the CFTC and after Binance purportedly distributed document preservation notices to its personnel,” according to the complaint. 

(By coincidence, my previous post this week explored the compliance issues around messaging apps. One presumes Zhao didn’t read it.) 

The ‘pop-up compliance control.’

In September 2019, Binance claimed it had begun to block customers (including U.S. customers) based on their IP addresses. In reality, Binance simply added a pop-up window on its website that appeared when customers attempted to log in from an IP address associated with the United States. The pop-up didn’t block customers from logging in to their account or trading on the platform. It just asked them to self-certify that they weren’t a U.S. person before accessing the platform. 

Because, ya know, that’s totally effective as a customer due diligence control. 

Zhao, Lim, and other Binance executives knew full well that the company was dealing with U.S. customers.

Sure, Binance supposedly stopped doing business with U.S. customers in 2019 — but in reality, the CFTC said, Zhao and his lieutenants knew that the company still did plenty of business in the American market. They received reports showing revenue from the U.S. market. In January 2020, those reports said 19.9 percent of Binance customers were located in the United States; in June 2020, the figure was 17.8 percent. This was a full year after Binance modified its terms of service to say it no longer did business with U.S. customers. 

Binance published guidance to help customers avoid its own compliance controls

That’s right: Binance published a pamphlet on its website about how to install virtual private networks, which can be used to circumvent the IP-blocking controls that companies use to block customers from certain countries. The pamphlet (“A Beginner’s Guide to VPNs”) expressly told customers, “You might want to use a VPN to unlock sites that are restricted in your country.”

Moreover, Binance executives knew the VPNs were a tool to circumvent the company’s compliance controls. In a March 2019 chat, Lim explained to colleagues that Zhao “wants people to have a way to know how to vpn to use [a Binance functionality] … it’s a biz decision.”

What Binance Has to Say

In a statement released on Monday, Zhao called the CFTC allegations “an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.” 

Zhao then stressed that Binance uses “best-in-class” technology for Know Your Customer due diligence, “and remains today to have one of the highest standards in KYC and AML” compliance. He also said Binance has more than 750 employees working on compliance teams, and assisted U.S. law enforcement with freezing more than $125 million in funds in 2022 and $160 million in 2023 so far. 

Binance has also beefed up its compliance leadership in recent months. The company hired a new chief compliance officer earlier this year, and a vice president of compliance last fall. It also promoted an internal investigations chief in December to be head of financial crimes compliance, and made numerous other appointments. 

So, I don’t doubt that many people within Binance are at least trying to right the company’s miserable reputation — but Zhao and his henchmen dug themselves into quite a hole in the early years of the firm’s existence.

Which is quite an accomplishment when your firm is barely six years old. 

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