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  • J Huang and M Bacina

Binance US faces 'regulation by enforcement' from CFTC

The US has doubled down its recent streak of aggressive regulation by enforcement of the crypto industry - this time targeting Binance, the world's largest crypto exchange.

On Monday, the Commodity Futures Trading Commission (CFTC) announced that it has filed a civil enforcement action in the US charging Binance and its chief executive officer Changpeng Zhao (commonly known as CZ) of operating illegally in the country in violations of the Commodity Exchange Acts (CEA) and CFTC Rules. The complaint also charges Samuel Lim, Binance's former chief compliance officer, with aiding and abetting Binance's violations.

The complaint charges that three Binance entities operate the Binance exchange along with numerous other corporate vehicles through what the CFTC alleges is an "intentionally" "opaque" structure, with CZ at the helm as Binance’s owner and chief executive officer. The complaint also alleges that Binance chose to knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.

The CFTC's complaint says:

Binance’s solicitation of customers located in the United States subjected Binance to registration and regulatory requirements under US law. But Binance, Zhao, and Lim have all chosen to ignore those requirements.

CFTC Chairman Rostin Behnam said:

This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of U.S. law.

CZ called the CFTC complaint “unexpected and disappointing”, and noted that Binance had been working cooperatively with the CFTC for over two years. It seems that Binance will be pushing back in the matter, as CZ said:

...the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.

While not able to give full responses immediately, CZ addressed a few key points in his response highlighting:

  • Binance's technology for compliance, including measures to block US users;

  • Binance has a 750-people compliance team' who cooperate and work with law enforcement;

  • Binance holds 16 licenses and registrations globally; and

  • The fact that Binance does not trade for profit or "manipulate" the market under any circumstances.

This complaint by the CFTC is another aggressive enforcement action that has been recently been brought in the US against the crypto industry and follows the Biden administration's White House Economic Report which took a very visible angle on drawing criticism to crypto generally, and will likely draw criticism again for the US not following a transparent rulemaking process for the novel crypto-asset sector.

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