I went through the CFTC complaint about Binance, the largest cryptocurrency exchange in the world, and it seemed like lawyers were having a lot of fun with this one. Lim said that Binance’s decision not to adhere to US law in favor of commercial success was a “biz decision”. I love reading these complaints.
To be clear, Binance is not the only entity that has ever decided to skirt US law in order to gain more customers. After all, US pharmaceutical companies have been making billion dollar settlements over the exact same “biz decision.” However, I think it is a really silly move to explicitly state that you are doing this. While a government body cannot hold you responsible for conversations they don’t hear, they can throw any written material back at you. Mens rea is important — you cannot call something an oopsily misunderstood-wakey if it’s also stated in writing that it’s business decision.
Binance is accused of deliberately violating the CFTC’s rules for trading derivatives such as Bitcoin futures. Is it possible that the CFTC put on a Warren G show when they published this? They intend to regulate.
As I have mentioned, Changpeng CZ Zhao was the target of Sam Bankman-Fried’s theft of FTX. To be fair, Binance was the subject of multiple investigations prior tothe Fall of FTX over insider trading and money laundering. This could have been due to the FTX’s fall.
Binance must have registered with CFTC to allow people to legally trade derivatives in the US. Binance instead made a lot of noise about it being only available to customers in the US and encouraged Americans to use virtual private networks (VPNs) to hide their location to trade on the platform. VPNs hide an individual’s IP address, browsing information and are often used by ordinary people to stream the latest episode of The Great British Bake Off before it is broadcast outside of the UK.
A Binance spokeswoman denied encouraging VPN use in Bloomberg’s money laundering tale. However, in the CFTC complaint Samuel Lim, a compliance officer, repeatedly stated that anyone who wants to trade on Binance should use VPNs. Take this example:
- Lim stated to Zhao that a large number of Binance customers who trade less then two Bitcoins “could actually be U.S. citizens” in February 2019. They need to be smarter and VPN through non U.S. IP.
- Binance introduced a popup in September 2019 asking customers to click on a button at the window to verify that they were not a US citizen. According to Zhao’s revenue reports, 20 percent of Binance customers still resided in the US as of January 2020.
- Lim was told by a Money Laundering Reporting Officer employee that he had no confidence in his geofencing.
- Binance provided helpful tips to US customers about VPNs, publishing ” A Beginner’s Guide to VPNs” online. According to the complaint, the guide told customers that a VPN could be used “to unlock websites that are restricted in your nation.”
- According to the CFTC, the guide was created to help US customers bypass Binances’s IP-based restrictions on who can use the site. Zhao and other senior managers knew this. Lim stated in chat that “CZ wants people know how to vpn to [use Binance functionality]”. . . It’s a business decision.”
- Lim says again, “They can use VPN but we aren’t supposed to tell them that.” . . It cannot come from us. . . But we can still inform our friends/third party to post (but not under Binance’s umbrella).
- Lim More: “Yes, it is still. We are subject to the following US regulators: fincen ofac, SEC and fincen ofac if we access.com from the US. We do our best to get users to use VPNs or to provide documents from non-US entities if they are a company. Although it may appear that we do not have US users, we need to get them through creative methods.
This is, I’m certain, very cool and normal compliance. However, I would like to concentrate on direct quotes because we love a funny direct quote!
Binance used WeChat and Telegram to communicate with customers and internally. Some of the direct quotations in the complaint, such as those from an unnamed US trading company, are from Zhao’s Signal chats.
The CFTC states that Zhao used Signal with auto delete on, “even after Binance received documents requests from the CFTC, and after Binance purportedly distributed documentation preservation notices to its personnel.”
It is curious how many of Zhao’s Signal chats about auto-deleting Signals did the Feds have! Is Zhao their phone?
Here are some other great hits from the complaint:
- Lim, a compliance officer explained to a colleague that he had received information’regarding HAMAS transactions.’ Lim replied that terrorists often send’small amounts’ because ‘large sums constitute laundering money.’
- Lim on Russian accounts: “Like, come on. They’re here to commit crime.” What was the response of our friend, the Money Laundering reporting officer? They are here for crime.” The response from our friend the Money Laundering Reporting Officer?
- Binance’s policy stated that KYC was not required if the customer withdraws less than 2 Bitcoin per day. According to the complaint, “The nominal value of two BTC was more than $22,000 in July 2019, and more than $100,000 in March 2021.”
- Binance trades on its own platform using 300 accounts “directly and indirectly” owned or controlled by Zhao. However, it has not told its customers!
This is not the end of our hearings about the Feds investigating Binance. These charges are not civil. These are only civil charges.
Binance responded: “On an initial review, it appears that the complaint contains an incomplete recitation, and we don’t agree with the characterization for many of the issues, alleged in the lawsuit,” Zhao stated in a statement. Although the statement does not deny the specifics of the complaint, it says many other things. The thing is, an incomplete factual recitation is not the same as a incorrect factual recitation!
It’s all quite brazen. This is all pretty brazen. This suggests Zhao doesn’t care about being caught. He is currently in Dubai. However, Dubai has been under constant pressure to clean its act since the international financial crime task force added United Arab Emirates to its money laundering watchlist. It is unclear how many more legal documents will be available before the UAE considers Zhao for extradition. It could depend on how bad he behaved.