In major crypto news yesterday, the CFTC (Commodity Futures Trading Commission) in the US filed a lawsuit against leading crypto exchange Binance, its CEO, Changpeng Zhao (often known as CZ), and its Chief Compliance Officer, Samuel Lim.
The violations the CFTC is charging Binance with include six counts, with the CFTC’s Chief Counsel, Gretchen Lowe, citing “wilful evasion of US law”, and claiming that “Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law.”
However, this summary alone doesn’t capture the colorful nature of the details given about alleged wrongdoing at Binance, which at times veers past brazenness, through an almost total disregard for regulatory compliance, and into darkly absurd territory.
Allegations
The CFTC has been able to access a trove of Binance internal communications and chats, providing a no-holds-barred insight into not only alleged violations but also into the mindset of the participants.
At times, this actually provides some humorous moments, as, for example, when we are told that Lim engaged a compliance auditor who would “just do a half-assed individual sub audit on geo[fencing]” to “buy us more time,” but then,
“As part of this audit, the Binance employee who held the title of Money Laundering Reporting Officer (“MLRO”) lamented that she “need[ed] to write a fake annual MLRO report to Binance board of directors wtf.””
And following on from that,
“the MLRO exclaimed to Lim in a chat, “I HAZ NO CONFIDENCE IN OUR GEOFENCING.””
Among other substantially egregious details, we hear how,
“Binance has traded on its own platform through approximately 300 “house accounts” that are all directly or indirectly owned by Zhao”
And, relatedly,
“Binance does not disclose to its customers that Binance is trading in its own markets in its Terms of Use or elsewhere.”
Later on, we’re told,
“Binance is so effective at obfuscating its location and the identities of its operating companies that it has even confused its own Chief Strategy Officer. For example, in September 2022 he was quoted as saying that ‘Binance is a Canadian company.’ The Chief Strategy Officer’s statement was quickly corrected by a Binance spokesperson, who clarified that Binance is an ‘international company.’”
There are also a couple of paragraphs in the filing that come across as dryly deadpan comic constructions, with one clause, relating to allegations that Binance knowingly served US customers despite restrictions on doing so, stating that:
“Binance knew that U.S. customers continued to comprise a substantial proportion of Binance’s customer base even after September 2019 because, among other reasons, Binance’s internal reporting told them so.”
And, a section relating to using VPNs as location workarounds remarks that:
“One reason Binance’s IP address-based compliance controls have not been effective is that Binance has instructed U.S. customers to evade such controls by using VPNs to conceal their true location.”
Incredibly, there are detailed allegations describing how Binance, on its own site, openly advised customers on the use of VPNs to bypass location restrictions.
Another section that grabs the attention for all the wrong reasons, is the alleged internal discussion around the use of Binance’s services in connection with illegal activities,
“In February 2019, after receiving information regarding HAMAS transactions” on Binance, Lim explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering.”
Lim’s colleague replied: “can barely buy an AK47 with 600 bucks.” And, with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: “Like come on. They are here for crime.” Binance’s MLRO agreed that “we see the bad, but we close 2 eyes.”
Reaction
Can there possibly be any positives to be taken from this affair? Surprisingly, there may be a couple. On page nine of the court filing, there is a definition of the term 'digital asset' which directly identifies Bitcoin and Ether, along with Tether, Binance USD, and “other virtual currencies as alleged herein,” as commodities.
This definition could come to act as an important precedent, since there has been ongoing conflict around whether or not crypto assets are securities and, as such, subject to SEC regulation . Many observers claim that Bitcoin should be regarded as a commodity, while there is less certainty around Ether and other coins. A legal case establishing both Bitcoin and Ether as commodities, then, may have long-term benefits for those particular protocols.
There is also the view that a cleaning of house activity is, ultimately, necessary in order for crypto to become a viable industry. Those who ardently believe in the possibilities enabled by decentralized currencies have no allegiance to Binance, just as they had no reason to hold FTX or Sam Bankman-Fried in high regard, and the entire sector may be about to get yet another inevitable dose of cleansing sunlight.
And, then there is the observation that crypto is resilient, and that after the collapse of FTX last year (and all the many crypto collapses through the years before that), there’s a perception, which may or may not be accurate, that whatever gets thrown at the industry will be shrugged off in time.
Having said that, there is currently a theory prevalent within parts of the crypto ecosystem that the US is engaged in a covert operation to incapacitate the crypto industry. While there may be certain merits to that argument, it is beginning to foster what looks like a siege mentality, and results in an attitude by which no wrongdoing on the part of crypto companies is ever properly acknowledged or apportioned with blame.
In fact, this mentality looked as though it was deliberately played into by Changpeng Zhao himself when, in response to the CFTC filing, he initially tweeted (before later releasing a blog post), nothing other than a cryptic number 4.
This message refers back to an earlier CZ tweet in which he listed dos and don’ts for 2023, with number 4 (presumably a do) reading, “Ignore FUD, fake news, attacks, etc.”
However, it’s difficult to see in what ways current events are either 'FUD' or 'fake news', and if what’s happening is an attack, then it can hardly be regarded as coming without provocation. Accordingly, if there is any truth in the claim that the US is attempting to take down crypto, then it should be recognized that Binance has been making it easy for the authorities.
