Binance, the world's largest centralized digital asset exchange, and its CEO Changpeng Zhao, commonly known as "CZ," are facing legal troubles in the United States as they are accused of operating a facility for trading futures, options, swaps, and leveraged retail commodity transactions involving digital assets that are commodities, such as bitcoin, ether, and litecoin, for persons in the United States. The allegations are part of a lawsuit filed against Binance, CZ, and other members of Binance's senior management by the Commodity Futures Trading Commission (CFTC) in the Southern District of New York.
According to the lawsuit, Binance has been soliciting and accepting orders, accepting property to margin, and facilitating trading for U.S. customers, despite publicly stating its intent to "block" or "restrict" customers located in the United States from accessing its platform. The lawsuit alleges that Binance has deliberately obscured the identities and locations of the entities operating the trading platform, with CZ stating that Binance's headquarters is wherever he is located at any given time, reflecting a deliberate approach to avoid regulation.
The lawsuit further claims that Binance has disregarded applicable federal laws and has actively facilitated violations of U.S. law by assisting and instructing customers located in the United States to evade the compliance controls that Binance purportedly implemented to prevent and detect violations of U.S. law. This allegedly includes instructing customers to use virtual private networks (VPNs) to obscure their location and allowing customers to trade on the platform without submitting proof of identity and location, despite announcing such conduct as prohibited.
The lawsuit also accuses Binance of prioritizing commercial success over compliance with U.S. law, with the platform earning significant revenue from derivatives transactions involving U.S. customers. For example, Binance's own documents reportedly showed that the platform earned $63 million in fees from derivatives transactions in August 2020, with approximately 16% of its accounts held by customers identified as being located in the United States. By May 2021, Binance's monthly revenue earned from derivatives transactions allegedly increased to $1.14 billion.
The CFTC has alleged that Binance's actions have violated federal laws that are essential to the integrity and vitality of the U.S. financial markets, including laws that require the registration and regulatory compliance of entities engaged in trading commodity derivatives. The lawsuit seeks various forms of relief, including permanent injunctions, civil monetary penalties, restitution, and disgorgement of ill-gotten gains.
Binance and CZ have yet to respond to the allegations in the lawsuit. However, the lawsuit highlights the increasing regulatory scrutiny and legal challenges faced by cryptocurrency exchanges and their operators as governments around the world seek to regulate the rapidly evolving digital asset space. The outcome of this lawsuit could have significant implications for Binance, CZ, and the broader cryptocurrency industry, as it may set precedents for the regulatory treatment of digital asset exchanges operating in the United States.