Yesterday, The Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Northern District of Illinois against Changpeng Zhao and three Binance entities for multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations. The CFTC also charged Samuel Lim, Binance's former chief compliance officer, with aiding and abetting Binance's violations.
A civil enforcement action is a legal proceeding in which a government agency seeks to enforce compliance with civil laws and regulations. The goal of a civil enforcement action is to obtain a court order compelling the defendant to stop engaging in the allegedly unlawful conduct, to pay restitution or disgorgement of profits gained from the alleged misconduct, and/or to pay a civil penalty.
Unlike criminal prosecutions, civil enforcement actions do not result in imprisonment or other criminal penalties, but they can result in significant monetary penalties and other remedies.
At the heart of the suit are allegations that Binance failed to register as a US derivatives exchange and intentionally structured its businesses and transactions to avoid those registration requirements. The agency alleged that CZ and senior managers took steps to violate US laws, including instructing US customers to use virtual private networks, or VPNs, to obscure their location and directing “VIP customers” to open Binance accounts under the name of shell companies.
Allegations per the CFTC case document include:
- Defendants operated an unregistered trading platform that facilitated transactions in digital assets.
- Defendants engaged in unlawful activities, including offering and selling unregistered futures contracts and options contracts. Binance allowed U.S. customers to trade futures contracts and options without complying with legal requirements.
- Defendants made false and misleading statements to customers about their regulatory status, anti-money laundering procedures, and other aspects of their business.
- Defendants failed to implement adequate know-your-customer procedures or report suspicious activity to authorities.
- Defendants violated recordkeeping requirements and failed to maintain required books and records.
Among other things, the complaint seeks a permanent injunction to stop Binance from continuing to commit violations and prohibit the defendants and related parties from trading digital assets and other commodities. It also seeks to recoup trading profits, revenues, salaries and other money derived by Binance as a result of the violations.
A permanent injunction means CZ personally as well as Binance will be prohibited from doing business in the US, basically from ever registering in the US or engaging in commodities transactions in the US.
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Policy and Regulation