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CFTC vs Binance: Why US Regulators Don’t Seem to Like Crypto Firms is facing a landmark lawsuit from a US regulator, over claims that the platform’s financial crime compliance efforts have been “a sham.” 

Why is Binance Being Sued in the US? 

On March 27, the US Commodities Futures Trading Commission (CFTC) announced that it was seeking to permanently ban from trading. 

The civil enforcement action suing Binance, the world’s largest crypto exchange, in addition to its founder and CEO, ChangPeng Zhao, was filed in a federal court in Chicago.  

For context, American users aren’t allowed to trade in crypto derivatives. So international trading platforms like Binance are required to either register with the CFTC or ban American users. 

“Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law” - Gretchen Lowe, CFTC’s Enforcement Division Principal Deputy Director and Chief Counsel 

The CFTC’s complaint alleged that Binance has been operating illegally by serving US-based customers, despite saying in 2019 that they would cease doing so. It also alleged that the crypto exchange has been helping clients avoid anti-money laundering (AML) regulatory requirements such as know your customer (KYC) checks, effectively violating anti-financial crime measures that safeguard American consumers. 

The charges against the three firms that make up the crypto currency exchange (Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited) claim that the defendants knowingly disregarded provisions of federal law by operating an illegal digital assets trading exchange in the US to their commercial benefit. The CFTC’s announcement cited “numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations,” and operating the platform through an “intentionally opaque common enterprise.” 

What Has Binance Said in Response to the CFTC Lawsuit? 

Notably, the CFTC’s complaint named Samuel Lim, Binance’s former Chief Compliance Officer between 2018 and 2022, accusing him of “aiding and abetting Binance’s violations,” suggesting that these are longstanding issues that may have existed since the company was an early-stage startup. Mr. Lim was replaced in January of 2023 by Noah Perlman, who recently described his role as CCO of the crypto exchange as one of the “most challenging in compliance.” 

At a recent crypto industry event in New York, Perlman spoke to the difficulties that crypto companies face trying to stay on the right side of the regulators compared with traditional financial institutions. He claimed that crypto firms don’t get the benefit of the doubt when encountering grey areas in compliance, but instead face a “Wells notice or worse” response from regulators. or worse” response from regulators. 

ChangPeng Zhao maintains that’s KYC and AML compliance framework goes above and beyond that of other global exchanges or what’s required by current regulations.  

The Binance CEO also emphasized in his official response to the CFTC that Binance collaborates with regulators and governments around the globe and is “aware of no other company using systems more comprehensive or more effective” for KYC and AML compliance. 

Why are Binance’s Alleged Compliance Breaches So Concerning? 

The CFTC’s lawsuit is not the first time that Binance has  fallen foul of the regulators because of registration issues. This incident does, however, shed light on an issue of major concern. No matter the quality of Binance’s AML framework, the issue lies within the fact that staff allegedly advised US-based clients on how to circumvent their mandatory compliance policies and procedures. 

As concerning as this conduct is, even more concerning is the possibility that Binance may also be allowing sanctioned foreign entities and individuals into the US financial system. Questions could and should be raised around if the company is letting sanctioned entities such as Russian, Iranian, and North Korean nationals, for example, use their platform – even if inadvertently. 

What Does the CFTC VS Binance Lawsuit Mean for Crypto Compliance Going Forwards? 

This lawsuit ultimately highlights the increasing expectation from US financial watchdogs that crypto firms behave in the same manner as traditional financial institutions, and be held to the same laws and regulations, including the Anti-Money Laundering Act (AMLA) of 2020.  

One of the major challenges crypto firms face at the moment is the lack of specialised AML teams in the space. Building out a new infrastructure approach to finance while simultaneously developing brand new financial crime controls presents serious difficulties. Especially amidst the ongoing regulatory crackdown in the US.

Rostin Behnam, Chairman of the CFTC, claimed that Binance knowingly avoided compliance for years to keep money flowing, and stated that this lawsuit “should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of U.S. law.” It seems that regulation of digital asset firms in the US is on the rise, and a priority for law enforcement bodies like the CFTC.  

Fenergo’s research report, Reading Between the Fines, found that financial penalties issued to crypto firms and their employees reached a global total of $193 million in 2022. This figure nearly doubled (+92%) from 2021, with the US taking the lead on enforcement actions against the sector.  

We predicted in the report that the digital assets sector was likely to come under increased scrutiny, and this has certainly been the case so far in 2023, following events such as the collapse of FTX, the $100 million fine against Coinbase, and now this action taken against Binance. 

How Can Crypto Firms More Effectively Comply with Financial Regulations? 

Given the lack of clear regulatory guidelines for crypto companies in the US, questions must be asked as to how crypto companies can grow while protecting consumers. Taking KYC and other AML compliance obligations more seriously is an obvious step. But these companies must also take a long view and make sure they’re prepared to adapt to unexpected regulatory demands. 

To avoid further scrutiny, crypto companies need to prioritize shoring up their compliance controls. They should look to adopt and incorporate automated protocols and technologies to better understand their customers and identify potential risks. This will ensure they are robust yet nimble enough to stay compliant amid an ever-evolving regulatory landscape.

Find out how KYC trends are affecting the industry in our latest report.

About the Author

Rory Doyle, Head of Financial Crime Policy, joined Fenergo in 2017 and brings with him a wealth of subject matter expertise surrounding financial services, hedge funds, anti-money laundering, and financial crime regulations. Rory is also qualified with ACAMS as a Certified Anti-Money Laundering Specialist (CAMS). Additionally, Rory has extensive experience in the financial, legal, and compliance sectors from the likes of Merrill Lynch, Brown Brothers Harriman, and J.P. Morgan.

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