CTFC Sues Binance for Violating Crypto Regulations

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The U.S. Commodity Futures Trading Commission (CTFC) is suing Binance, alleging that the popular crypto exchange was illegally selling crypto derivatives — for currencies including bitcoin, ethereum, litecoin, tether, and binance USD — to retail investors.

Billy Crudup on Creativity

The lawsuit (pdf) accuses Binance employees of explicitly encouraging some customers to use illegal VPNs for transactions, while ordering customers designated as important to set up front companies in places like the British Virgin Islands and the Netherlands. Low to avoid US trade restrictions.

The CTFC accused Binance of a number of additional violations, including failing to register as a futures commission merchant, improperly supervising its business, and failing to implement routine processes to detect money laundering by customers.

“Zhao Answers Only to Himself”

The lawsuit, filed March 27 in the Northern District of Illinois, also names Binance CEO and founder Changpeng Zhao, accusing him of using a maze of corporate entities to obfuscate company ownership and deliberately elude US law, saying “Zhao answers to no one but himself.”

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This is the first major lawsuit against a crypto firm by federal commodity regulators in the United States since BitMEX was ordered to pay $100 million for illegally operating a foreign derivatives trading market in 2021.

What is a crypto derivative?

Buying crypto derivatives is not the same as buying cryptocurrency itself. On the contrary, buying a derivative – something that is possible for any commodity – allows an investor to place a leveraged bet on whether the price of a cryptocurrency will rise or fall like Bitcoin.

This practice is heavily regulated by the CTFC in the US (and completely illegal in some countries, including the UK), with regulators deeming the transactions too easily manipulated to suit retail investors. Buying crypto derivatives in the US requires a litany of protections, including safeguards for investors and strict safeguards against money laundering risks.

A 2021 report from The Wall Street Journal found that US investors routinely used VPNs to access foreign cryptocurrency markets, in violation of CTFC regulations.

“Binance asked US customers to evade these controls by using VPNs to conceal their true location,” the CFTC lawsuit alleges. “Customer use of VPNs to access and trade on the Binance platform has been an open secret, and Binance has always been aware of and encouraged the use of VPNs by US customers.”

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