This story has been updated with comment from Binance.
Binance Holdings Ltd., the leading global digital currency exchange, along with its CEO Changpeng Zhao, is facing a lawsuit Monday from the U.S. Commodity Futures Trading Commission that accuses the company of violating trading and derivatives regulations.
The legal action was initiated on Monday in federal court in Chicago.
What Happened: The lawsuit alleges that Binance facilitated trades in cryptocurrencies such as Bitcoin BTC/USD, Ether ETH/USD, Litecoin LTC/USD, Tether USDT/USD, and Binance USD BUSD/USD, which it refers to as commodities.
Furthermore, the lawsuit alleges that Binance, under the guidance of Zhao, instructed its employees to use virtual private networks (VPNs) to disguise their locations.
Following the lawsuit's filing, the price of Bitcoin dropped by around $1,000, and Binance's exchange token, Binance Coin BNB/USD, fell by roughly 3%.
The CFTC asserted that Binance purposefully established a complex system of corporate entities to obscure its actual operations and reach, including its U.S. affiliate, Binance.US.
The filing states that Binance's intricate structure is intended to "obscure the ownership, control, and location of the Binance platform," adding that "Zhao answers to no one but himself."
A Binance spokesperson told Benzinga the lawsuit is "unexpected and disappointing," adding that Binance has been working collaboratively with the regulatory agency for more than two years.
The exchange has invested in its compliance efforts in the last two years to ensure that U.S. users are not active on the platform, the spokesperson said.
Binance's compliance process includes the following, according to the company: mandatory KYC for all users worldwide, country blocks for U.S. residents, blocks of U.S. citizens regardless of where they live, blocking devices using a U.S. cellular provider, blocking logins from U.S. IP addresses and preventing deposits and withdrawals from U.S. banks for credit cards.
CFTC Chief Counsel Gretchen Lowe referred to Binance's actions as a "willful evasion of Federal law" in a press release, citing internal communications as evidence.
Additionally, the lawsuit alleges that Binance advised its U.S. customers to use various methods, including VPNs, to bypass restrictions on U.S.-based users.
The filing alleges that "VPNs have the effect of masking an internet user's true IP address" and that "VPN use by customers to access and trade on the Binance platform has been an open secret, and Binance has consistently been aware of and encouraged the use of VPNs by U.S. customers."
The suit contends that Binance directed significant clients, such as trading firms, to establish shell companies in jurisdictions like Jersey, the British Virgin Islands and the Netherlands to avoid restrictions.
Binance was reportedly fully aware of the extent of its U.S. operations, with the filing citing internal monthly reports submitted to Zhao, indicating that 17.8% of customers were still based in the U.S. as of June 2020, even after control measures had been enacted.
Read Next: Regulation Rumble: Unpacking The Coinbase-SEC Showdown And What It Means For Crypto
Photo: Web Summit on flickr.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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