CFTC Charges Binance with Evasion of U.S. Regulations
Commentary by Nihal Patel and Steven Lofchie
The CFTC filed charges against Binance, the world’s largest central digital asset exchange, and its CEO, alleging that the firm solicited U.S. customers while evading the Commodity Exchange Act and CFTC rules.
In a Complaint filed in the U.S. District Court for the Northern District of Illinois, the CFTC alleged that the exchange knowingly solicited and maintained accounts for customers located in the United States and helped to facilitate U.S. customers' trading of futures, options, swaps and leveraged retail commodity transactions involving digital assets, including bitcoin, ether and litecoin, each of which the Complaint describes as "commodities." The CFTC asserted that while the asset exchange publicly stated its intent to "block" and "restrict" U.S. customers from accessing its platform, the exchange took a "calculated, phased approach" to increase its presence in the United States. According to the CFTC, the exchange ignored U.S. federal laws by (i) failing to register with the CFTC despite cultivating "lucrative and commercially important ‘VIP’ customers" in the United States and (ii) not implementing controls aimed at preventing money laundering and terrorism financing.
Among other things, the CFTC alleged that the exchange and its personnel actively urged U.S. customers to (i) use virtual private networks ("VPNs") to hide their location and (ii) open accounts with the exchange under newly incorporated shell companies to evade the exchange’s compliance controls.
The Complaint alleged violations of:
- either CEA Section 4(a) (restriction on futures trading) or CEA Section 4(b) (regulation of foreign transactions by United States persons) and Rule 48.3 (registration required);
- CEA Section 4c(b) (prohibited transactions - regulated option trading) and Rule 32.2 (commodity option transactions; general authorization);
- CEA Section 4d (for failing to register as a futures commission merchant);
- CEA Section 5h(a)(1) (swap execution facilities -registration) and Rule 37.3(a)(1) (requirements and procedures for registration);
- CFTC Rule 166.3 (failure to diligently supervise);
- CFTC Rule 42.2 (failure to implement a "customer identification program," "Know Your Customer" and AML procedures); and
- CFTC Rule 1.6 (anti-evasion).
The CFTC requested an order against the exchange and its CEO implementing a (i) permanent injunction prohibiting further regulatory violations, (ii) disgorgement of all monetary benefits received, (iii) withdrawal of all contracts and agreements with any customer or investor, (iv) full restitution of funds to each customer and investor and (v) civil monetary penalty.
Commentary
Perhaps the most interesting aspects of the Complaint are the CFTC's allegations regarding the location of certain of the exchange's participants. The Complaint does not primarily look to existing law for defining whether a person is considered a "U.S. person" for relevant CFTC rules and regulations (e.g., the definitions used for futures or swaps). Instead, the Complaint addresses these point more generically, including repeatedly using the phrase "real economic party" to describe the location of the participants.
Commentary
On jurisdiction, the Complaint attempts to create as many links between Binance and the United States as is possible. Many of the links alleged do not raise any obvious U.S. legal issue; e.g., hiring U.S. service providers. Likewise, it is not inherently problematic that Binance would have non-U.S. customers that are subsidiaries of U.S. holding companies. Presumably the question of what creates jurisdiction for purposes of the CEA and CFTC Rules will be better and more narrowly defined in the course of the proceedings.