Scammers Are Stepping up Their Game, and so Should You

“Ignore FUD (fear, uncertainty, and doubt), fake news, attacks, etc,” according to Changpeng Zhao’s (CZ) pinned tweet on 3 January. But it is much more than just FUD that CZ is facing now.

In recent allegations, the United States (US) Commodity Futures Trading Commission (CFTC) has sued Binance, one of the largest cryptocurrency exchanges in the world, and its founder CZ, for alleged violations of derivatives regulations.

To dive more into the details of the lawsuit, it alleged that Binance operated a derivatives trading operation in the US, offering trades for crypto including the likes of Bitcoin (BTC), Ether (EtH), Litecoin (LTC), Tether (USDT), and Binance USD (BUSD), which the suit referred to as commodities. It also alleged that the company had directed its employees to spoof their locations through the use of virtual private networks.

The lawsuit sent shockwaves across the crypto industry and further raised questions about the future of regulation in the space.

The filing stated that, “Binance’s reliance on a maze of corporate entities to operate the Binance platform is deliberate; it is designed to obscure the ownership, control, and location of the Binance platform.”

In a press release, CFTC Chairman Rostin Behnam mentioned that, “For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance. This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of US law.”

In addition, CFTC’s Enforcement Division Principal Deputy Director and Chief Counsel Gretchen Lowe, added that the “defendants’ alleged willful evasion of US law is at the core of the Commission’s complaint against Binance. The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose ─ over and over ─ to place profits over following the law.”

The 74-page complaint against Binance contains some pretty shocking allegations. Here are the seven claims:

1) The use of virtual private network (VPN) was encouraged by Binance for its customers based in US
CFTC claims that Binance actively encouraged its customers based in US to use a VPN to obscure their IP addresses so they could use the exchange, though Binance was banned in the U.S. in 2019.

In that same year, “A Beginner’s Guide to VPNs” was published on its site ─ the CFTC’s complaint alleges that Binance prodded users by reminding them that the mechanism can unlock sites that are restricted in your country”.

“They can use VPN but we are not supposed to tell them that… it cannot come from us,” internal conversations obtained seemed to show Binance executives directing subordinates to encourage US traders to use VPNs to obscure their IP address.

2) Compliance efforts were merely “for show”
A conversation obtained appears to state that, “As Lim [Samuel ─ Binance’s CCO at that time]… recognised in an October 2020 chat with other Binance compliance personnel, Binance’s compliance environment has amounted to ’email sending and no action… for media pickup… I guess you can say its fo sho’.”

In short, the staff acknowledged that all the efforts were merely “for show”.

3) Fake reports were written for a fake board of directors
Messages seen by the CFTC showed Samuel acknowledging that Binance deliberately sourced for a firm that would “just do a half assed individual sub audit” to “buy [Binance] more time.”

4) Staff seemed to know that the exchange was facilitating transactions for criminals
According to CFTC’s complaint, Samuel and other Binance personnel appear to have knowledge that the platform was being used for criminal activities yet turned a blind eye.

One of the indications were of a response from a staff joking, “Can barely buy an AK47 with 600 bucks”; another was of Samuel saying in a chat that he was aware that certain Russian Binance customers were “here for crime” ─ and the reply to that was, “We see the bad, but we close 2 eyes.”

5) Messages between staff, including its CEO, were auto-deleted
In the lawsuit, it pointed out that “Zhao and others acting on behalf of Binance have used Signal ─ with its auto-delete functionality enabled ─ to engage in business communications, even after Binance received document requests from the CFTC and after Binance purportedly distributed document preservation notices to its personnel.”

6) Where is its headquarters? Nobody, not even Binance’s chief strategy officer (CSO), knows
Binance’s own CSOwas quoted saying “Binance is a Canadian company” last September to which a spokesperson hastily clarified that it is actually an “international company”.

In short, according to CFTC, “Binance is so effective at obfuscating its location and the identities of its operating companies that it has even confused its own chief strategy officer.”

7) CZ has total control of everything, down to the minutiae details
As the head of Binance, it is natural for major decisions with regards to its management and development, to go to him. But CFTC also noted that “Zhao also involves himself in the minutiae of Binance’s operations.”

He personally approved a $60 office furniture expense requested in January 2021, which was during a month when Binance earned over $700 million in revenue.

That sounds like a solid mike drop from CFTC. And, it was no shock at all when CZ ‘fought back’. You can peruse his response to the CFTC complaint here.

In a blog post on Binance, CZ expressed his disappointment over the complaint, “…the CFTC filed an unexpected and disappointing civil complaint, despite our working cooperatively with the CFTC for over two years. Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterisation of many of the issues alleged in the complaint. While we will only be able to give full responses in due time, we will address a few key points below.”

Shortly thereafter, he mentioned and linked a post from Bloomberg in his tweet.

Addressing the main point of the complaint, CZ noted that Binance blocked U.S. users “by nationality (KYC), IP (including commonly used VPN endpoints outside of the US), mobile carrier, device fingerprints, bank deposit and withdrawals, blockchain deposits and withdrawals, credit card pin numbers, and more.”

With major players like Coinbase, Kraken, and Binance being embroiled in the flurry of enforcement actions, it seems inevitable that more crypto companies will be dragged into similar lawsuits. According to XRP lawyer John Deaton, the US Securities and Exchange Commission (SEC) would likely take up 200 enforcement actions on the crypto market over the next two years.

The implications of this lawsuit could be significant. If the CFTC is successful in its claims, Binance could face hefty fines and could be forced to cease operations in the US. Furthermore, the lawsuit could have wider implications for the crypto industry as a whole, with regulators potentially becoming more aggressive in their attempts to bring the industry in line with traditional financial regulations.

Many investors are expressing concern over the potential consequences for the industry ─ some argued that the lawsuit highlights the need for greater regulatory clarity and oversight in the crypto space, while others have expressed concerns that increased regulation could stifle innovation and growth.

While the outcome of the lawsuit remains uncertain, the battle will be long. As the crypto industry continues to evolve, it is likely that regulatory issues will remain a key topic for discussion, and it will be interesting to see how the industry responds to these challenges in the coming years.

Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Crypto is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Crypto market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.