Binance seeks dismissal of CFTC suit, preps Japanese noncompliance

Getting your Trinity Audio player ready...

Binance is seeking the dismissal of one of its U.S. federal lawsuits despite fresh evidence that its founder knew the digital asset exchange was conducting illegal wash trading.

On Monday, attorneys for Binance Holdings Ltd, several other Binance entities, founder Changpeng ‘CZ’ Zhao and former compliance chief Samuel Lim alerted the U.S. District Court for the Northern District of Illinois that they plan to seek a dismissal of the complaint filed in March against the exchange by the U.S. Commodity Futures Trading Commission (CFTC).

That complaint alleged that the various Binance entities, CZ and Lim engaged in a “calculated, phased approach,” to violate “core provisions” of the Commodity Exchange Act. Citing numerous internal Binance communications, CFTC chair Rosnim Behnam said the company’s “compliance efforts have been a sham and Binance deliberately chose—over and over—to place profits over following the law.”

Binance has until Thursday to file its response to the CFTC suit, but is asking the court for permission to exceed the 15-page limit for such responses. Binance wants to file a joint 50-page response due to “the complexity of the CFTC’s Complaint and the number of arguments Defendants anticipate making in support of their Motions to Dismiss.”

The filing claims the CFTC isn’t objecting to Binance’s over-limit request, apparently convinced that whatever verbose arguments the exchange plans to make won’t diminish the damning admissions the complaint exposed in Binance’s internal emails and chats.

Said admissions include Lim informing colleagues that CZ was okay with publicly claiming to be blocking U.S. customers from the international dot-com exchange, supposedly forcing them to deal with the U.S.-licensed Binance.US. All the while, Binance was focused on ensuring that “we can find a way to backdoor them to .com,” where Lim deemed compliance to be “fo sho.”

Wash. Trade. Repeat.

The CFTC suit also detailed some 300 ‘house accounts’ on Binance that are “all directly or indirectly owned by Zhao.” Other accounts belonged to CZ-controlled market-makers Merit Peak and Sigma Chain, both of which have been linked to rampant wash trading to create the illusion of greater customer interest in high-profile tokens such as BTC.

Similar allegations were made in the suit filed in June by the U.S. Securities and Exchange Commission (SEC). That suit also cited “manipulative trading” by “dozens” of Binance.US accounts belonging to Sigma Chain. This inflationary wash trading was particularly noticeable during three periods, including the September 2019 launch of Binance.US.

On Monday, the Wall Street Journal quoted a CZ-authored internal message addressing some US$70,000 in BTC trades that occurred in the first hour following the launch of Binance.US. “That was ourself, I think,” CZ reportedly told his staff in regards to this flurry of initial activity.

The SEC previously detailed how Sigma-/CZ-controlled accounts were responsible for “more than 99% of the initial hour of trading volume in at least one crypto asset” on the day following the Binance.US launch. Sigma accounts also engaged in significant wash trading following the launch of new tokens on Binance.US, and during the period immediately prior to an equity raise of the holding company behind Binance.US.

The Journal’s report quoted a Binance.US spokesperson appearing to offer a preview of how Binance plans to defend itself against these allegations. “We strongly believe that the SEC’s allegations regarding wash trading are entirely unfounded, and based on a fundamental misunderstanding of the facts and a misapplication of the relevant law.”

The spokesperson added that the company believes “these trades were entirely legitimate interactions involving independent strategies. The relative size of the trading activity does not support the suggestion that overall volume on the platform was affected.” The spokesperson claimed that Sigma’s self-trading amounted to less than 0.5% of trading volume in the three months prior to the fundraising round.

Could Binance be planning to argue that wash trading isn’t illegal if it’s not measured in the billions? Or that ‘crypto’ is such a regulatory outlier and revolutionary innovation that the rules barring self-dealing in securities and commodities simply don’t apply? Are Binance’s wash-trading bots not the droids that U.S. regulators are looking for?

It’s worth noting that CZ has hired some seriously pricey legal talent to help him navigate this valley of the shadow of legal death, so might as well have them pitch a few legal Hail Mary’s at the end zone. Unfortunately, there’s no open receivers to catch these legal long bombs but the attorneys have to at least look like they’re working.

Like many Binance customers, some of these attorneys have significant experience in the field of money laundering, adding to expectations that CZ expects the U.S. Department of Justice to add criminal charges to his list of legal woes. And with Racketeer Influenced and Corrupt Organizations (RICO) charges carrying potential sentences of 20 years for each count, CZ and other Binance employees could soon have plenty of time in federal prison to ponder building a tokenized cigarette-and-shiv exchange.

Bifrance compare des pommes et des oranges

Speaking of money laundering, Binance France is still waiting to learn what’s next in the Paris Public Prosecutor’s Office investigation into “aggravated money laundering” involving Binance’s local operations. The prosecutors staged a surprise ‘on-site visit’ in June to Binance’s Parisian HQ, which Binance is/was trying to establish as its “flagship center in Europe.”

Last week, Binance France released its first audited financial statements covering the 14-month period ending December 31, 2022. The annual statement, a requirement of Binance’s local license, shows the company holds around €1 billion on behalf of its French customers, while holding US$7 million worth of USDT (Tether) in its own accounts.

The statement also show a net loss of €4 million during the period, but Binance claims this is due to it having been approved to commence operations only last July, while incurring expenses during the whole 14-month period. (Binance neglected to mention that the exchange waited three years before finally obtaining a license from L’Autorité des Marchés Financiers at the last minute.)

Apparently anticipating customers inferring that Binance’s operations are unprofitable when it’s compelled to comply with regulations, Binance France insists that it “would show profit” had the expenses and revenue durations been equal. “Globally, Binance remains a profitable business,” although that’s in part due to its flagrant disregard for regulatory constraints.

Rising sun, sinking feeling

Finally, Binance is preparing to make its official debut in Japan’s regulated digital asset market next week. CZ made the announcement on Tuesday via a video hook-up at a Tokyo Web3 conference.

Last November, Binance acquired Japan’s Sakura exchange, which was already registered with the Japan Financial Services Agency (JFSA). Binance has made a habit of acquiring licensed companies in markets in which its own operations fall woefully short of the levels of compliance required for licensing. A similar ‘backdoor licensing’ strategy was rebuffed in the U.K. after the Financial Conduct Authority opined that Binance was “not capable of being effectively supervised.”

Binance.com’s Japan-based customers will be invited to migrate to the new Japanese site as of August 1. These Japan-based customers will officially lose access to the dot-com exchange as of November 30.

Users who successfully submit to the country’s strict ‘know your customer’ (KYC) requirements will reportedly have the opportunity to spot trade around 30 different tokens on Binance Japan, although the exact number and types of tokens is subject to change.

Binance Japan GM Takeshi Chino told the Tokyo conference the exchange would look to offer stablecoins following the JFSA’s relaxation of its rules on stablecoins backed by currencies other than the yen. But if Binance thinks it will be able to offer its in-house unbacked ‘B-tokens’ or its new favorite stablecoin TUSD, which is primarily backed by the wattage of Justin Sun’s ‘what, me worry?’ smirk, it may find its Japanese excursion cut short.

CZ is saying all the right things about Japanese regulators and offering up the usual bromides about Binance’s commitment to compliance. He habitually makes these statements despite fleeing every market in which Binance was challenged to honor those commitments, often continuing to serve customers in those markets long after claiming to have cut all ties (as in the U.S.).

With Japan tightening its anti-money laundering controls, this would be a very bad time for CZ to engage in his usual public-saint/private-sinner subterfuge. Japan has been widely praised for its approach to regulating digital assets, which considers the needs of both customers and companies. Woe to any operator who makes Japanese authorities look foolish for trusting exchanges to do as they promised.

With apologies to our Japanese readers for this momentary episode of cultural appropriation, we present our predictions for Binance’s ill-fated Japanese operations, in haiku form:

Binance in Japan
CZ thought rules were for fools
F*cked around, found out

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.