As expected, the activities of Binance have once again caught the eye of U.S. regulators. According to Bloomberg, Binance is the subject of an active investigation by the Commodity Futures Trading Commission (CFTC) for potentially offering digital asset derivative products to U.S. citizens in contravention of U.S. regulations.
Binance investigated by CFTC
If a digital asset exchange offers its products to customers within the United States, they must generally register with the CFTC. States may have specific requirements: for example, New York requires that any company conducting digital asset activities in the state of New York must apply for a specific license called a “BitLicense.” Doing business without such a license is a felony.
To say that Binance has a complicated relationship with geographic restrictions would be an understatement. In fact, they have already been identified by regulators for failing to enforce them at all: in 2019, the New York Attorney General’s office issued their Virtual Markets Integrity Initiative Report 2 in 2018 and revealed that they had referred Binance to the New York State Department of Financial Services for potentially providing services to citizens in New York in contravention of digital asset regulations. In 2020, the Financial Action Task Force, an intergovernmental anti-money laundering agency, identified an anonymized digital asset exchange as an example of the practice of ‘shopping’ jurisdictions around the world for the most beneficial (read: least regulated)—though it does not say so explicitly, it is strongly implied that this exchange is Binance.
However, it is no defense to say that Binance is not based in the U.S. or New York: for the purposes of U.S. regulators, what matters is whether Binance is serving U.S. customers.
Binance was founded in 2017, and announced that it would stop serving U.S. customers in 2019. As Binance has never registered itself in the U.S., at the very least it can be said that Binance was illegally serving U.S. customers until 2019. However, it’s also very unlikely that they ever stopped. The controls that Binance has in place to prevent U.S. citizens from accessing the platform have been perfunctory at best and intentionally evasive at worst. For example, in 2019, after the period in which Binance was supposedly geoblocked, founder Changpeng Zhao tweeted that users could trade on Binance by using certain wallet apps integrated with the platform. The same day, he tweeted that using a VPN was “a necessity, not optional.”
The report by Bloomberg indicates that the CFTC is focusing on whether Binance offered derivatives products to U.S. citizens, but as their case against BitMEX illustrates, this is likely just the starting point, opening the door to a host of other and more serious CFTC violations. For example, once it is established that Binance is serving U.S. citizens, they will then be measured against the rigorous requirements of the CFTC…