CFTC sued Binance and Zhao over alleged U.S. derivatives evasion

The U.S. Commodity Futures Trading Commission filed a civil enforcement action against Binance, founder and chief executive Changpeng Zhao, and former chief compliance officer Samuel Lim on March 27, 2023, alleging that they deliberately evaded federal commodities law while serving U.S. derivatives customers.

Filed in the U.S. District Court for the Northern District of Illinois as case 1:23-cv-01887, the complaint named Zhao, Lim and three Binance entities. It contained seven counts addressing unregistered futures, commodity options and swaps activity; failure to register as a futures commission merchant; deficient supervision and customer controls; and alleged willful evasion.

The filing was an allegation, not a judgment. No court had determined liability on March 27, and the complaint did not itself impose a penalty or establish that every factual assertion was true.

The alleged business model

The CFTC said Binance had offered or executed futures, options, swaps and leveraged retail commodity transactions for people in the United States from no later than July 2019. Those products involved digital assets the agency characterized as commodities, including bitcoin, ether and litecoin.

According to the complaint, Binance publicly represented that it would restrict U.S. customers but continued cultivating commercially valuable American users. The regulator alleged that personnel advised certain customers to use virtual private networks or offshore corporate structures to bypass location and identity controls. It also said Binance had never registered with the CFTC in any capacity.

The complaint cited Binance’s internal records to support the regulator’s theory that U.S. activity was commercially important. It alleged that approximately 16% of accounts were associated with U.S. customers in August 2020 and that Binance earned $63 million in derivatives fees during that month. Those figures were CFTC allegations drawn from company documents, not independently audited market statistics.

The regulator also alleged that Binance’s compliance system failed to collect required identity information for much of the relevant period and that internal communications reflected awareness of weaknesses in geofencing, know-your-customer procedures and anti-money-laundering controls. Zhao was charged under a control-person theory, while Lim was accused of aiding and abetting Binance’s alleged violations.

Why the case mattered

The case directly challenged the operating model of what the complaint described as the world’s largest centralized digital-asset exchange. Its institutional importance extended beyond whether an exchange maintained a physical U.S. headquarters: the CFTC argued that an offshore platform could incur U.S. obligations by soliciting American customers and handling their commodity derivatives transactions.

The regulator sought permanent injunctions, disgorgement, civil monetary penalties and restrictions on trading and registration. None of that relief had been granted on March 27. The immediate consequence was litigation risk and a public challenge to Binance’s compliance representations, not an adjudicated shutdown or quantified liability.

The complaint also illustrated the distinction between spot cryptocurrency trading and regulated derivatives. The CFTC based much of its case on futures, options, swaps and leveraged retail transactions rather than asserting general supervisory authority over every transaction conducted on Binance.

Binance disputed the allegations

Zhao responded on March 27 that the complaint was unexpected and that its account of the facts was incomplete. Binance said it had worked with the CFTC, invested in compliance and implemented controls intended to prevent U.S. users from accessing the global platform.

Those statements established the defendants’ contemporaneous position but did not independently resolve the factual dispute. The defensible event-day conclusion was narrower: a federal commodities regulator had placed Binance’s U.S. customer controls, corporate structure and derivatives business before a court, creating a major test of how American trading law applied to a globally distributed cryptocurrency exchange.