Binance Holdings Ltd. is facing a lawsuit by the US regulator, Commodity Futures Trading Commission (CFTC), over “sham” compliance with US derivatives regulations.
The CFTC alleges that Binance failed to comply with the regulatory requirements, including preventing Americans from accessing its exchange as promised, and not registering with the regulator.
The lawsuit mentions Jane Street Group, Tower Research Capital, and Radix Trading, three anonymous trading firms companies cited as “VIP” clients of Binance. The CFTC cites these three US quant firms as examples of how US clients accessed the Binance platform but did not accuse them of any wrongdoing.
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The CFTC’s complaint alleges that Binance facilitated the violation of US law by helping US-based traders evade know-your-customer rules and compliance measures meant to block their access.
Reports say that Radix is Trading Firm A, Jane Street is Trading Firm B, and Tower Research is referred to as Trading Firm C, according to anonymous sources. The lawsuit’s mention of US-based firms using offshore entities to trade on Binance has sent a chill through the quant industry, which has been dabbling in crypto but remains focused on traditional assets.
The institutional trading firms active in trading Bitcoin perpetual and other crypto derivatives on Binance allegedly received “VIP” treatment from the exchange, according to the CFTC. The CFTC alleges that Binance provided “white glove” treatment to these trading firms, which included lower transaction fees and faster access for trades in exchange for providing liquidity on the exchange and trading fee revenue.
Binance also offered its top traders “prompt notification of any law enforcement inquiry concerning their account,” the CFTC said.
For its part, Binance has long contended that it isn’t required to register with the CFTC since it walls off US users from accessing its global platform. However, the CFTC alleges that Binance’s strictures were weak, and in some instances, the exchange helped firms get around them.
For example, Binance instructed Trading Firm A, which was really Radix, to access the exchange’s website through a virtual private network. Trading Firm B entered into a “services agreement” with an entity registered in Jersey, a British dependency, and was described as one of Binance’s largest customers.
Trading Firm B was Jane Street, according to anonymous sources. The CFTC said that Trading Firm B’s Jersey nominee does not have any employees and does not have any meaningful sources of capital, apart from Trading Firm B.
The lawsuit has raised concerns among trading firms about the potential risk and exposure to their license and activity in the US. Representatives for Jane Street, Tower Research, and Radix declined to comment or respond to multiple requests for comment. A representative for the CFTC declined to comment, while Binance has stated that it has boosted compliance and was disappointed by the CFTC’s accusations but did not respond to a request for comment.