How CZ and Binance Solicited U.S. Investors while Evading Regulatory Scrutiny

FACTS

III. UNDER ZHAO’S CONTROL, BINANCE PROVIDED EXCHANGE, BROKERDEALER, AND CLEARING AGENCY SERVICES TO U.S. INVESTORS THROUGH THE BINANCE.COM PLATFORM.

E. Zhao and Binance Actively Solicited Investors in the United States to Trade Crypto Assets on the Binance.com Platform.

i. Binance Marketed its Services Worldwide, Including Specifically to U.S. Customers.

104. At least since the launch of the Binance.com Platform in 2017, Binance has regularly solicited customers in the United States—at first overtly and later furtively—to transact in crypto asset securities. Throughout, it has held itself out as being in the business of effecting transactions in many different crypto assets offered and sold as securities. It has engaged in this solicitation on a worldwide basis, including through its website, blog posts, and social media.

105. Among other things, Binance’s website has solicited “investors” and “traders” to “buy and sell crypto in minutes,” inviting them to “Trade. Anywhere.” Binance advertises the Binance.com Platform on its social media accounts, including on Facebook, Twitter, and Reddit, where it collectively has over 12 million followers, many of whom reside in the United States.

106. From the Binance.com Platform’s launch until at least September 2019, Binance overtly marketed its services to all customers and imposed no restrictions whatsoever on the ability of U.S. persons to buy, sell, and trade crypto assets on the Binance.com Platform. During this period, Binance opened tens of thousands of accounts for customers who submitted “Know Your Customer” (“KYC”) identity verification information that indicated they were based in the United States or who accessed the platform via Internet Protocol (“IP”) addresses indicating that they were physically located in the United States. Binance, and Zhao as its control person, knew that U.S. persons transacted on the Binance.com Platform.

107. In addition, until at least August 2021, Binance did not require customers whose accounts were limited to withdrawing two bitcoin per day to submit any KYC information, allowing those investors to bypass well-recognized international anti-money laundering restrictions and disclosures when seeking to open accounts on the Binance.com Platform.

108. Zhao and Binance regularly tracked customer activity on the Binance.com Platform and were thus aware that U.S. customers made up a substantial portion of Binance’s business. For example, in an August 2019 internal presentation, Binance estimated that the Binance.com Platform had over 1.47 million customers in the United States.

109. Moreover, by 2019, Binance had over 3,500 U.S. customers who were largevolume traders that Binance referred to as “VIPs.” These U.S. customers were important to Binance not only because they directly produced substantial revenues, but also because they provided substantial liquidity on the Binance.com Platform, which in turn encouraged other investors to trade on the platform.

ii. Zhao and Binance Developed a Plan to Evade U.S. Legal Scrutiny While Continuing to Profit from U.S. Investors.

110. Zhao and Binance understood that they were operating the Binance.com Platform in violation of numerous U.S. laws, including the federal securities laws, and that these ongoing violations presented existential risks to their business.

111. As Binance’s CCO bluntly admitted to another Binance compliance officer in December 2018, “we are operating as a fking unlicensed securities exchange in the USA bro.” (Emphasis added.)

112. In 2018, Zhao and Binance hired several advisors to advise them on managing their U.S. legal exposure. One of these advisors was a consultant who operated a crypto asset trading firm in the United States (“Binance Consultant”). In November 2018, the Binance Consultant proposed a plan to Zhao and Binance that involved the creation of a U.S. entity, which the Binance Consultant at the time dubbed the “Tai Chi” entity (“Tai Chi Plan”).

113. In presentations shared with Zhao and other Binance senior officials in November 2018, the Binance Consultant warned against Binance continuing the “status quo” of unrestricted U.S. customer access to the Binance.com Platform, dubbing this a “high” risk due to potential U.S. “regulatory actions,” including actions by the SEC with respect to the “[i]ssuance of BNB to US Persons” and “for [operating an] unregistered securities brokerage.”

114. The Binance Consultant then discussed two alternative approaches for Zhao and Binance to consider. First, he discussed what he described as a “low” risk approach of “[a]ctive outreach to regulators and resolve all potential issues,” but ultimately advised against this approach because, among other things, “settlement costs can be substantial” and could result in the “complete loss of the US market during the settlement process.”

115. Second, the Binance Consultant described a “moderate” risk approach in which Binance would establish a U.S. entity—the Tai Chi entity—that “will become the target of all built-up enforcement tensions,” “reveal, retard, and resolve built-up enforcement tensions,” and “[i]nsulate Binance from legacy and future liabilities.” The Binance Consultant recommended that Zhao and Binance adopt this approach, known as the Tai Chi Plan.

116. To implement the Tai Chi Plan, the Binance Consultant recommended that Binance brand a U.S. entity a Binance entity through a “franchise model” that would rely on Binance’s technology “by visualizing Binance as a technology vendor.” 117. He further recommended that Binance provide liquidity and market access from the Binance.com Platform to the proposed U.S. crypto asset platform established by the Tai Chi entity “through either affiliated . . . or contracted market makers.”

118. The Binance Consultant touted this approach as both “maintaining functional access to the US market,” and providing “[l]icense and services fees paid by the US Service Company to Binance” that “are functionally US-sourced trading fees.”

119. As another benefit to Binance, the Binance Consultant further recommended that Binance use the Tai Chi entity’s OTC trading services to provide “functional fiat capacity” – i.e., Binance could serve as an OTC counterparty on the U.S. platform to sell crypto assets for fiat currency, thereby giving Binance ready access to fiat currency without having to separately establish a bank account.

120. In addition, the Binance Consultant recommended steps to “insulate Binance from US Enforcement.” Those steps included having “[k]ey Binance personnel continue to operate from non-US locations to avoid enforcement risk” and ensuring that “[c]ryptocurrency wallets and key servers continue to be hosted at non-US locations to avoid asset forfeiture.”

121. As to the SEC, the Binance Consultant also recommended that, “just for publicity,” the Tai Chi entity should “release a long and detailed Howey Test Asset-Evaluation Framework … to show Howey test sophistication” and then engage with the SEC to discuss the “formation or acquisition of a broker/dealer or alternative trading system (ATS), with no expectation of success and solely to pause potential enforcement efforts.” (Emphasis added.)

122. The Binance Consultant also recommended that Binance take steps to “reduce the attractiveness of enforcement” by U.S. regulators concerning the Binance.com Platform. This included publicly “restrict[ing] US persons’ access to the main Binance site” while privately encouraging U.S. customers to bypass these restrictions through the “strategic treatment” of virtual private networks (“VPNs”) that would disguise their locations and thereby “minimize [the] economic impact” of Binance’s public proclamations that it was prohibiting U.S investors on the platform.

123. Longer term, the Binance Consultant recommended the “[e]ventual integration with Binance” by “acquir[ing] the US operation at a nominal price and re-arrang[ing] its leadership when it has served its purposes.”

124. After considering the Tai Chi Plan, Zhao informed the Binance Consultant that Binance had also talked to U.S. law firms that proposed “a more conservative approach” that was “probably safer for now.” But Zhao made clear that he would “still very much like to continue to work with” the Binance Consultant, explaining, “There are elements from both of your proposals[] we may combine.” Zhao further noted that “having [a U.S. law firm] behind us reduces the personal exposure you take on as well.” Finally, Zhao emphasized to the Binance Consultant that they “should work together as a team.”

iii. Consistent with the Tai Chi Plan, Binance Encouraged and Assisted U.S. Customers to Circumvent Binance’s Supposed Restrictions.

125. In fact, Binance implemented much of the Tai Chi Plan. In addition to creating BAM Trading and the Binance.US Platform, Zhao and Binance implemented policies and controls to give the impression that the Binance.com Platform was blocking U.S. customers while at the same time secretly subverting those controls.

126. On June 14, 2019, Binance updated the Binance.com Platform’s “Terms of Use” to provide—for the first time—that U.S. customers were not permitted to trade on the Binance.com Platform. Binance further announced that it would begin implementing measures to block U.S. customers from trading or depositing assets on the platform after 90 days. Zhao and Binance timed this announcement to coincide with its announcement that an ostensibly independent U.S. entity, BAM Trading, would soon launch the Binance.US Platform.

127. But Zhao and Binance were unwilling to risk losing all of Binance’s U.S business—particularly its VIP U.S. customers—on the well-established and more liquid Binance.com Platform. And so Zhao and Binance engaged in widespread covert efforts to permit U.S. customers to continue to trade on the platform.

128. First, Zhao directed Binance to implement a plan to encourage customers to circumvent Binance’s geographic blocking of U.S.-based IP addresses by using a VPN service to conceal their U.S. location. Second, Zhao directed Binance to encourage certain U.S.-based VIP customers to circumvent the new KYC restrictions by submitting updated KYC information that omitted any U.S. nexus.

129. As Zhao explained in a June 9, 2019 weekly meeting of senior Binance officials:

We don’t want to lose all the VIPs which actually contribute to quite a large number of volume. So ideally we would help them facilitate registering companies or moving the trading volume offshore in some way—in a way that we can accept without them being labeled completely U.S. to us.

130. Binance implemented Zhao’s instructions. On or about June 13, 2019, a Binance employee who belonged to a team that managed VIP customers messaged Zhao and other senior Binance officials, “We contacted 16 US top clients so far, some [of] them already have offshore entity, they said they can underst[and] and they are happy that we can get ahead of that.” A few days later, Binance’s Chief Marketing Officer reported that the team had reached out to the top 22 U.S. VIP customers and that 19 had “already agreed to change KYC, or change their IP.”

131. With respect to its thousands of other VIP U.S. customers, Zhao explained in a June 24, 2019 meeting with other Binance senior officials:

We do need to let users know that they can change their KYC on Binance.com and continue to use it. But the message, the message needs to be finessed very carefully because whatever we send will be public. We cannot be held accountable for it.

132. The following day, Zhao met with other senior Binance officials to discuss their VIP U.S. customers, and Zhao provided further instructions on crafting the message to customers about changing IP addresses or KYC documentation. During the meeting, the Binance CCO noted that Binance would engage in “the international circumvention of KYC,” and Zhao affirmed that his “goal” was “to reduce the losses to ourselves, and at the same time to make the U.S. regulatory authorities not trouble us.”

133. To that end, the Binance CCO drafted a “VIP Handling” document, dated June 26, 2019, which included draft emails to send to VIP customers who were identified as having U.S. KYC documents or U.S. IP addresses, along with instructions to Binance employees about messaging to customers. For customers with U.S. KYC documents, the “VIP Handling” document instructed Binance employees to make sure the U.S. customers opened new accounts “with no US documents allowed” and to inform the customer “to keep this confidential.”

134. For customers with U.S. IP addresses, the “VIP Handling” document instructed Binance employees to “[i]nform [the] user that the reason why he/she can’t use our www.binance.com is because his/her IP is detected as US IP; if user doesn’t get the hint, indicate that IP is the sole reason why he/she can’t use .com.” The document further instructed Binance employees not to “explicitly instruct user to use different IP. We cannot teach users how to circumvent controls. If they figure it out on their own, it[’]s fine.”

135. Binance continued to circumvent these controls for several years. On February 12, 2020, for example, a Binance employee asked the Binance CCO whether it was still a “hard requirement” for Binance to block U.S. customers, and the Binance CCO replied:

136. Similarly, on July 15, 2020, a Binance VIP customer team member asked the Binance CCO how they could onboard a large U.S. customer. The Binance CCO replied, “[T]he best way I can think of is to onboard with US exchange … but we let them trade on .com through a special arrangement.” He further explained, “[W]e ask them to onboard with US, and then if their volume is really very big … we will push hard on .com side to accept it on an exceptional basis … we always have a way for whales … either we do it, or [a competitor crypto trading platform] does it.” (“Whales” is a market term referring to large volume investors.)

137. The Binance CCO further admitted, “CZ will definitely agree to this lol … I have been briefed by top management to always find a way to support biz.”

138. Moreover, despite statements about its compliance efforts, Binance did not even require all customers to submit KYC documents until after August 2021. Around that time, Binance had over 62 million worldwide customers, but only approximately 25 million had submitted KYC documentation. Thereafter, more Binance.com Platform customers began submitting KYC documentation, but Binance continued to have large numbers of customers that still had not done so at least through mid-2022.

139. Binance’s plan to retain lucrative U.S. investors while pretending to restrict them was a success. For example, a March 2020 internal Binance presentation reported that the Binance.com Platform still had approximately 159 U.S. VIP customers, representing almost 70 percent of all global VIP trading volume. Similarly, in May 2021—two years after the launch of the Binance.US Platform—an internal Binance presentation reported that U.S. VIP customers still accounted for over 63 percent of the Binance.com Platform’s VIP customer trading volume.

140. U.S. customer trading volume on the Binance.com Platform included substantial activity trading in crypto asset securities. For example, between January 2019 and September 2021, over 47,000 U.S. investors traded in BNB on the Binance.com Platform.