FTC v Binance: Binance Accused of Helping This Firm Evade Its Compliance Controls

L. Examples of Market Participants Currently Trading on Binance and Binance’s Efforts to Help Them Evade Its Compliance Controls

Trading Firm A

150. Trading Firm A is a quantitative trading firm that has traded bitcoin perpetuals on Binance, among other products, through at least three different accounts during the Relevant Period. Trading Firm A is a Delaware limited liability company headquartered in Chicago, Illinois. Trading Firm A also has offices in New York and Amsterdam.

151. Trading Firm A is majority owned by U.S. residents. Its executive management, including Trading Firm A’s two principals, one of whom functions as its Chief Risk Officer and one of whom functions as its Chief Technology Officer (“CTO”), work from Trading Firm A’s Chicago headquarters. Trading Firm A’s personnel access Binance.com through VPNs.

152. Trading Firm A’s trading activity on Binance is conducted through automated trading strategies programmed into computer algorithms. These algorithms determine whether to place or cancel any orders based on instructions in their code. Trading Firm A’s algorithms are developed by quantitative technologists that work at Trading Firm A’s Chicago headquarters, among other locations. The algorithms are built using computer code that Trading Firm A considers to be valuable intellectual property. Trading Firm A’s computer code and its algorithms are owned by an Illinois limited liability company that is a wholly-owned subsidiary of Trading Firm A.

153. At all times, whether trading in a Binance account in its own name, in the name of a foreign-incorporated nominee subsidiary, or through a sub-account opened on its behalf by Prime Broker B, Trading Firm A has been the real economic party to its trading activity on Binance. Trading Firm A has capitalized its trading activity on Binance and Trading Firm A’s net trading revenue derived from its trading activity on Binance is consolidated into Trading Firm A’s financial statements.

154. At the time it maintained an account directly on Binance, Trading Firm A benefited from its status as a VIP customer. Binance provided Trading Firm A with the “incentive” of “lower latency access [to Binance’s matching engine] for up to 2 IP addresses,” Trading Firm A received exceptions to Binance’s default order-messaging limits, and Trading Firm A received reduced trading fees relative to non-VIP customers.

155. Trading Firm A has conducted its trading activity on Binance through a series of accounts during the Relevant Period. First, beginning before the Relevant Period, Trading Firm A conducted its trading activity on Binance through a “personal” account registered under the name of one of Trading Firm A’s principals, who is a U.S. citizen that resides in Illinois.

156. In June 2019, a Binance Key Account Manager instructed Trading Firm A to “switch the account KYC.” Following Binance’s instructions, Trading Firm A opened a “new” Binance account in August 2019 in the name of a wholly-owned subsidiary incorporated in the Cayman Islands. Substantially all personnel that perform work for this Cayman Islands nominee entity are employed by Trading Firm A or its subsidiaries and Trading Firm A controls all aspects of its Cayman Islands subsidiary. During the account opening process, Binance instructed Trading Firm A to access the Binance website through a VPN to avoid Binance’s IP address based compliance controls. Once this account was opened, Trading Firm A transferred all of its trading activity, and Binance transferred Trading Firm A’s VIP status and benefits, to the “new” account. Trading Firm A did not make any material changes in the way it traded on Binance in August 2019, other than the name on the account.

157. In December 2020, Binance sent Trading Firm A an email that stated that Trading Firm A had “identified [itself to Binance] as a U.S. Person.” Following numerous telephone conferences with Binance personnel concerning their “corporate structure,” Trading Firm A, again with the assistance of Binance personnel, opened a “new” account held by a different nominee shell entity in April 2021. This time, the nominee was a Netherlands entity that was 100 percent capitalized by Trading Firm A. Once this “new” Binance account was opened, Binance transferred Trading Firm A’s VIP status and benefits to the new account. Trading Firm A did not make any material changes in the way it traded on Binance in April 2021, other than the name on the account.

158. In or around August 2021, Binance told Trading Firm A that it was no longer permitted to trade derivatives on Binance but, on information and belief, took no further action at that time. Approximately three months later, in or around November 2021 Trading Firm A temporarily discontinued its trading activity on Binance.

159. In or around January 2022, Trading Firm A began discussing opening an account with Prime Broker B. Prime Broker B offered Trading Firm A “direct exchange access [to Binance] with no . . . intermediation if you can pre-fund the trades.” Trading Firm A explained to Prime Broker B: “the market we are most interested in right now would be Binance Futures” but “Binance does not let us use [the Netherlands nominee entity to trade derivatives]” and “[o]ur other entities are either US based or have US UBOs.” Prime Broker B responded that it could “definitely” allow Trading Firm A to “trade futures [on Binance] via our non-US [Prime Broker B] entity.”

160. Shortly thereafter, Trading Firm A opened an account with Prime Broker B in the name of its Cayman Islands-incorporated subsidiary referenced in paragraph 156 and resumed its trading activity on Binance through Prime Broker B’s Binance “sub-accounts.” Trading Firm A has continued to trade bitcoin perpetuals, among other products, on Binance and has not made any material changes to the manner in which it trades on Binance, other than that it is now trading through intermediated access.

161. At all times, whether trading in an account in its own name, in the name of a foreign-incorporated nominee subsidiary, or through a sub-account opened on its behalf by Prime Broker B, the development and control of Trading Firm A’s algorithms, the capitalization of its trading activity, and the location of the company’s senior management has remained the same.