Since the collapse of FTX, regulatory focus has zoned in on a number of cryptocurrency exchange sites, and the big boys such as Binance are no exception.
Binance could actually now be in a spot of bother as it has now been charged by the USA’s Commodity Futures Trading Commission (CTFC) with evading Federal Law and Operating an Illegal Digital Asset Derivatives Exchange.
And one of its main crimes? Recommending using a VPN.
Binance and VPNs
Let me explain why Binance is in bother for recommending VPNs.
The CTFC has accused Binance of deliberately putting the growth of its business ahead of compliance with US law when it comes to the trading of derivatives such as Bitcoin Futures.
If Binance wanted to let US citizens trade derivatives, it was required by law to register with the CTFC. Binance did not do this and made a lot of fuss on its website about the fact that derivatives trading was only available to users outside the US.
All sounds good so far. But that’s not all.
Binance also made a great deal of noise about encouraging its users in the USA to use a Virtual Private Network (VPN) to connect from a non-US IP address and allow them to trade derivatives without Binance breaching US law.
In the CTFC statement, they cite a huge number of different evidential sources for this claim, which is going to be hard for Binance to refute.
Let’s look at the evidence.
Perhaps foremost is the fact that Binance regularly published information for its users on how to use a VPN. This included a full ‘Beginners Guide to VPNs’ that noted that a VPN can be used “to unlock sites that are restricted in your country.”
According to the CTFC, this guide was used to teach US customers to bypass Binances’s IP-based controls on who could use the site.
They also cite written communication from founder Changpeng Zhao saying that “CZ wants people to have a way to know how to VPN to use [a Binance functionality] . . . it’s a biz decision.”
This biz decision could well end up costing Binance a whacking great big fine from US regulators.
Of course, Binance did have some geo-restrictions in place. This included a pop-up asking users to click a button to confirm they weren’t US citizens.
And trading derivatives wasn’t possible for US users of the site without using a VPN.
But the CTFC also cites a comment from an employee with the job title of Money Laundering Reporting Officer as saying, “I haz no confidence in our geofencing.”
Hardly a ringing endorsement of their provisions, especially from someone in such a critical regulatory role.
The suggestion from the CTFC complaint is that the geo-restrictions that Binance had in place were little more than a token effort, and the site itself was working hard to actively encourage its users to get around the restrictions and essentially do what they wanted regardless of US law and restrictions on what Binance was supposed to permit them to do.
Does this mean problems for VPNs or Binance users?
The short answer to this question is, most probably, no.
Binance’s promotion of VPNs is nothing to do with the VPN providers themselves, who are always very clear that they do not promote the use of their service for any illegal activity or, indeed, anything other than the core online security and privacy provisions that they provide.
Binance users themselves shouldn’t be in any problems either, assuming their own trading was not illegal in any way.
The consequences, however, could be significant for Binance and its officials. If they are found to have deliberately breached Federal Law, there could be individual legal charges against executives who were involved.
And the platform itself is likely to face a sizeable fine. US pharmaceuticals companies have faced fines in the hundreds of millions and higher.
It could be that FTX is not the only cryptocurrency exchange to collapse this year if US regulators decide to really turn the screw on Binance.