Binance Undergoing CFTC Probe Due to KYC Concerns

Yesterday, things were going so well – markets were thriving, with assets like Bitcoin making another run up towards all-time-highs.  Today however, the entire market has seen a swift pullback.  It is widely believed that this action is due to a new probe in to Binance by the Commodities Futures Trading Commission (CFTC).

It should be noted that this market action may be premature.  At this point in time, the CFTC is simply conducting probe.  Not only has the regulator refrained from taking punitive action against Binance, but it hasn’t even formally accused it of wrong-doing at this time.

News of this probe has prompted Binance CEO, Changpeng Zhao, to tweet his thoughts on the matter.  He stated, “It’s not a bull market without some FUD.  Ignore FUD, keep BUIDLing”

Details of the Probe

The heart of the issue is whether Binance has allowed for United States based citizens to gain access to derivatives on its platform – Binance is not registered with the CFTC to serve U.S. based clients.

Examples such as this are one of the many reasons why stringent KYC/AML practices are so important.  Without gathering appropriate data on clientele, exchanges run the risk of investors gaining access to services which they are not legally allowed to.

This is not the first time that Binance has had its KYC/AML practices questioned.  In 2018, Japanese exchange ‘Zaif’, saw roughly $60M stolen in a hack.  The exchange alleged that these funds were then laundered through Binance – made possible due to the alleged lapses in its KYC/AML practices.

As a result of this, Zaif went on to file a lawsuit against Binance, as it believes the worlds largest exchange could have halted this theft if appropriate measures were taken.

A Repeat of History?

While no enforcement actions have been taken at this time, tensions are high perhaps due to recent dealings between the CFTC and BitMex.

BitMex, which was once a wildly popular exchange, found itself on the receiving end of enforcement action from the CFTC due to similar issues surrounding U.S. based clients gaining access to its services.  Now BitMex finds itself banned from multiple Canadian provinces and its founder, Arthur Hayes, a fugitive.

At the time, the CFTC commented on why it was laying various charges against BitMex, stating,

“As the CFTC has made clear, registration requirements are a cornerstone of the regulatory framework that protects Americans and U.S. financial markets…Effective anti-money laundering procedures are among the fundamental requirements of intermediaries in the derivatives markets, whether in traditional products or in the growing digital asset market. This action shows the CFTC will continue to work vigilantly to protect the integrity of these markets.”

While describing the past situation with BitMex, this quote could easily be used to highlight the current issue at hand involving Binance.

Due to this past enforcement action, BitMex was forced to develop and complete a ‘user verification programme’, which essentially gathers extensive KYC/AML data on its entire client base.  Perhaps a similar action, beefing up its KYC/AML practices will be taken by Binance to satisfy CFTC requirements.