Episode 114 – Binance in Trouble

Binance in Trouble (streamed live on March 27th, 2023) Crypto Critics' Corner

Bennett Tomlin and Cas Piancey discuss the lawsuit filed against Binance and Changpeng Zhao by the CFTC. This video was streamed live on March 27th, 2023. Additional resources: Complaint https://www.cftc.gov/media/8351/%20en… Coverage of the complaint https://protos.com/cftc-lawsuit-again…

Cas Piancey and Bennett Tomlin discuss the lawsuit filed against Binance and Changpeng Zhao by the CFTC.

This episode was streamed live on March 27th, 2023.

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English Transcript:

I am Cass PNC and I'm joined as usual joined by my partner in crime Mr Bennett Tomlin how are you today I'm doing I'm doing pretty good it's a good day how are you doing Cass yeah good again you know not in a montenegrin prison not getting sued by the cftc not getting sued by the SEC um by any measure then I guess I'm good right um what a wacky day it's been what a wacky week here we are again um binance CZ this Litany of other companies under the umbrella of both of them um are getting sued by the cftc the Commodities Futures and trading commission um and man this is a 74 page Banger of a lawsuit that they're bringing against them um you want to get us started sure I mean there was a lot in here I think there's a few different like things this revealed one it discussed Finance trading on binance so this is cz's personal accounts the Merit Peak accounts the sigma chain he accounts and all in all allegedly allegedly just assume allegedly for everything we say for the rest of this episode okay allegedly CZ controlled 300 accounts that were trading on finance and it was specifically called the Quant desk where they run their proprietary trading which was hilarious because on the binance AMA spaces on November 14th right after the collapse of FTX CC goes in there and says we're just a simple exchange we're not trading Futures we're not trading to make a profit we don't run a Quant firm or anything like that we're just matching customer orders very simple and then this lawsuit comes out today and says no no you had 300 accounts doing proprietary trading underneath you um so we can get more into that there's also a whole bunch of discussions of their kyc AML failures the number of people in the U.S they were serving the way they treated their VIP customers which is is really good and just broadly a truly shocking case so you know what Cass you pick which one of those you want us to talk about first

um yeah here I mean I'm just gonna go ahead and go by what I started highlighting as I went through this document um I think the first thing that that stuck out to me first of all Samuel Lim I'm sure other people who are much more familiar with binance than I am know about this guy I don't know anything about this guy I'd never heard of this guy before today um I think what's weird is that it says Finance placed limb on paid administrative leave in or around May 2022 but continues to employ limb um

I don't understand that I don't it I don't know why I don't know why you would be on administrative leave for I mean maybe you had a baby they also don't seem like the kind of employer that would give you a bunch of time to be off as a parent or for sick leave or for any like why is he off but getting paid I'm I'm curious I know you don't know the answer to that I just thought that was weird um also I don't I don't know who this Samuel limb is if he's the same one who's involved in compliance for a bunch of other large companies and Banks

so I'm not going to mention this other Samuel limb because I don't know if it's the same that I would assume that's a relatively common name um so I'm not sure if this is the same one if it is he doesn't list it on his LinkedIn um but then let's keep going here okay so this is here's a big one the cftc says certain digital assets including BTC uh eth LTC and at least two feet got back stable coins tether and binance USD as well as other virtual currencies as alleged herein are commodities so usdt and busd as well as apparently ethereum and Litecoin are uh I I think BTC it was already generally widely accepted that that was a commodity as viewed by the U.S regulatory regime but these other guys seem like news possibly what do you think uh the cftc has argued before that ethereum might be a commodity especially if it ends up not being a security same for tether and so I can imagine that applying to other stable coins as well so none of that isn't the SEC isn't the SEC also arguing they can be people coins or their jurisdiction though yeah they oh they're going to be both which is really getting back to like fundamentally what we talked about this isn't the point of today's episode but like in the stable act like legislation like that that moves these things into the banking framework eliminates the problem of stable coins ending up being treated as either commodity or a security but that's that's not why we're here today

no I just thought that was uh interesting uh I guess here is one of the first things we can delve further into uh you mentioned VIP customers uh

0.51 in this lawsuit it says another important benefit that binance has provided its VIP customers is prompt notification of any law enforcement inquiry concerning their account according to a policy titled quote for management of Le requests for information and funds transfer created by Samuel Lim based on directions from Zhao binance instructed its VIP team to notify a customer at point of account freeze based on a request from a law enforcement agency and immediately after the unfreeze VIP team is to contact the user through all available means to inform him or her that his account has been frozen or unfrozen do not directly tell the user to run just tell them their account has been unfrozen and it was investigated by three-letter agency if the user is a big Trader or a smart one he or she will get the hint

um pretty damning I would think right I the binance early warning system if you if you trade enough on binance you'll know when the SEC or the cftc is trying to look into your Market manipulation because binance will tell you yeah no that seemed like a really bad policy especially one to like have in writing as part of your like VIP management process especially when CZ makes that point um there's another point where he specifically says don't put this in writing when he's talking about one of these VIPs he's like tell them not to connect from a usip don't put any of this in writing in a message he put in writing to one of his team members and this whole thing was in writing we've we keep talking about it because it just keeps happening in like um yeah thank you um a couple things that I noticed uh are gonna be get by this um our signal which they specifically call out again similar to FTX where they talk about the auto delete and encrypted messaging um and vpns which uh CZ and Executives along with people at FTX like uh Sam bankman freed just straight uphold people publicly you know if you want to still access the platform just just use a VPN um so I that seems like I don't know I it seems like a bad idea to be saying that stuff aloud it seems like it could cause issues for VPN providers um well I don't think it's good it seems like a problem for VPN providers I don't think the cftc is mad at nordvpn I think the CF no but I'm mad at Samuel lemons no the cftc isn't but I bet I bet the three letter agencies might be and I think that we're we're setting up Congress to get stupid about it oh I'm sure um like I I would ex I would expect Congress to get upset about this and be like you wish maybe we should ban vpns anyway um I can we talk about how much it's just like you have had access to because I'm kind of like shocked by this yes I yes especially there was one part here that seems to suggest that they have Chang penzao's phone or unencrypted backups thereof because they describe specific signal chats that were set to Auto delete that Zhang penzao was in and say these were obtained from his phone if they have if the feds have cz's phone along with nishad sings Gary Wang's Carolyn Ellison's and like all these other people that's a lot of information that's a lot of stuff that could be coming out in the coming weeks or months the other thing that I thought was like in that sense of all this data is I think there there's kind of a it feels like there might be a whistleblower involved for some of this as well but yeah there's like they have internal Financial reports they have internal chat logs they've got like discussions between uh customer service representatives and us-based trading firms so the cftc had a really like pretty substantial amount of evidence here

um yeah I I don't know it it seems like you said it seems like almost multiple sources of information so I don't know how you tackle this uh as a mole issue that that probably the first thing that uh CZ is thinking about as of today not the merits of the lawsuit or how they're gonna get rid of it or any of this stuff probably just wondering throwing away all of his phones and computers and starting um let's see 0.59 in option sellers one counterparty to an options transaction so when binance sells options it is trading against its customers I thought that was an interesting way of discussing options trading um and sets them up to look bad again well yeah and we knew they were also engaged like they were one side if they're over-the-counter trades as well they had these 300 accounts like you said there were even periods where binance was the only one selling the options on binance like they were all of the liquidity and so yeah CZ contrary to his statements appears to have been regularly trading against binance customers

uh uh yeah um let's keep going here um oh yes uh so Leo Schwartz um on Twitter a writer for Fortune um pointed out that a employee wrote that they need to make sure the product does not look like a gambling game users might get addicted to these products so we need to enhance responsible trading or you could say playing um

so I think that's about as far as they got in terms of being concerned for customers

and how the gamification of the trading platform will harm them that sounds about where the the concerns stopped because it not two pair paragraphs down we're talking about 125x leverage and Perpetual contracts yeah which is which is fundamentally gambling we can pretend it's trading but it's really gambling I think the other thing that was we've known this for a while but what I think the cftc did a good job of laying out is how pervasive U.S persons using binance was even after binance started to pretend that was untrue and like Finance at points in their past even recruited what they call their Angels which are volunteers who helped promote binance uh from U.S persons to interact with U.S people there was internal financial reporting that showed at different times that 16 to 19 percent of the revenue could be attributed to the United States for the first several years and we knew this because we were around back then they didn't do anything to stop U.S customers right it was just a complete free-for-all um and like even limit one point said in a message in 2018 there is no [ __ ] way in hell I am signing off as the CCO for that for the ofack [ __ ] like he didn't want to sign off on the corporate documents that Finance had to submit saying yeah we're compliant with ofac because he didn't think they were compliant with ofek and hilariously in a very bitfinex move that you'll recognize Cass in 2019 when they went into they launched binance us and then started making token gestures that they were actually pushing people there and so they had a pop-up that would come up if you connected from a usip and you had to check a box saying no I'm not actually a US person and so once you checked the box it was a free fall free for all again um for people who don't understand the bitfinex reference back around this same period in 2019 the block was able to register a user account on bitfinex out of New York with the name I am New York resident and similarly all they had to do was check a single check box to self-certify that they were not from New York so this is like a classic crypto compliance strategy you know um and eventually they realized this was going to be a problem like you get into like 2020 and on their internal documents they told people to change uh their country code from U.S to unknown so that when they were looking at the analysis they wouldn't be as easily attributable to the U.S and like when trading firms would connect there was one trading from trading firm B that connected from a us-based IP and so like when binance had to go through the show of pretending to ban them they had one of the Traders from that firm set up a personal account out of like Hong Kong and then they run that whole they ran that whole firm's trading activities through that individual's account until they could set up a new corporate entity in Jersey that was far enough dissociated that it didn't look like it had ultimate beneficial owners in the U.S and then they were able to come back on binance totally fine like it was just abject failures at preventing people from the US from trading for multiple years I I also just read as I was going through this that they uh before we jumped on that when they hired an auditing group for trying to be perceived as you know following protocols um they hired a shitty I don't if that I think that was the exact terminology that you a [ __ ] ass or something like they said something like just some crappy crappy [ __ ] dumb um auditor that's gonna do a bad job and doesn't know what they're doing they literally do we know which auditor this is one of their like cyber security Auditors like they're compliance Auditors not their financial auditor so I don't think we would recognize it but you're right like it says in the lawsuit they were intentionally searching out the one they thought would be the laziest and would do the least edgy check any of this stuff so they could say look it they gave us a report it says we're fine yeah this is why I I like I I was drawn to that because I was like I think there's this running joke you know top 12 Auditors and all this idea of like oh these guys are hiring shitty Auditors on purpose and I think people think no they're not they're just hiring whoever is willing to work with them and I'm like I don't know about that like this kind of tells me that there is an actual they're like going out of their way to hire the the least competent people a lot of the time not to say that that's always the case but like I do think that it can be

as proven has proven in this sorry to as proven in this that like it definitely can be that they they purposely hire crappy Auditors and stuff performative compliance they want to like Jack Barris minimum to look like they're doing compliance without actually having to do it um sorry there's one thing that just really came into my mind that I want to make sure I don't forget Point number 98 in the lawsuit they talked and I remember this from 2021 they announced that they were going to verify every single user on binance and I'm like okay I figured they were gonna have to do this eventually right legal and Regulatory pressure was going to make this wild west kind of go legit and they were going to end up eventually paying some fine to the cftc and would get to continue operating and I figured this is like what was happening in the background back in 2021 um and I'll get back to that date in a second they announced they were going to have all their users verify their accounts however and that if they didn't by October 19th 2021 they were going to be banned from the platform they just didn't do that they said they were going to do it just didn't go through with it and apparently as of February 2022 like up to 40 of their customer base was still not verified and this is like especially uh wild to me because the cftc state or not the cftc the binance statement that was given to protos about this lawsuit said that they have been working with the cftc for two years that this lawsuit was very unexpected two years ago would be 2021 and what did I just say I thought when that happened it was an attempt for them to like pretend to be compliant so they could pay some fine and make these lawsuits go away like bitfinex did with the cftc back in 2015 right but it turns out they just didn't go through with what they were supposed to do they didn't actually do the kyc they said they were doing

yeah at the sheer level of um

I don't know what to term it I like purposeful negligence I don't know um I it it's yeah there I don't like I don't think anyone sees this cftc lawsuit and goes oh man cftc bring in the hammer um that's not what's happening here like they're not bringing they're they're not bringing the hammer just because they're the cftc that's like they can like they're not really gonna hurt you but the data that they're providing in this lawsuit is kind of terrifying because it tells me that like man I just would not be surprised this isn't to say anything's happening and I certainly know as much as The Idiot down the street I don't know anything about anything but like man this looks ripe for the Department of Justice it just looks ripe for them yes and that's what we've really been kind of leading up towards here and leading up to I feel like for our last several episodes about Finance right um and there was one kind of particularly funny line that came from Lim that kind of touched on that where he said let me find this

U.S users equals cftc equals civil case can pay fine and settle no kyc equals BSA act equals criminal case have to go to jail and if you read through the lawsuit carefully from the cftc here they reference that these things might be in violation in the bank secrecy Act and the bank secrecy Act is one of the things that ended up taking out Arthur Hayes and making him eventually go into the Department of Justice and we know that there's been an ongoing Department of Justice investigation that the Western Washington prosecutors out of Seattle believe they have enough information to indict by Nance and Cheng penzawan but it's supposedly been held up by emlers this substantial of a civil case that feels as though it's discussing multiple things that could potentially be criminal issues makes me think that if there is an indictment coming it may be soon like this has laid out a lot of violations

and and the reason I think this Samuel Lim guy the same one on LinkedIn is because they're supposedly both in Singapore um

but so if he's in Singapore and CZ according to this lawsuit CZ is in Dubai um

it let let's pretend that this let's let's keep walking down this hypothetical here if the if these Executives get called in by the doj um I mean who cares right I mean yeah who cares but also like I think the more

once or if CZ and whoever else is a fugitive even if they can't easily arrest them because they position themselves in non-extradition countries they make it really easy for every other company to justify cutting off uh finances accounts access to the banks going after their subsidiaries and shutting those downright it gives them a very easy pretext to take all these other actions that don't necessarily go after CZ the person but to go after Finance the organization made up of dozens and dozens of entities spread across all these different countries

yeah yeah I'm while I I will admit that the amount of regulatory enforcement in the past month or so has surprised even me um just because it has happened swiftly um and all at once I still have a bit of hesitation and look we did see the successful like I mean Sam bankman freed is he's out on house arrest but he's gonna go to prison like it's over um so so let's let's pause and think of the last couple years right SPF is indicted dokwan is indicted happened moments moments after we finished our last live stream dokwan gets indicted mashinsky's being pursued for fraud charges in New York right like a lot of the major Bad actors of the last couple years actually are like either fugitives or like in custody for various cases there has been a meaningful change in the posture of regulators in law enforcement towards cryptocurrency they fundamentally don't seem to have the same patience for it they've had in the past and seem far more willing to bring cases and indict like and that's kind of like the challenge with this binance complaint right is they're talking about behavior that dates back to 2017-2018 and 2019 in 2023 and reading it like you do come awake kind of feeling like really you had to wait till 2023 to do anything about these egregious violations that seems kind of like [ __ ] and so what I think has changed is kind of the political landscape around these regulators and around law enforcement that is letting them bring some of these cases and stuff now I will say that they lay out a lot of relatively convincing arguments in this I'm sure there's a lot of stuff that people will take issue with and that I haven't you know probably if I read line by line I'll take away some different understandings and have have my own issues with it as well maybe I don't know but like from what I've read it does seem pretty damning and um you know I know innocent until proven guilty and all of that uh but sorry go ahead no you you're absolutely right there is one last thing that I want to kind of push on with the federal government's change and stance towards these things and like that comes back to the Hydra darknet Marketplace that was a major takedown for the United States Department of Justice and they've used it to take down some of these related entities and like there was the national cryptocurrency enforcement task force in the doj did their press conference when they took out bitslotto and it was hilarious because it was [ __ ] bitslotto but the other major counterparty for Hydra besides local Bitcoins and besides bits Lotto is binance and in this cftc lawsuit Stephen limit one point was discussing a customer who appeared to be associated with illicit activity and said let him know to be careful with his flow of funds especially from darknet like Hydra he can come back with a new account but this current one has to go it's tainted I think the fact that Hydra made its way into this cftc case is the biggest clue that there is a major federal case coming for binance

um I'm curious so when they say at the very end of this the takeaway here without obviously we've we've given some takeaways of what it could mean and all these hypotheticals but the conclusion of this lawsuit they say jury trial demanded uh plaintiff hereby Demands a jury trial on all issues so try a tryable um so is CZ is CZ Coming to America like is like so he can just have his lawyers represent him at this trial I know the details but I'm pretty sure he's not coming to America

they also they also strictly lay out that he's a Canadian citizen which I know everyone like we we all know that but like I bet he doesn't go to Canada ever either so I'm kind of like he's probably a citizen of 14 different countries um so I'm I'm curious why they is that just like where he grew maybe they just mean that's where he grew up and spent spent his adulthood until he left or where they've been able to easily and confidently like establish he does have a citizenship right like it's pretty easy for them to call up Canadian authorities and get a straight answer on that it may be more difficult for some of the other places that he may have passports and they may be under variations of his name let's say um

yeah well I mean I think I I don't know if there's anything else you want to um kind of lay out here I'm this Samuel limb guy is like I'm I am fascinated by this this new actor appearing in the play that is binance um so I'm looking he is the things he says throughout this entire thing are absurd and he clearly spends a lot of time on cryptocurrency Twitter just based on the way he types and the things he says um so I'm sure he's out there somewhere uh he's probably not watching us but he's he's on cryptocurrency Twitter somewhere um and I'm just wondering I'm just wondering if he if yeah I'm just wondering who this guy is I'm I hope someone figures it out I'm looking forward to uh a nice a nice long hopefully like a New York Times

long look and they're gonna go meet up with Samuel Lim and spend a day with him I don't know I just want to know who this is I they do make it clear that CZ is like the number one guy which I think there's been kind of questions about that before right there have been conspiracies about that before I think that it's been pretty I've never felt like there was someone standing behind CeCe you know

I mean yeah fair enough I guess uh I guess that's true um but also how would you how would we how would we have any idea I will say that yeah yeah the um

I don't know everyone should take a look at this lawsuit it the just simply reading the things that um Samuel Lim puts into writing as the chief compliance officer are kind of are truly mind-boggling I'm not like maybe I guess that's your job right like you you you are a chief compliance officer you have to write back to people and answer their questions about compliance issues you have to I mean I don't know why are they taking phone calls I yeah so that but you're right like uh and besides Lim there was the money laundering reporting officer under binance who wants complained to limb that she needed to write a fake annual mlro report to binance board of directors WTF because Finance didn't have a board of directors and Lim's response was just oh don't worry management will sign it it'll be fine and I get another point in a chat with them she's like I has no confidence in our geofencing in all caps like the 2000 and whatever cat me Mike and has Cheeseburger um or in another point when talking about offloading clients and then was like don't need to be so strict off-boarding equals bad in cz's eyes like but I I I have to maybe I assume most people who who watch know about and and I feel like this has been a pretty common thing for most crypto maybe they don't do it anymore but for most cryptocurrency exchanges it was pretty common that you had this like these tears of amounts of money let's not call it money digital assets um the amount of in TR in US dollar it'll be in US dollars or in Bitcoin or in ethereum like you can move x amount onto and off of The Exchange up to up to this amount without having to do kyc or AML and I I always thought like how could the legal limit possibly be forty thousand dollars or like a hundred K like it just doesn't that seems absurd like just grant given how not to suggest that I think the numbers that the U.S operates with when it comes to um suspicious activity report so the the ongoing belief I think or like I think what banking people say is that it's a there's a ten thousand dollar that's when the flag gets thrown up and you can be safe to say that if you do 9999 or 9998 you're probably getting flagged too and possibly getting referred for a structure in charge right yes if you do more than one yes um anyway uh I I that that might be stupid and the idea that you could move fifty thousand dollars worth of digital assets onto and off without getting any kyc AML I just always kind of boggled my mind that that was not immediately getting flagged by government agents and saying like hello big problem like they've got to be there's got to be money launderers using the plot there has to be has to be and it's even worse than you just said because they had a stated to bitcoin limit but when there were certain VIPs in Wales they would be encouraged or allowed to set up uh non-kyc accounts despite binance clearly knowing who's associated with it and they would remove that withdrawal limit from those non-kyc accounts and like clearly if they're removing it they must know it's connected to some whale but they're still not collecting the know your customer information on those accounts that's wild that's like clearly trying to flout and violate the rules it's just blatant that's that's like yeah that's like insane that they win especially that they would do this in writing that's insane but also like if we want to look outside that scope they set up this like two Bitcoin limit like for one account right so just set up two three four five six seven set up your 25 different accounts and do it however you need to do it like it's it's absurd to think that two limit for one account is gonna stop anyone determined enough to move money through this platform or just withdraw 50k a day five days a week that's 250k per week in terms of like in a steering mechanism for cash 250k a week through a single account is a lot

for an individual yes sure but no like you're not thinking you're not thinking big enough at all no for a billion dollar for a billion dollar Enterprise that's [ __ ] nothing right sure but like even like in terms of like common money laundering steps being able to pass through that much week after week onward and onward is like a high amount of flow through a single thing and that's just with one account like you said you could have a dozen you could have a hundred exactly 40 of their users as a February in finance had 300 they had 300 of their own account and and CZ had two personal accounts and two personal accounts and binance had 300 or whatever it was so it's like yeah clearly that this is being used in the exact way that like you you want to talk about you want to talk about the most skeptical critical people of cryptocurrency you're like we don't talk about the criminality of it very I think I think it's hyped up more than it's actual I think it's main use cases speculation I continue to believe that but like I think there are genuinely people out there saying like it's only used for bad things and [ __ ] like this I sure does make them look possibly correct is all I'm saying yeah no it absolutely does I think especially when you um like especially when you look at the fact that of those 300 binance accounts they were reportedly Exempted from the anti-fraud the anti-manipulation surveillance and weren't tracked as part of binance's insider trading policy

yeah they probably don't even have to abide by um leverage policies either guess maybe we'll find that out later on down the line huh um uh I don't know all of it sounds bad it doesn't mean like I'm not surprised by any of this I'm just surprised it's in writing that the government gained access to all of this in writing and that the government um that the first one to put it out and spell it out like this in such a concise way is the cftc like all of that is kind of surprising to me but um I don't know fascinating crazy day another fascinating crazy day absolutely who knows what tomorrow will bring uh yeah it's this is casscoin is fine obviously um but I will say we have relied uh on binance as our main Market maker uh since the collapse of FTX because obviously before this FTX was the main Market maker Alameda research was our main Market maker before that so uh we're stressing a little bit um but everything should be fine the reserves are back back one to one everything Seafood foreign

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