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Binance's giant cryptocurrency exchange has caused a new tremor in a market still bruised from the collapse of FTX.
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David Yaffe Bellany, Emily Flitter, and Matthew Goldstein
David Yaffe Bellany, Emily Flitter, and Matthew Goldstein all report from New York on the financial industry.
April 26, 2023
Binance, the largest cryptocurrency exchange, has a long-standing reputation of avoiding regulators and skirting rules without any significant consequences.
Now, the largest crypto exchange in the world is under increasing legal pressure.
Binance's chief executive and founder, Changpeng Zhao has hired Latham & Watkins lawyers to represent him as he faces a tightening of the legal net. The Justice Department is investigating Binance for money laundering, while the Securities and Exchange Commission looks into the business practices of the company. The Commodity Futures Trading Commission sued Mr. Zhao last month for alleged compliance failures which allowed criminals on Binance to launder their money.
Binance is in the most dangerous moment of its history. The criminal charges brought against Mr. Zhao and his company may cause panic on the crypto markets. They are still reeling after the collapse of FTX last year, as well as the arrest of Sam Bankman Fried, the founder of the firm. Binance processes tens billions of dollars of trades each day, which is many times more than FTX.
Hilary Allen, crypto expert at American University, said: 'It is the largest exchange for crypto and if they clamp down, it's going be a huge deal.' It's difficult to imagine the rest of crypto industry escaping unharmed.
Mr. Zhao, 46 years old, responded by hiring compliance officers with government credentials, and promising to help law enforcement agencies prevent crypto crimes. Binance executives have been meeting with journalists to tout the company's efforts in compliance, and its U.S. arm formed a political committee to push the agenda of the exchange in Washington.
Mr. Zhao described the C.F.T.C. Mr. Zhao called the C.F.T.C. A spokesman for the company declined to comment about the other investigations. Justice Department, C.F.T.C. Representatives of the Justice Department, C.F.T.C. The S.E.C.
Binance's increasing pressure has already caused tremors in the crypto market. Signature Bank, a troubled lender, was a major partner of the exchange's U.S. operations until it went out-of-business last month. Binance lost its external auditing firm Mazars last year when the company announced it would be pausing work with crypto clients. The spokesman for Binance said that Binance has engaged new auditing firms, but refused to name them.
Binance customers seem frightened. Nansen, a crypto data tracker, reports that over a seven-day period in late March, the exchange saw more than $2 billion worth of cryptocurrencies based on the Ethereum network withdrawn. In the first month of this year, almost $1 billion in cryptocurrency has been withdrawn from the exchange. Nansen claims that Binance is still sitting on approximately $66.5 billion worth of customer holdings.
The C.F.T.C. The lawsuit served as a warning about Binance's serious legal problems. Citing internal emails and texts, the complaint alleged that Binance had allowed criminals launder money. The complaint claimed that some customers were able to bypass background checks by using loopholes created in order to protect the exchange's profit. Binance employees privately joked that terrorists were moving money through the platform, and admitted to the C.F.T.C. In its complaint, the C.F.T.C. stated that Binance employees joked about terrorists moving money on the platform and acknowledged that they 'facilitated potentially illegal activities.
Aitan Goelman is a partner in the law firm Zuckerman Spaeder and was previously the C.F.T.C. Binance's enforcement director said that the severity of the allegations in the lawsuit set Binance apart.
Mr. Goelman stated that the misconduct was so egregious, you'd think it would interest the Justice Department.
Three people with knowledge of the investigation said that the criminal investigation by the Justice Department is being led by its Money Laundering and Asset Recovery Section. The people who spoke to us said that these officials were working with prosecutors at the U.S. Attorney's Office in Seattle and the S.E.C. Parallel to the SEC's investigation, there is a separate one. Reuters had previously reported on the details of the case.
Binance is defended by a variety of law firms. According to court records and sources with knowledge of the case, Mr. Zhao hired four Latham & Watkins attorneys, and the company was represented by a dozen Gibson Dunn attorneys in its discussions with U.S. regulators and the Justice Department.
Binance, founded in 2017, grew quickly by offering a market for a variety of experimental cryptocurrencies. It also allowed customers to place a risky and highly leveraged bet in crypto prices. This is still illegal in the United States. According to CCData's data analysis, about two thirds of all cryptocurrency trades are conducted on Binance.
In the crypto-world, Mr. Zhao has the same fame and influence as Mr. Bankman Fried did before his arrest. But Mr. Zhao is more elusive. He's better known as CZ in the crypto-community.
According to a source with knowledge of this matter, Mr. Zhao, a Chinese-born Canadian, has moved from one country to another and is now spending most of his time in Dubai and Paris. The person who spoke to us said that Mr. Zhao visited the United States at the very least once in the year 2022.
Binance is a company that has been accused of evading regulations and skirting global money laundering rules. Binance, a privately-held exchange, has at times operated from China, Malta, and Singapore. A spokesman stated that the firm has now major regional offices located in Dubai and Paris with 8,000 employees worldwide.
Binance does not have the right to operate in the United States. Mr. Zhao therefore has created a separate business called Binance.US. for American users. It is said to function independently from the global exchange. The company's U.S. customers were able to access its main platform by using virtual private networks that disguised their location.
Binance has been under regulatory scrutiny in the U.S. for many years. Patrick Hillmann revealed in February that the exchange had been in discussions with regulators to settle the legal investigations through a fine or other penalties. He stated that the company felt 'extremely confident' and'really good' about these discussions.
The C.F.T.C. The C.F.T.C.
The agency filed a lawsuit against Binance affiliates in Cayman and Ireland. It claimed that these corporate entities were owned 'directly or indirect' by Mr. Zhao, and connected to dozens of business entities maintained by Binance. The complaint stated that Mr. Zhao is personally responsible for Binance’s compliance failures. It described a meeting where he admitted the existence of a gap that allowed users to bypass know-your-customer protocol.
The C.F.T.C. The C.F.T.C. also sued Binance’s former top compliance officer, Samuel Lim. They claimed he helped American customers avoid systems that prevent money laundering. The lawyer of Mr. Lim didn't respond to comments.
Binance was sued for allowing three American firms, which were not named in the lawsuit, to trade on its platform despite US rules that prohibited this. According to a source familiar with the situation, the firms were Jane Street Group Tower Research Capital Radix Trading. Bloomberg News previously identified the firms, but there is no indication they are being investigated by federal authorities.
A spokesperson for Jane Street declined comment. Radix and Tower Research representatives did not respond when asked for comments.
Binance was also accused of allowing money laundering, which has been proven false in several private lawsuits. Some plaintiffs claim that they were scammed and then the stolen funds were routed through Binance.
David Silver, an attorney from Florida who sued Binance in Florida last year, stated that the C.F.T.C. The suit is likely to be one of many law enforcement actions taken against Mr. Zhao and his firm.
Silver stated that the truth would come out. 'And Binance is going to be held responsible.'
Binance's spokesman stated that the company works "closely" with law enforcement in order to freeze funds which are suspected of being illegally obtained. Binance's spokesman said that the firm worked 'closely with law enforcement to freeze funds that are identified as potentially illicitly gained.'
Binance is building a robust compliance infrastructure. A spokesman for the company said that the compliance department now includes more than 750 people, and hundreds have been hired over the last year. Noah Perlman was named global compliance chief in January. He is a former federal prosecutor.
Binance also hired former law enforcement agents. Tigran Gambaryan was an investigator with the Internal Revenue Service who worked on some of the most high-profile cases in early crypto.
In an interview with The Telegraph, Mr. Gambaryan stated that the accusations made against Binance are remnants from an earlier time when Binance was a start-up exchange focused on growth.
Binance "sees itself" as a technology company, he added, adding that they break things. All exchanges have done this.