Binance faces legal pressure as crypto crackdown intensifies

Note from the Editor: Your subscription to Finance & Commerce includes business content from The New York Times. Binance, the giant cryptocurrency exchange, has a reputation of avoiding regulators and skirting rules without any significant consequences.

The world's largest cryptocurrency exchange is now facing increasing legal pressure.

Binance CEO and founder Changpeng Zhao has hired Latham & Watkins' white-collar lawyers to represent him, as he faces a tightening of the legal net. The Justice Department is investigating Binance for money laundering violations while the Securities and Exchange Commission looks into the business practices of the company. The Commodity Futures Trading Commission sued 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 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.

Zhao, 46 has responded to this 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.

Zhao described the CFTC suit as 'unexpected' and 'disappointing', describing it an 'incomplete recitation' of facts. A spokesperson for the company declined to comment about the other investigations. The Justice Department, CFTC, and SEC representatives also declined to make any comments.

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, after it announced that it would be pausing work with crypto clients. The spokesperson confirmed 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 withdrawn. In the first month of this year, almost $1 billion in cryptocurrency has been withdrawn from the exchange. Binance is still sitting on approximately $66.5 billion worth of customer holdings.

The CFTC's lawsuit served as a warning to Binance about its legal position. Citing internal emails and texts, the complaint argued that Binance had allowed criminals launder money. The complaint claimed that some customers were able to bypass background checks and use loopholes created by the exchange in order to maintain profits. Binance employees jokingly joked that terrorists were moving money through the platform, and they acknowledged, according to the CFTC complaint, that Binance 'facilitated potentially criminal activities'.

Aitan Goelman is a partner in Zuckerman Spaeder and former enforcement director of the CFTC. He said that the level of conduct described by the lawsuit set Binance apart.

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 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. In addition, the SEC is conducting a parallel investigation. Reuters had previously reported on the details of the case.

Binance is defended by a variety of law firms. Zhao has 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, according to court documents and sources with knowledge of this matter.

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 (on crypto prices) that is still illegal in the United States. According to CCData's data analysis, about two thirds of all cryptocurrency trades are conducted on Binance.

Zhao, better known in the crypto community as CZ, is a more elusive figure. He's just as influential and famous as Bankman-Fried before his arrest. Zhao, also known as CZ in the crypto-community, is an elusive figure.

Zhao, a Chinese-born Canadian, has moved from one country to another. He now spends most of his time in Dubai, United Arab Emirates and Paris, says a source with knowledge. Zhao visited the United States at the very least once in 2022.

Binance is plagued by accusations that it has skirted money-laundering regulations globally and tried to evade the laws in countries where it operates.

The privately-held exchange has at times operated from China, Malta, and Singapore. A spokesperson stated that the firm has now major regional offices located in Dubai and Paris with 8,000 employees on the global level.

Binance does not have the right to operate in the United States. Zhao therefore created a separate business called Binance.US for American users, which he claims is independent of 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 Binance was in discussions with regulators to settle the legal investigations through a fine, or other penalties. He stated that the company felt 'highly optimistic and confident' about the talks.

The CFTC then filed its suit a month later.

The agency filed Binance affiliates in Cayman and Ireland. It claimed that these corporate entities were owned 'directly or indirect' by Zhao, and connected to dozens of business entities maintained by Binance. Zhao is alleged to be personally responsible for Binance’s compliance failures. The complaint describes a meeting where Zhao acknowledged that there was a loophole which allowed users to bypass know-your-customer protocol.

The CFTC has also filed a lawsuit against Binance's former chief compliance officer, Samuel Lim. They claim that he helped American customers evade money laundering systems. Lim's lawyer did not respond when asked for 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 has not indicated that any of the firms are being investigated by federal authorities.

Jane Street's spokesperson declined to comment. Radix Tower Research representatives did not respond to comments.

Binance was also accused of allowing money laundering, which has been proven false in several private lawsuits. Several plaintiffs claim that they were scammed and then cheated by traders of crypto currencies who sent stolen funds to the exchange.

Binance's spokesperson stated that the company works closely with law enforcement in order to freeze funds which are suspected of being illicitly obtained. Binance reportedly helped law enforcement in 40,000 cases worldwide last year to 'thwart criminals'.

Binance is building a robust compliance infrastructure. A spokesperson for the company said that the compliance department now has more than 750 staff, 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 IRS investigator who worked in several of the most high-profile crypto cases that were brought by the government.

Gambaryan stated in an interview that the accusations made against Binance are remnants from an earlier time when Binance was a startup focused on rapid growth.

Binance "sees itself" as a technology company, he added, adding that they break things. All exchanges have done this.

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