US ramps up probe of crypto exchange Binance

During his time as a prosecutor, Ghose said, “Binance did not have a reputation of being a responsible exchange.”

Binance’s Hillmann acknowledged the company had shortcomings in its approach to regulatory compliance in the first few years of its rapid expansion. But more recently, he said, Binance has heavily invested in compliance programs, worked closely with law enforcement and developed new technology for catching criminals on its platform.

“Over the last two years, the company has completely changed its posture,” Hillmann said. “Now that we have those resources, we are easily one of the most proactive parties to identify, freeze and get back funds” laundered by criminals, he said, adding that he believes overall incidents of criminal activity in crypto are going down.

A report last year by data provider Chainalysis showed that cryptocurrency crime hit an all-time high in 2021, with illicit addresses receiving $14 billion, up from $4.6 billion in 2017, the year Binance was founded. Over the same time period, as crypto adoption boomed, the portion of overall transactions that were illicit shrank considerably, Chainalysis found.

Based on his experience with these types of cases, Ghose believes that prosecutors are examining whether Binance violated the Bank Secrecy Act, which requires financial institutions to verify the identities of their customers and report suspicious activity that might be a sign of money laundering, tax evasion or other crimes.

The recent subpoenas could mean prosecutors are scrutinising Binance’s relationships with US investors, said Ghose, who cautioned that he does not have firsthand knowledge of the Binance investigation.

“The basis of those charges is whether there are US customers,” he said. “If there are US customers, there are charges for avoiding the money laundering requirements.”

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But there are signs that Zhao, a crypto superstar with 8 million Twitter followers, is losing the trust of some of his customers. Over one 24-hour period in December, investors withdrew $3 billion more from Binance than they deposited, the most net withdrawals in a single day from the exchange since June, according to crypto analytics firm Nansen.

“People are getting scared,” said Carol Alexander, a crypto expert and finance professor at the University of Sussex. “The whales,” or professional traders, “are starting to move out of Binance as regulatory pressure mounts,” she said.

Zhao has said Binance has more than enough reserves to back all user deposits, a fact he said was substantiated by an independent auditor’s review last month. “Every user could withdraw their assets from Binance and the company will continue to function as normal,” a Binance spokesman said in an email.

Nine days after releasing its assessment, however, Paris-based auditing firm Mazars said in a statement it was suspending work with crypto companies “due to concerns regarding the way these reports are understood by the public.” Although Binance had referred to its work with Mazars as a “third-party audit,” the auditor said its assessment does not constitute a legally binding assurance or audit opinion.

“Providing an audit opinion or assurance on its review of Binance reserves would significantly increase Mazars’ risk of being sued if it later turns out that Binance doesn’t have enough money to cover customer assets,” said Vivian Fang, an accounting professor at the University of Minnesota.

One challenge facing US prosecutors will be proving that Binance is even subject to American laws.

Industry experts attribute part of Binance’s success to its marketing of risky financial products, such as crypto derivatives, which let users place high-leverage bets on speculative digital tokens such as dogecoin. Such products are generally prohibited in the US, and since 2019, Binance has barred Americans from accessing its main offshore exchange where derivatives can be bought and sold. (Binance.US, the American exchange owned by Zhao, offers a more limited menu of investment options to US residents and says it operates independently from the main Binance exchange.)

Binance’s website lists the US as one of its “restricted jurisdictions,” along with Cuba, the Crimea Region, Iran, Syria and North Korea.

Some Americans claim they can bypass Binance’s restrictions. In Reddit discussion threads and YouTube videos, crypto traders have shared tips for how to access the site from the United States.

Hillmann, the Binance executive, said the company has tested this and other supposed loopholes for accessing its trading platform and found they do not work. “There is no ability for any user today in the US to be able to access Binance.com” without committing fraud, Hillmann said.

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Binance has said it complies with all US laws and assists law enforcement agencies with their investigations. But it has not registered Binance.com, its primary offshore exchange, with the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, a baseline requirement for complying with the Bank Secrecy Act, records show.

Because Binance.com does not operate in the US, it does not believe it needs to register with the Treasury Department, Hillmann said. A spokesperson for FinCEN declined to comment.

That defence has not worked for others. Last year, three co-founders of BitMEX, another offshore crypto exchange, pleaded guilty to “willful” failure to verify the identities of its customers. According to the indictment, BitMEX had courted thousands of American investors, despite billing itself as a Seychelles-based exchange with no American users.

Washington Post