May 29, 2023

Big cryptocurrency exchange Binance has built a solid reputation over the years dodge regulators and bypass financial rulesall without major consequences.

Now, the world’s largest cryptocurrency exchange is facing mounting legal pressure.

Binance founder and CEO Changpeng Zhao has hired Latham & Watkins white-collar defense attorneys to represent him personally as he and his company face an increasingly strained legal network. Justice Department prosecutors are investigating the exchange for possible money laundering violations as the SEC investigates the company’s business practices. Last month, another agency, the Commodity Futures Trading Commission, sued Zhao, accusing him of non-compliance that allowed criminals to launder money on Binance.

The legal threats came together to create the most dangerous moment in Binance’s history. Criminal charges against Mr. Zhao or his company could cause mass panic in the cryptocurrency market, which has been reeling from the collapse of the FTX exchange last year and the failure of its founder, Sam Bankman-Fried. ) was arrested and in trouble. Binance is several times larger than FTX, processing tens of billions of dollars Everyday is a transaction.

“It’s the biggest cryptocurrency exchange, and if it gets restricted, it’s a big deal,” said Hilary Allen, a cryptocurrency expert at American University. “It’s hard to see the rest of the cryptocurrency industry unscathed.”

Zhao, 46, responded by hiring government-qualified compliance officers and promising to help law enforcement agencies stop cryptocurrency crimes.Binance executives are meeting with reporters to tout the company’s compliance efforts, and the exchange’s U.S. arm has formed a Political Action Committee Push its agenda in Washington.

Mr. Zhao known as The CFTC’s lawsuit was “unexpected and disappointing,” describing it as an “incomplete statement of facts.” A company spokesman declined to comment on other investigations. Representatives for the Justice Department, CFTC and SEC also declined to comment.

Mounting pressure on Binance has been issued Tremor through the cryptocurrency market. The exchange’s U.S. operations recently lost a major banking partner, Signature Bank, after the struggling bank collapsed last month. Binance also lost external audit firm Mazars last year. explain It is suspending work for crypto clients. (The spokesperson said Binance had hired a new audit firm, but declined to name them.)

Some of Binance’s customers appeared to be spooked. Over a seven-day period in late March, more than $2 billion in cryptocurrencies built on the popular ethereum network were withdrawn from exchanges, according to crypto data tracker Nansen. Nearly $1 billion has left the platform so far this month. Binance still holds about $66.5 billion in customer assets, Nansen said.

CFTC Lawsuit Sounds Wake-Up Call to Seriousness of Binance’s Legal Situation. Citing internal texts and emails, the complaint said the company allowed criminals to launder money. Some customers were able to bypass critical background checks, exploiting remaining loopholes to protect the exchange’s profits, the complaint said. Privately, Binance employees joked about terrorists moving funds on the platform, acknowledging that the company “facilitated potentially illegal activity,” the CFTC said in its complaint.

The scope of the conduct in a suit Differentiate Binance from its crypto peers.

“This type of misconduct is so serious that you’d think the Justice Department would be interested,” Mr. Gorman said.

The Justice Department’s criminal investigation is being led by its Money Laundering and Asset Recovery Section, three people familiar with the matter said. The officials are cooperating with prosecutors from the U.S. Attorney’s Office in Seattle, and the Securities and Exchange Commission is conducting a parallel investigation, the people said.Details of the case were previously provided by Reuters.

Binance has a series of law firms coordinating its defense. In discussions with the Justice Department and U.S. regulators, Mr. Zhao hired at least four Latham & Watkins attorneys, while the firm was represented by six Gibson Dunn attorneys, according to court records and people familiar with the matter.

Founded in 2017, Binance has grown rapidly by providing a market for various experimental cryptocurrencies and allowing customers to place risky, highly leveraged bets on cryptocurrency prices, which are still illegal in the United States.About two-thirds of all cryptocurrency trades allegedly happen on Binance’s platform CC dataa data analytics company.

Mr. Zhao is as well-known and influential in the crypto world as Mr. Bankman-Fried was before his arrest. But Mr Zhao, better known in the crypto community as CZ, is a more elusive figure.

Mr. Zhao, a Chinese-born Canadian citizen, has jumped from country to country and now spends most of his time between Dubai and Paris, according to a person familiar with the matter. Zhao will travel to the United States at least once in 2022, the person said.

Binance has long been accused of circumventing global money laundering rules and attempting to circumvent regulations in countries where it operates. At times, the privately held exchange operates out of China, Malta and Singapore; it now has major regional offices in Dubai and Paris and employs 8,000 full-time staff globally, a spokesman said.

Binance isn’t licensed to operate in the U.S., so Mr. Zhao started a small business for U.S. users called Binance.US., which the company says operates independently of global exchanges. But the company’s U.S. customers have been able to use virtual private networks to access major platforms to disguise their tracks.

Binance has faced U.S. regulatory scrutiny for years. In February, its chief strategy officer, Patrick Hillmann, revealed that the exchange was in talks with regulators on a settlement to resolve various legal probes with fines or other penalties.he explain The company is “very confident and feels really good” about the discussions.

A month later, the CFTC filed suit.

The agency sued Binance affiliates based in the Cayman Islands and Ireland, saying the corporate entities were “directly or indirectly owned” by Mr. Zhao and had ties to dozens of other business entities maintained by the exchange. The complaint alleges that Mr. Zhao was personally responsible for Binance’s compliance failures and describes a meeting in which he acknowledged loopholes that allowed users to bypass Know Your Customer protocols.

The CFTC also indicted Binance’s former top compliance officer, Samuel Lim, alleging he helped U.S. customers evade systems designed to prevent money laundering. A lawyer for Mr. Lin did not respond to a request for comment.

The lawsuit added that Binance allowed three unnamed U.S. trading firms to operate on its platform, despite rules prohibiting U.S. companies from doing so. The firms are Jane Street Group, Tower Research Capital and Radix Trading, according to a person familiar with the matter. There is no indication that these companies, previously determined It is being investigated by federal authorities, Bloomberg News reported.

A spokeswoman for Jane Street declined to comment. Representatives for Radix and Tower Research did not respond to requests for comment.

Allegations that Binance allowed the proliferation of money laundering have also emerged in a number of private lawsuits, several of which have been dismissed in court. Some plaintiffs claim they were scammed by cryptocurrency traders who then moved the stolen funds through exchanges.

Florida attorney David Silver, who sued Binance last year, said the CFTC lawsuit was likely the first of several enforcement actions against Mr. Zhao’s company.

“The truth will come out,” Silver said. “And Binance will be held accountable.”

A Binance spokesman said the company “works closely with law enforcement to freeze funds that are determined to have been obtained illegally.” Last year, Binance helped law enforcement “thwart cybercriminals in more than 40,000 cases worldwide,” he said. .

Binance has been looking to build a stronger compliance infrastructure. The company now has a compliance department with more than 750 employees and has hired hundreds of people over the past year, the spokesman said. In January, former federal prosecutor Noah Perlman was named the new global compliance chief.

Binance has also recruited former law enforcement operatives, including former IRS investigator Tigran Gambaryan, who worked on several of the government’s highest-profile early crypto cases.

In an interview, Mr. Gambaryan said the allegations against Binance are a hangover from an earlier era, when the exchange was a small start-up focused on growth.

Binance “sees itself as a tech company,” he said, adding: “They break things. All exchanges do.”

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