Subpoena Issued In Ongoing Federal Investigation Against Crypto Exchange Binance

A previously unreported subpoena does not necessarily mean that authorities are likely to file charges, legal experts said. Reuters reported last month that prosecutors were in talks with Binance about a potential settlement and were considering whether there was sufficient evidence to charge Binance.

Binance Chief Strategy Officer Patrick Hillman said in an interview that the company is in talks “with virtually every regulator around the world on a daily basis,” but declined to comment on the status of the U.S. investigation. Justice Department spokesman Joshua Steve also declined to comment.

The federal investigation into Binance is unfolding at a time of great uncertainty for the cryptocurrency industry. The collapse of FTX, a popular trading platform that authorities say has been a years-long plot to deceive investors, has raised concerns about the freewheeling and largely unregulated online marketplace where digital assets are bought and sold. I’m provoking

Crypto company failures have become more common and interrelated. Cryptocurrency platform Celsius, which went bankrupt in July, made a large loan to FTX affiliate Alameda Research, which went bankrupt five months later. Binance founder and CEO Changpeng Zhao was an early FTX backer, and his decision to sell most of his digital tokens at the company has caused customer panic. , helped FTX to run on bank deposits it was unable to meet.

As the world’s largest cryptocurrency exchange, Binance, gets the spotlight, Zhao has repeatedly criticized FTX and hailed himself as an advocate for tighter industry scrutiny. “It’s only natural that regulators will scrutinize the industry more closely, which is probably a good thing,” Zhao said at a conference in Indonesia in November.

But legal experts say Binance has long frustrated financial regulators and law enforcement. For years, Binance has allowed users to buy and sell cryptocurrencies on its platform without identifying themselves, making it an easy way for criminals to launder their ill-gotten money, Binance said. Former Justice Department prosecutor John Gorse, who specializes in cryptocurrency cases before joining, said: Private sector in 2021.

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

Binance’s Hillmann admitted that there were flaws in its approach to regulatory compliance during its first years of rapid expansion. More recently, however, Binance has invested heavily in its compliance program, working closely with law enforcement agencies and developing new techniques to catch criminals on its platform, he said.

“Over the past two years, the company has completely changed its stance,” says Hillmann. “Now that we have these resources, we have become one of the most active parties to identify, freeze and reclaim funds laundered by criminals,” he said. We believe that overall incidents of criminal activity in cryptocurrencies are declining.

Cryptocurrency crime hit a record high in 2021, with illegal addresses rising to $14 billion from $4.6 billion in 2017, the year Binance was founded, according to a report last year by data provider Chainalysis. , Chainalysis found that as the adoption of cryptocurrencies surged, the proportion of illicit transactions dropped significantly.

Based on his experience with these types of incidents, Ghose requires financial institutions that Binance verify the identity of their customers and report any suspicious activity that could be an indication of money laundering, tax evasion. I believe prosecutors are investigating whether they violated the Bank Secrecy Act. or other crimes.

The recent subpoenas could mean prosecutors are scrutinizing Binance’s ties to U.S. investors, Gorse said, warning he had no direct knowledge of the Binance investigation. bottom.

“The basis for these charges is whether or not we have U.S. customers,” he said. “If you have US customers, there will be a charge to avoid money laundering requirements.”

As part of its response to growing regulatory concerns, Binance has launched a Washington charm attack. The company this fall formed a global advisory board chaired by former Democratic Senator from Montana and the Obama administration’s ambassador to China, Max Borkus. Last month, I joined the Digital Chamber of Commerce, a Washington-based crypto lobby group.

Baucus and Plouffe did not respond to requests for comment.

Meanwhile, Zhao-owned Palo Alto, Calif.-based trading platform Binance.US has hired two new outside lobbying firms, set up a political action committee, and raised funds from its own ranks. raised and enabled the proceeds to be distributed as campaign funds. Federal records show. He also hired BJ Kang, the former FBI agent who led a high-profile investigation into insider trading on Wall Street, as his first investigative director.

A Binance.US spokesperson said there are no plans to make donations to PAC at this time.

Carlos Gomez, chief investment officer of the Berobaba Crypto Asset Fund, which invests in Binance’s platform, said Zhao has met with government leaders, advocated for regulation, and faced other challenges. He said he was “trying to do the right thing” by proposing to bail out cryptocurrency companies. “He’s trying to position himself as a trustworthy person.”

However, there are signs that Zhao, a cryptocurrency superstar with 8 million Twitter followers, is losing the trust of some customers. In his 24 hours in December, investors withdrew $3 billion more than they deposited from Binance, according to crypto analytics firm Nansen. This is his highest single-day net withdrawal from the exchange since June.

“People are scared,” said Carol Alexander, a cryptocurrency expert and professor of finance at the University of London. Sussex. “whale” or Professional traders are “starting to move away from Binance as regulatory pressure mounts,” she said.

Zhao said Binance has sufficient reserves to back all user deposits, a fact that was substantiated by an independent auditor review last month. “All users will be able to withdraw their assets from Binance and the company will continue to function as normal,” a Binance spokesperson said in an email.

However, nine days after announcing the assessment, Paris-based audit firm Mazars said in a statement that it had suspended work with cryptocurrency firms “due to concerns about the way these reports are generally understood.” said to do. Binance referred to his collaboration with Mazars as a “third-party audit,” but the auditor said the assessment did not constitute a legally binding guarantee or audit opinion.

“[Mazars] Vivian Huang, an accounting professor at the University of Minnesota, said that if someone later finds out that Binance doesn’t have enough money in its reserves, “we can’t sue.”

One of the challenges facing US prosecutors is to prove that Binance is subject to US law.

Zhao founded Binance in China, but later moved the company to Japan and then to Malta. Since 2020, he claims the business has no headquarters.Binance Holding Ltd. is a shell company that operates multiple subsidiaries of Binance and is based in the Cayman Islands. We are also connected to dozens of business units around the world, including the British Virgin Islands, Singapore, Ireland, Liechtenstein and Seychelles. , according to Reuters.

Industry experts believe that part of Binance’s success lies in marketing risky financial products such as cryptocurrency derivatives that allow users to place high-leverage bets on speculative digital tokens such as Dogecoin. I’m here. Such products are generally prohibited in the United States, and since 2019, Binance has prohibited Americans from accessing major offshore exchanges where derivatives can be bought and sold. (Zhao-owned American exchange, his Binance.US, offers US residents a limited menu of investment options and operates independently from the main his Binance exchange. He says he is.)

Binance’s website lists the United States as one of its “restricted jurisdictions”, along with Cuba, the Crimean region, Iran, Syria, and North Korea.

Some Americans claim they can get around Binance’s limits. A discussion thread on Reddit and a video on his YouTube share tips on how crypto traders can access the site from the United States. One of her content creators, known as Full Value Dan, posted a tutorial on “How I Beat Binance KYC” (short for “know your customer” authentication method). This included setting up a shell business in Taiwan and obtaining a residency certificate from that country.

In the video, Full Value Dan claims that he used these documents to gain approval to trade on Binance despite being a US citizen. He didn’t respond to a request for comment.

Binance executive Hillmann said the company tested loopholes and other supposed loopholes to access the trading platform and found them to not work. “Currently, a US user cannot visit Binance.com without committing fraud,” Hillman said.

In an interview with The Washington Post, several large US crypto-focused hedge funds either do not use Binance or only have accounts on the more restricted Binance.US trading platform. Some said they preferred Coinbase, a publicly traded cryptocurrency exchange that provides quarterly financial statements to investors.

The CEO of a New York investment firm that manages $2.5 billion in assets said his firm is traded on Binance’s offshore exchange through an entity it owns outside the United States. Binance strictly bans US citizens from trading, but “a company and a citizen are very different,” said the executive, who spoke on condition of anonymity, concerned about raising his company’s profile with regulators. and spoke.

Binance says it complies with all US laws and is assisting law enforcement investigations. However, Binance.com, a major offshore exchange, has not registered with the Ministry of Finance’s Financial Crimes Enforcement Network (FinCEN). Records show that it is a basic requirement to comply with the Bank Secrecy Act.

Hillmann said he believes Binance.com does not need to be registered with the Treasury because it does not operate in the United States. FinCEN spokesperson declined to comment.

That defense didn’t work for others. Last year, three of his co-founders of BitMEX, another offshore cryptocurrency exchange, pleaded guilty to “willfully” failing to verify the identity of their customers. BitMEX, a Seychelles-based exchange that claims to have no American users, has attracted thousands of American investors, according to the indictment.

BitMEX agreed to pay up to $100 million to settle the claims, and the co-founders were ordered to pay $10 million each. Arthur Hayes, who resigned as CEO after being indicted, was sentenced to six months of house arrest and two years of probation.