On March 27, the US Commodity Futures Trading Commission filed a lawsuit against the Binance cryptocurrency exchange, its founder Changpeng Zhao (known by the nickname CZ, CZ) and compliance director Samuel Lim. Businessmen are accused of massive violation of US stock trading laws. If the court agrees with the arguments of the regulatory organization, the exchange will face heavy fines, and its employees will be banned from such activities.
Binance is the largest exchange in the world in terms of daily trading volume on the crypto market. Its founder is Changpeng Zhao, a Chinese-Canadian businessman. Zhao’s personal fortune in April 2023 is estimated at almost $30 billion. The Binance exchange’s revenue was estimated at $12 billion in 2022.
The Commodity Futures Trading Commission accuses Changpeng Zhao and Samuel Lim of operating Binance illegally in the United States. Binance's revenue from trading with the Americans was greater than with other countries: in 2019, according to the correspondence of top management, 22% of Binance's income was received from American users and companies. By law, Binance cannot operate in the US, as it trades in crypto-currency instruments – futures, options, and others. In America, this requires registration with the regulator, which Binance did not receive.
Other accusations against the top management of the crypto exchange include insider trading and insufficient anti-money laundering measures. The text of the lawsuit was at the disposal of The Insider. It contains indications that the owner of the exchange knew that money obtained by criminal means was passing through it, but turned a blind eye to this.
Tricks Binance
To get around the restriction on trading in the US market, the crypto exchange introduced a primitive “self-certification” of users. When trying to create an account, a window appeared that "strictly" asked the client if he was a US citizen or resident. If he answered "no", he was allowed to register. Subsequently, to create the appearance of compliance, the Binance website began to block American users by IP address. However, this problem was easily solved by turning on the VPN, Binance itself gave instructions on how to set it up. One of the accusations of the regulator in the lawsuit against the exchange is that the company taught users how to hide their location, that is, use a VPN.
Any operations in the financial market require the implementation of the Know Your Customer (KYC) procedure. However, this requirement was completely ignored by Binance for clients who withdraw less than two bitcoins per day. As of April 2023, this is about $56 thousand, and in 2021-2022 – $40-130 thousand. The commission's lawsuit, citing Lim, said that "giving priority to commercial success over compliance with U.S. laws was Zhao's business decision."
For large customers who were originally registered as US entities, Binance also offered the service of setting up shim firms in other jurisdictions such as the British Virgin Islands, Cayman Islands, Malta, and so on. At the same time, a new account was not even created for trading financial instruments, but the existing one was simply renamed.
In addition, Binance was caught trading against its own clients. It operated on its own platform on behalf of approximately 300 accounts. Some of them were directly or indirectly owned by Zhao. To manage such trade, the company even established a special department. In addition, Zhao traded on his platform under two personal accounts. This can be regarded as insider trading. Binance has not disclosed to customers that it trades on its own markets.
How managers turn a blind eye to crime
However, the most remarkable thing in the lawsuit of the American regulator is not violations of US financial laws, but Zhao's correspondence with Lim and other top managers of the exchange.
According to the commission, this correspondence was taken, in particular, from the Signal messenger. We do not know how it became available to the Commodity Futures Trading Commission. The lawsuit mentions that an automatic message deletion feature was enabled in employee chats. Cyber lawyer Sarkis Darbinyan, head of Roskomsvoboda’s legal practice, believes this could be the result of a leak:
“The information could have been obtained from the employees themselves, who leaked this data. Or we can assume that someone intercepted CZ's messages on a mobile phone. We are talking about Pegasus software. However, the import of such programs into the United States was prohibited by an executive order of President Joe Biden. It can be assumed that some licenses were bought and thus employees of the state department had access to this correspondence. This in no way compromises Signal: it has fairly strong cryptography and the ability to encrypt chats. And, as far as I know, there is not yet a single technology that could, in fact, be introduced in the middle between two subscribers, intercepting signals, and decrypt these messages.
Even before the commission's lawsuit, Reuters and the Wall Street Journal published reports in which they referred to the correspondence of company employees in Telegram and to documents received by the editors.
The top management of the exchange was well aware that some users use the platform to transfer money obtained by criminal or dubious means. For example, when lawyers asked how to deal with the account of a client whose $5 million transactions "were very closely related to illegal activity" and the money was "received for dubious services." Of the options “ban the client” and “invite the client to create a new account,” Lim chose the second: “You can tell him to be careful with receipts, especially from darknet sites like Hydra <Russian marketplace for drugs and other illegal goods – The Insider> . He can register a new account. But this one must be removed, it is already tarnished.” This echoes the policy of Zhao himself. The lawsuit cites the words of one of the employees of the company: “Do not be very strict. A ban on the platform is bad in the eyes of CZ."
Top management knew that some users were transferring money obtained from crime
Samuel Lim understood that some clients, in particular from Russia, could be involved in money laundering using Binance for this. In February 2020, in a correspondence with an employee responsible for identifying such transactions, he wrote about such clients: “Come on, we understand that they are here for criminal purposes.” To which the employee replied: “We see the bad, but we will turn a blind eye to it.” She, on another occasion, complained that she needed to write a “fake AML annual report for the board of directors of Binance, wtf.” Lim replied that he was ready to give the management a fake report for signing. At the same time, Lim knew that Binance does not have any board of directors. In their correspondence, they also discussed the possibility of hiring an auditor who, for a formal check, would “hurriedly concoct an individual partial audit” to meet the requirements of blockchain platforms.
Investigative journalist Andrey Zakharov, author of a book on the history of the cryptocurrency movement in Russia, argues that Binance is unlikely to be used in Russia for money laundering:
“If you need to withdraw some large amount of money, you can come to the Federation Tower or a crypto exchanger elsewhere, with a cold wallet on a flash drive and a suitcase of cash, you do not need the services of an exchange. If some large amounts go through Binance, and this can be seen in the blockchain, it can be seen when a “crypt” arrives, which is laundered through a wallet on Binance, then it is believed that you can find out who is behind the wallet, and the security forces can find out too. ” .
Lim also knew that the platform has accounts registered by the Palestinian organization Hamas, which is recognized as a terrorist organization in the United States and other countries. In one of the correspondence in 2019, he explained to a colleague that terrorists usually send "small amounts" because "large amounts mean money laundering." To this, the colleague replied: "You can hardly buy an AK47 for 600 bucks."
Judging by the correspondence presented in the lawsuit, the top management of Binance knew that some clients are on the sanctions lists of the United States and other countries. In 2018, Lim asked Zhao: “Are we going to block the IP addresses of countries that are under sanctions? <…> The risk is that if FinCEN <the US Treasury Department of Financial Crime Enforcement – The Insider> or OFAC <The Office of Foreign Assets Control of the US Treasury – The Insider> have concrete evidence that the exchange is registered sanctioned users, they can start an investigation or shake the whole world about it.”
For VIP clients, Binance had such a service as “notification of law enforcement requests”. In the event that the user's account was blocked at the request of law enforcement agencies, the managers of the VIP client had to contact him "by all available means". “Don't tell the client to run right away: just report that the account has been suspended and that it is being investigated by XXX. If the user is a big trader or just smart enough, they will take the hint, ” read the instruction created by Lim at the behest of Zhao.
Lim understood that all the behavior described above could lead him and other employees to an American prison. In 2020, when the company already had many clients from the United States, he noted that due to the lack of a correct KYC policy, they could face criminal charges. He wrote about this in October 2020 , probably after the founders and top management of the BitMEX crypto exchange received not only a civil lawsuit from the futures trading commission, but also a criminal case on similar charges in 2020, and were arrested .
Reports that hackers, scammers and drug cartels are laundering money on Binance have been in the media for a long time. In June 2022, Reuters reported that a total of $2.35 billion of dubious origin passed through the exchange over five years. Indefibank CEO Sergey Mendeleev said that among the wallets that brought money to the exchange were those belonging to the "false miners" of schools and railway stations.
What's next for Binance
After the charges were filed, CZ tweeted "4" – the code word for "Ignore the FUD", that is, "Forget the manipulation."
The market really did not react much: the price of the two largest cryptocurrencies – bitcoin (BTC) and "ether" (ETH) – remained approximately the same. However, Binance coin's native currency (BNB) sank 7%. In a statement issued by the company on the day the lawsuit was filed, Zhao argued that the company did nothing wrong, complies with the law and maintains its own transparency. He did not comment on the authenticity and source of the leaked correspondence.
The main charge in the lawsuit is that Binance traded derivatives without having permission to do so in the US market. According to Mikhail Khudokormov, an expert on the crypto market, in this case, the point is rather that the American regulators claim to control the entire crypto market. Since the beginning of the year, the Securities and Exchange Commission (SEC) has already filed several similar lawsuits against other leading players in the crypto market.
The point is rather that American regulators claim control over the entire crypto market.
“For the market, this looks pretty bad, since the state wants to control all processes in general. In addition, the reason for filing these lawsuits may be the intrigues of competitors – other large crypto exchanges, such as Coinbase, ” says Khudokormov. According to him, the fact that the regulator filed a lawsuit not against the American subsidiary of Binance.US, but against a global player, can only be regarded as pressure on the market as a whole. It’s too early to talk about the prospects that the founder of Binance may face a criminal case on the aforementioned “turning a blind eye” to money laundering, Khudokormov believes. Regulators will not be able to present something to Binance.US, since the American company operates in accordance with the law, and the global company is not under US jurisdiction to regulate it, the expert claims. “< Changpeng Zhao and Samuel Lim – The Insider > will face not only fines, but also sanctions. The United States will make sure that the business has no opportunity to work in America, with American users, and possibly even outside of America, ”said Irakli Ablotia, a representative of the AllTrust.Me crypto exchange.
Binance has also been sued for $1 billion — U.S. law firms Moscowitz Law Firm and Boies Schiller Flexner allege that the exchange was involved in trading unregistered securities and paying influencers to illegally promote such services. In addition to CZ, three cryptocurrency influencers were named as defendants in the case: famous basketball player Jimmy Butler, video bloggers Graham Stefan and Ben Armstrong. This lawsuit is essentially provoked by a lawsuit filed by the Commodity Futures Trading Commission. The lawsuit is directed against Binance.US, so if it is successful, it will not be able to work in the US market, says Irakli Ablotia.
Binance Collaboration with Rosfinmonitoring
It is noteworthy that the desire to circumvent the requirements of regulators from Binance arose in relation to American, but not Russian government agencies. As Reuters writes in its investigation, in 2021, Binance managers met with representatives of Rosfinmonitoring regarding the transfer of client data, in particular names and addresses. According to the investigation, Gleb Kostarev, head of Binance’s division for Eastern Europe and Russia, agreed with the requirements of Rosfinmonitoring to provide client data. This came to light when Kostarev wrote in messages to a business partner whom Reuters was able to speak with that he "didn't have much of a choice" in the matter. From Kostarev's messages studied by the agency, it also follows that Binance agreed to the requirement of the Russian authorities to open a regional office in Russia, through which Russian regulators could request the data they need about customers.
Binance agreed with the requirements of Rosfinmonitoring to provide client data
In response to a request from Reuters, Binance stated that in the event of establishing a division in Russia, Binance "will never share data [with the authorities] without a legitimate request from law enforcement." Translating from bureaucratic into Russian, we understand that in Russia this means “we will always leak your data to Rosfinmonitoring,” since it is well known that “all requests from Russian law enforcement agencies are legitimate.”
Rosfinmonitoring's interest in Binance is understandable: accounts in it were actively used by supporters of Alexei Navalny to finance the activities of the Anti-Corruption Foundation and were recommended by the foundation as a safe way to make donations. Through cryptocurrency donations, the foundation has raised over 670 bitcoins, which would currently be equivalent to approximately $19 million.
After the outbreak of the war, Binance blocked the possibility of trading for those Russian clients of the platform whose total value of crypto assets exceeds €10,000. However, in April 2023, these restrictions were lifted. Russia is in the top 5 crypto exchange markets in the world, but these restrictions, according to Bloomberg, affected approximately 0.5% of users. To bypass the KYC procedure, unlike the Americans, the Russians had to buy already created accounts on the dark web or “draw” documents, information security experts said . In March 2023, in connection with the tenth package of EU sanctions on Binance, the purchase of euros and dollars by Russian persons was prohibited .