Binance Faces Growing Pressure as US Crypto Crackdown Intensifies

For years, giant cryptocurrency exchange Binance has had a reputation for dodging regulators and circumventing financial rules, all without meaningful consequences.

Today, the world’s largest crypto exchange is facing increasing legal pressure.

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

Legal threats have converged to create the most precarious moment in Binance’s history. Criminal charges against Mr. Zhao or his company could trigger mass panic in crypto markets, which are reeling from the collapse of the FTX exchange last year and the arrest of the company’s founder. , Sam Bankman-Fried. Binance is several times larger than FTX, processing tens of billions of dollars in transactions every day.

“It’s the biggest crypto exchange, and if it’s cracked down, it’s going to be a big deal,” said Hilary Allen, a crypto expert at American University. “It’s hard to see the rest of the crypto industry remaining unscathed.”

Mr. Zhao, 46, responded by hiring compliance officers with government credentials and pledging to help law enforcement stop crypto crimes. Binance executives are meeting with reporters to trumpet the company’s compliance efforts, and the exchange’s US arm has formed a political action committee to push its agenda in Washington.

Zhao called the CFTC lawsuit “unexpected and disappointing,” describing it as an “incomplete recitation of facts.” A company spokesperson declined to comment on the other investigations. Representatives of the Justice Department, the CFTC and the SEC also declined to comment.

The growing pressure on Binance has already caused tremors in the crypto market. The stock exchange’s US operation recently lost a major banking partner, Signature Bank, when the embattled lender went bankrupt last month. Binance also lost its external audit firm, Mazars, last year after the company said it was suspending work for crypto clients. (The spokesperson said Binance had hired new auditing firms but declined to identify them.)

Some Binance customers seem scared. In seven days at the end of March, more than $2 billion worth of cryptocurrencies built on the popular Ethereum network were pulled from the exchange, according to crypto data tracker Nansen. So far this month, nearly $1 billion has left the platform. Binance still has an estimated client portfolio of $66.5 billion, Nansen said.

The CFTC lawsuit raised the alarm about the seriousness of Binance’s legal situation. The complaint, citing internal texts and emails, argued that the company enabled criminals to launder funds. Some clients could circumvent critical background checks, the complaint alleges, using loopholes left in place to preserve exchange profits. Privately, Binance employees joked about terrorists transferring money to the platform and acknowledged that the company was “facilitating potentially illegal activities,” the CFTC said in its complaint.

Aitan Goelman, a partner at law firm Zuckerman Spaeder who previously served as the CFTC’s chief enforcement officer, said the extent of the conduct described in the lawsuit sets Binance apart from its crypto counterparts.

“The misconduct is egregious enough that you would think the Justice Department would be interested,” Goelman said.

The Justice Department’s criminal investigation is being led by its Money Laundering and Asset Recovery Section, three people familiar with the investigation said. Those officials are working with prosecutors at the U.S. Attorney’s Office in Seattle, the people said, and the SEC is conducting a parallel investigation. Details of the case had previously been reported by Reuters.

Binance has an array of law firms orchestrating its defense. Mr Zhao hired at least four lawyers from Latham & Watkins, while the company was represented by half a dozen Gibson Dunn lawyers in discussions with the Justice Department and US regulators, court records show. and people familiar with the subject.

Founded in 2017, Binance has grown rapidly by providing a marketplace for a wide selection of experimental cryptocurrencies and allowing customers to make a type of risky, high-leverage bet on crypto prices that remains illegal in the United States. UNITED STATES. About two-thirds of all crypto trading takes place on Binance’s platform, according to CCData, a data analytics firm.

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

A Canadian citizen of Chinese descent, Zhao has hopped from country to country and now divides much of his time between Dubai and Paris, according to a person with knowledge of the matter. Mr. Zhao has visited the United States at least once in 2022, the person said.

Binance has long been dogged by allegations that it circumvented global money laundering rules and sought to evade regulations in the countries where it operates. At times, the private exchange operated from China, Malta and Singapore; a spokesperson said the company now has major regional offices in Dubai and Paris, with 8,000 full-time employees worldwide.

Binance is not licensed to operate in the United States, so Mr. Zhao has a small business for US users called Binance.US., which says it operates separately from the global exchange. But the company’s US-based customers were able to access the main platform using virtual private networks to conceal their whereabouts.

Binance has been under US regulatory scrutiny for years. In February, Patrick Hillmann, its chief strategy officer, disclosed that the exchange was in talks with regulators over a settlement to resolve the various legal investigations with a fine or other penalty. He said the company was “very confident and felt really good” about the talks.

A month later, the CFTC filed its lawsuit.

The agency sued Binance subsidiaries based in the Cayman Islands and Ireland, saying these companies were “directly or indirectly owned” by Mr. Zhao and related to dozens of other business entities run by the exchange. The complaint said Mr. Zhao was personally responsible for Binance’s compliance failures, describing a meeting in which he admitted to a loophole that allowed users to circumvent know-your-customer protocols.

The CFTC has also sued Binance’s former top compliance officer, Samuel Lim, claiming he helped US customers evade systems designed to prevent money laundering. A lawyer for Mr. Lim did not respond to requests for comment.

The lawsuit added that Binance had allowed three unnamed US trading companies to operate on its platform, despite rules prohibiting US companies from doing so. The companies were Jane Street Group, Tower Research Capital and Radix Trading, according to a person familiar with the matter. There is no indication that the companies, previously identified by Bloomberg News, are under investigation by federal authorities.

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

Allegations that Binance allowed money laundering to proliferate have also surfaced in a few private lawsuits, several of which have been dismissed by the courts. Some complainants claim they were scammed by crypto traders who then routed stolen funds through the exchange.

David Silver, a Florida attorney 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,” Mr. Silver said. “And Binance will be found guilty.”

Binance’s spokesperson said the company is working “closely with law enforcement to freeze funds identified as potentially illicitly acquired.” Last year, Binance helped law enforcement “thwart cybercriminals in more than 40,000 cases worldwide,” he said.

Binance has sought to build a more robust compliance infrastructure. The company now has a compliance department of more than 750 employees, the spokesperson said, with hundreds of employees hired over the past year. In January, a former federal prosecutor, Noah Perlman, was named the new global chief compliance officer.

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

In an interview, Gambaryan said the charges against Binance were holdovers from an earlier era when the exchange was a small, growth-focused startup.

Binance “thinks of itself as a tech company,” he said, adding, “They break things. All exchanges have.