Home Business Subpoenas issued in ongoing federal investigation into cryptocurrency Binance

Subpoenas issued in ongoing federal investigation into cryptocurrency Binance


Federal prosecutors are investigating US hedge funds’ dealings with cryptocurrency exchange Binance as part of a long-running probe into potential money-laundering violations at one of the world’s leading cryptocurrency companies.

In subpoenas sent in recent months, the U.S. attorney’s office for the Western District of Washington in Seattle ordered the investment firms to hand over records of their communications with Binance, each reviewing one of the subpoenas and speaking stipulations. anonymity to discuss a confidential matter.

Legal experts said the previously unreported subpoenas do not mean authorities are likely to file charges. Reuters reported last month that prosecutors are still discussing a possible settlement with Binance and weighing whether they have enough evidence to bring charges against the company.

In an interview, Binance chief strategy officer Patrick Hillmann said the company talks “on a daily basis with almost every regulator in the world,” but declined to comment on the status of any U.S. investigations. Justice Department spokesman Joshua Stueve also declined to comment.

The federal investigation into Binance comes at a time of deep uncertainty in the crypto industry. The implosion of FTX, a popular trading platform that authorities say was a years-long scheme to defraud investors, has raised concerns about free, largely unregulated online markets where digital assets are bought and sold.

Crypto company failures are more common and interconnected. Celsius, the cryptocurrency platform that collapsed in July, owed a lot 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 a large portion of the company’s digital tokens helped create panic among customers and a run to bank deposits that FTX couldn’t meet.

With the spotlight on Binance, the world’s largest cryptocurrency, Zhao criticizes FTX and casts himself as a champion of stricter oversight of the industry. “Regulators will rightfully scrutinize this industry much, much harder, which is probably a good thing,” Zhao said at a conference in Indonesia in November.

However, Binance has long frustrated financial regulators and law enforcement, legal experts said. For years, Binance has allowed users to buy and sell cryptocurrencies on the platform, making it an easy way for criminals to launder ill-gotten gains, said John Ghose, a former Justice Department prosecutor who specialized before leaving to join the cryptocurrency business. private sector in 2021.

“Binance did not have a reputation as a responsible exchange,” Ghose said during his tenure as prosecutor.

Binance’s Hillmann acknowledged that the company’s approach to regulatory compliance was flawed in the first few years of its rapid expansion. But recently, he said, Binance has been investing heavily in compliance programs, working closely with law enforcement and developing new technology to catch criminals on its platform.

“Over the past two years, the company has completely repositioned itself,” Hillmann said. “Now that we have these resources, we are one of the most proactive parties to identify, freeze and recover funds that are easily laundered by criminals,” he said, adding that he believes the overall incidence of criminal activity in cryptocurrency has decreased.

A report last year by data provider Chainalysis showed that cryptocurrency crime reached an all-time high in 2021, with illegal addresses taking in $14 billion, up from $4.6 billion in 2017, when Binance was founded. Over the same period, as cryptocurrency adoption grew, the fraction of total transactions that were illegal declined significantly, Chainalysis found.

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

The latest subpoenas could mean prosecutors are probing Binance’s ties to U.S. investors, Ghose said, cautioning that he had no first-hand knowledge of the Binance investigation.

“The basis of these charges is whether or not there are US customers,” he said. “If there are US customers, there are fees to evade money laundering requirements.”

In response to increased regulatory interest, Binance has launched a Washington charm offensive. The company this fall formed a global advisory board chaired by Max Baucus, a former Democratic senator from Montana and the Obama administration’s ambassador to China. Last month, he joined the Digital Chamber of Commerce, a Washington-based crypto lobbying group.

Baucus and Plouffe did not respond to requests for comment.

Meanwhile, Binance.US, the Palo Alto, Calif.-based trading platform owned by Zhao, has hired two new outside lobbying firms and created a political action committee, allowing it to raise funds from its ranks and distribute the proceeds as campaign contributions. federal records show. And he hired BJ Kang, a former FBI agent who led high-profile investigations into insider trading on Wall Street, as his first chief of investigations.

A spokesperson for Binance.US said the company has no plans to donate to any PAC.

Carlos Gomez, chief investment officer of Belobaba Crypto Asset Fund, which invests in the Binance platform, said Zhao is “trying to do the right thing” by meeting with government leaders, defending regulation and offering to bail out other crypto companies in trouble. “He’s trying to make himself look like a reliable person.”

But there are signs that Zhao, a cryptocurrency superstar with 8 million Twitter followers, has lost the trust of some of his clients. In a 24-hour period in December, investors withdrew $3 billion more from Binance than they deposited, according to cryptocurrency analytics firm Nansen, the largest net withdrawal from the exchange in a single day since June.

“People are starting to get scared,” said Carol Alexander, a crypto expert and professor of finance. Sussex. “whales” or Professional traders are “starting to exit Binance as regulatory pressure mounts,” he said.

Zhao said Binance has enough reserves to support all user deposits, a fact he said was confirmed by an independent auditor’s review last month. “Any user can withdraw their assets from Binance and the company will continue to operate as normal,” a Binance spokesperson said in an email.

Nine days after publishing the assessment, Paris-based auditing firm Mazars said in a statement that it had stopped working with crypto companies “due to concerns about the public’s understanding of these reports.” Although Binance refers to its work with Mazars as a “third-party audit,” the auditor said its assessment is not a legally binding assurance or audit opinion.

“Providing an opinion or assurance on Binance’s reserves would significantly increase the risk of Mazars being sued if it later turns out that Binance does not have enough money to cover client assets,” said accounting professor Vivian Fang. University of Minnesota.

One of the challenges facing US prosecutors will be proving that Binance even complies with American law.

Zhao founded Binance in China, but later moved the company to Japan and later to Malta. Since 2020, he claims that the company does not have a single headquarters. Binance Holding Ltd., a shell company that operates several Binance subsidiaries, is based in the Cayman Islands, but Zhao is also affiliated with dozens of business units around the world, including in the British Virgin Islands, Singapore, Ireland, Liechtenstein and the Seychelles. , Reuters reports.

Industry experts attribute part of Binance’s success to its marketing of risky financial products, such as crypto derivatives, which allow users to place highly leveraged bets on speculative digital tokens such as dogecoin. Such products are generally banned in the US, and since 2019 Binance has banned 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 of the main Binance exchange.)

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

Some Americans claim to be able to bypass Binance’s restrictions. In Reddit discussion threads and YouTube videos, crypto traders have shared tips for accessing the site from the US. A content creator known as Full Value Dan has published a tutorial on “How I Beat Binance KYC” – shorthand for “know your customer” verification laws – which includes setting up a shell business in Taiwan and obtaining residency documents from that country.

In the video, Full Value Dan said that despite being a US citizen, he used these documents to get approved to trade on Binance. He did not respond to a request for comment.

Binance CEO Hillmann revealed that the company had tested these and other potential loopholes to gain access to the trading platform and found that they did not work. “Today, no user in the US can access Binance.com without committing fraud,” Hillmann said.

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

The CEO of a New York investment firm that manages $2.5 billion in assets said his company trades on the Binance offshore exchange through corporate entities it owns outside the United States. Although Binance strictly prohibits US citizens from trading, “corporations and citizens are very different,” said the executive, who spoke on condition of anonymity because he was concerned about raising his firm’s profile with regulators.

Binance said it complies with all US laws and is assisting law enforcement in their investigations. But it has not registered its main offshore exchange, Binance.com, with the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN. A key requirement to comply with the Bank Secrecy Act, records show.

Hillmann said he does not believe Binance.com needs to register with the Treasury Department because it does not operate in the United States. A spokesperson for FinCEN declined to comment.

This defense did not work for others. Last year, three co-founders of BitMEX, another offshore cryptocurrency exchange, pleaded guilty to “intentionally” failing to verify the identities of their customers. According to the indictment, BitMEX attracted thousands of American investors despite serving as an exchange based in the Seychelles, which had no American users.

BitMEX agreed to pay $100 million to settle the charges, and the co-founders were ordered to pay $10 million each. Arthur Hayes, who resigned as CEO after the charges were filed, was sentenced to 6 months of house arrest and 2 years of probation.

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