Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week, we’re taking a look at Binance’s face-off with a US regulator.
The US derivatives regulator hit Binance with a lawsuit on Monday, alleging the company illegally accessed US customers. Some legal cases are more equal than others. This one matters.
Binance, led by chief Changpeng Zhao, is by far the world’s largest crypto exchange, the linchpin of the market. Zhao and Samuel Lim, Binance’s former chief compliance officer, have also been named in the Commodity Futures Trading Commission suit.
The CFTC also wants permanent injunctions against Binance to stop it from ever working with US-based customers, even if the customer is trading through an offshore account. And it wants Binance to hand over all benefits received, such as trading profits. The stakes are high.
If you haven’t read the complaint in full, I highly recommend you do. It’s extensive and very detailed, with parts of the case built on messages retrieved from Zhao’s phone.
To be clear, this is only the starting point in a legal case that may stretch for some time. Binance responded to the CFTC’s case with the following:
“Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterisation of many of the issues alleged in the complaint.” The exchange’s response can be read in full here.
That said, here are some of the CFTC’s main allegations.
ACCESSING US CUSTOMERS
Binance has long claimed it serves no US customers. According to the CFTC, this just isn’t so. They accounted for almost a fifth of the exchange’s trading revenue at one point in its history.
The CFTC says the exchange has gone to lengths to indirectly source US customers, especially the big ones, the high-speed trading firms based in places such as Chicago and New York, by encouraging them to use virtual private networks, tools used to obscure the location of the user.
One excerpt reads: “[Changpeng Zhao] wants people to have a way to know how to VPN to use [a Binance functionality] . . . it’s a biz decision,” said Lim in March 2019.
Later that year the CFTC said Binance claimed it had begun to block customers based on their IP address. The regulator alleges:
CO-OPERATING WITH REGULATORS
Like many crypto companies, Binance says it co-operates with regulators. The regulator disagrees, saying that it refused to provide Lim’s residential address in response to an investigative subpoena.
“Regulatory co-operation” came with added benefits for its VIP customers. The below, according to the CFTC, is an excerpt from a Binance policy created by Lim:
“WE SEE THE BAD, BUT WE CLOSE TWO EYES”
The CFTC complaint is rife with allegations that Binance has purposely turned away from compliance.
Let’s start with an eye-popping conversation between Lim and an unidentified Binance money laundering reporting officer (MLRO). In late 2020 Binance underwent a compliance audit to satisfy a request from Paxos, the company that used to mint BUSD, the stablecoin which carries Binance branding. It was to look at concerns on geofencing, or blocking activity that came from US-based internet addresses.
The CFTC alleges, according to Lim, Binance purposely engaged a compliance auditor that would “just do a half assed individual sub audit on geo[fencing]” to “buy us more time”.
Binance’s MLRO complained about having to write a “fake annual MLRO report” for Binance’s (non-existent) board of directors. “Wtf,” she added.
Lim told the MLRO he could “get management to sign off on the fake report”. The MLRO said: “I HAZ NO CONFIDENCE IN OUR GEOFENCING.”
On a separate occasion, Lim acknowledged that certain Binance customers — including some from Russia — were “here for crime”. The Binance MLRO chimed in with this gem: “We see the bad, but we close two eyes.”
Another highlight below. For context, at one point Hydra was the world’s largest darknet marketplace. You can read more about it here.
TRADING AGAINST THE CUSTOMERS
Perhaps the customers don’t care about any of the above and only see the money on offer from trading. Some seemed happy to dive in. One Chicago trading firm appeared to account for no less than 12 per cent of Binance’s volume in October 2020.
One final note. The CFTC also slammed Binance for its interpretation of company headquarters: “ . . . Binance intentionally does not disclose the location of its executive offices. Instead, Zhao has stated that Binance’s headquarters is wherever he is located at any given point in time,” the CFTC said.
How do you see the case going? As always, email me your thoughts at email@example.com.
Crypto rivalries endure even in regulatory battles. The Department of Justice added another criminal charge to the sheet facing Sam Bankman-Fried (remember him?), the day after the CFTC served Binance and Zhao. US prosecutors accused SBF of sending a bribe to regain access to trading accounts that had been frozen by law enforcement in China. He has pleaded not guilty to the new charge and entered the same plea to the others.
While we’re on Binance, make sure to read my scoop on the company’s efforts to hide its substantial ties to China during its early years. These links included an office in use until at least the end of 2019, and one Chinese bank that was used to pay some employee salaries. “People in China can directly say that our office is not in China,” Zhao said in 2017.
If you’re hungry for more scoops, check out my colleagues Nikou Asgari and Kadhim Shubber lifting the lid on FTX tokens being offered to Genesis executives on the cheap before they were issued to the public. Story here.
Soundbite of the week: The cost of an AK-47
The CFTC suit dug up a conversation on Binance receiving information on potential transactions by Hamas, the Palestinian militant group. The excerpt in full below:
In February 2019, after receiving information “regarding HAMAS transactions” on Binance, Lim explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering”. Lim’s colleague replied: “Can barely buy an AK47 with 600 bucks.”
Data mining: Decreasing Circle
At the start of the month Circle said it had a $3.3bn exposure to Silicon Valley Bank, an admission that temporarily broke the peg linking its USDC stablecoin to the dollar. The situation righted itself when the US government stepped in to support SVB depositors and Circle promised to back the coin. But the ramifications continue.
The amount of USDC stablecoins in circulation has dropped by a fifth to $33bn, and by nearly half of its circulating value last summer. In contrast, use of the rival Tether USDT token is soaring.
Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to firstname.lastname@example.org. There will be no newsletter next week as I’ll be away. The next newsletter will be April 14.