For years, the giant cryptocurrency exchange Binance has had a reputation for evading regulators and circumventing financial rules, all without significant consequences.
Now the world’s largest crypto exchange is under increasing legal pressure.
Changpeng Zhao, the founder and CEO of Binance, has hired white-collar defense attorneys from the law firm of Latham & Watkins to personally represent him as he and his company face a tighter legal net. Justice Department prosecutors are investigating the exchange for money laundering violations, while the Securities and Exchange Commission is investigating the company’s business practices. Last month, another agency, the Commodity Futures Trading Commission, sued Mr. Zhao, accusing him of compliance deficiencies that allowed criminals to launder money on Binance.
The legal threats have converged to create the most precarious moment in Binance’s history. Criminal charges against Mr. Zhao or his company could spark mass panic in crypto markets, which have been reeling from the collapse of the FTX exchange last year and the arrest of the company’s founder, Sam Bankman-Fried. Binance is many times bigger than FTX and processes tens of billions of dollars in transactions every day.
“It’s the biggest exchange for crypto, and if it’s curbed, that’s going to be a big problem,” said Hilary Allen, a crypto expert at American University. “It’s hard to imagine the rest of the crypto industry going unscathed.”
Mr Zhao, 46, has 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 US arm of the exchange has formed a political action committee to push the agenda in Washington.
Mr. 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 from the Justice Department, the CFTC and the SEC also declined to comment.
The increasing pressure on Binance has already shaken the crypto market. The exchange’s US operation recently lost a key banking partner, Signature Bank, when the embattled lender filed for bankruptcy last month. Binance also lost its third-party accounting firm, Mazars, last year after the company said it was interrupting work for crypto clients. (The spokesperson said Binance had hired new accounting firms, but declined to identify them.)
Some Binance customers seem shocked. More than $2 billion in cryptocurrencies built on the popular Ethereum network were pulled from the exchange over seven days in late March, according to crypto data tracker Nansen. Nearly $1 billion has left the platform so far this month. Binance still sits at an estimated $66.5 billion in customer holdings, Nansen says.
The CFTC lawsuit provided a wake-up call about the seriousness of Binance’s legal situation. The complaint, which cited internal texts and emails, alleged that the company had allowed criminals to launder money. Some clients could evade critical background checks, the complaint said, by using loopholes left behind to keep the exchange’s profits. Privately, Binance employees joked about terrorists moving funds on the platform, acknowledging that the company “enabled potentially illegal activities,” the CFTC said in its complaint.
Aitan Goelman, a partner at the Zuckerman Spaeder law firm who was previously the CFTC’s director of enforcement, said the scope of the conduct described in the lawsuit sets Binance apart from its crypto peers.
“The misconduct is so egregious you’d think the Justice Department would be interested,” said Mr. Goelman.
The Justice Department’s criminal investigation is led by the Money Laundering and Asset Recovery Section, three people familiar with the investigation said. Those officials are working with prosecutors in the US Attorney’s Office in Seattle, the people said, and the SEC has a parallel investigation. Details of the case were previously reported by Reuters.
Binance has a series of law firms orchestrating its defense. Mr. Zhao has hired at least four Latham & Watkins attorneys, while the company was represented by half a dozen Gibson Dunn attorneys in its talks with the Justice Department and US regulators, according to court documents and those with knowledge of the matter. .
Founded in 2017, Binance grew rapidly by providing a marketplace for a wide selection of experimental cryptocurrencies and enabling customers to make a type of high-risk, high-leverage bet on crypto prices that remains illegal in the United States. According to CCData, a data analytics company, about two-thirds of all crypto transactions take place on Binance’s platform.
In the crypto world, Mr. Zhao 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.
Mr. Zhao, a Chinese-born Canadian citizen, has jumped from country to country and now splits his time largely between Dubai and Paris, according to a person with knowledge of the matter. Mr. Zhao traveled to 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 attempted to circumvent regulations in the countries where it operates. At times, the privately owned exchange operated out of China, Malta and Singapore; a spokesperson said the company now has large regional offices in Dubai and Paris, with 8,000 full-time employees worldwide.
Binance is not authorized to operate in the United States, so Mr. Zhao runs a smaller company for US users called Binance.US., which he says is separate from the global exchange. But the company’s US-based clients have been able to access its main platform using virtual private networks to disguise their whereabouts.
Binance has been facing scrutiny from US regulators for years. In February, Patrick Hillmann, the chief strategy officer, revealed that the exchange was in talks with regulators about 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 discussions.
A month later, the CFTC filed its lawsuit.
The agency sued affiliates of Binance in the Cayman Islands and Ireland, saying those corporate entities were “owned directly or indirectly” by Mr. Zhao and were connected to dozens of other corporate entities maintained by the exchange. The complaint stated that Mr. Zhao was personally responsible for Binance’s failure to comply, describing a meeting in which he acknowledged the existence of a loophole that allowed users to circumvent know-your-customer protocols.
The CFTC also sued former top Binance executive Samuel Lim for alleging that he had helped US clients circumvent systems designed to prevent money laundering. A lawyer for Mr Lim did not respond to requests for comment.
The lawsuit added that Binance allowed three unnamed US trading firms to operate on its platform despite rules prohibiting US companies from doing so. The firms 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 being investigated by federal authorities.
A Jane Street spokesperson declined to comment. Representatives from Radix and Tower Research did not respond to requests for comment.
Allegations that Binance allowed money laundering to spread also surfaced in some private lawsuits, several of which have been dismissed by the courts. Some claimants claim they were defrauded 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 would likely be the first of several law enforcement actions against Mr. Zhao’s company.
“The truth will come out,” said Mr. Silver. “And Binance will be held guilty.”
Binance’s spokesperson said the company is “working closely with law enforcement to freeze funds that have been found to be potentially ill-gotten.” Last year, Binance helped law enforcement “thwart cybercriminals in more than 40,000 cases worldwide,” he said.
Binance has been trying to build a more robust compliance infrastructure. The company now has a compliance department of more than 750 employees, the spokesperson said, hiring hundreds of employees over the past year. In January, former federal prosecutor Noah Perlman was appointed as the new global compliance chief.
Binance has also recruited former law enforcement officers, including Tigran Gambaryan, an ex-Internal Revenue investigator who worked on several of the government’s most high-profile early crypto cases.
In an interview, Mr. Gambaryan said the allegations against Binance were relics of an earlier era when the exchange was a small start-up focused on growth.
Binance “thinks of itself as a tech company,” he said, adding, “They break things. All the exchanges have done it.
