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Binance: The low-down on the drama-ridden crypto exchange

ComplianceX | Jack J. Kelly | Aug 16, 2021

binance legal scrutiny - Binance: The low-down on the drama-ridden crypto exchangeThanks to a wave of disgruntled customers and enthusiastic regulators, Binance has been garnering all the wrong types of attention over the past 24 months.

Bloomberg reported in March that the firm was under investigation by the US Commodity Futures Trading Commission, with the regulator seeking to determine whether cryptocurrency derivatives were bought and sold by US citizens on the Binance platform. This was followed by another report in May that the US Justice Department and IRS were also investigating the Group.

Around the same time, German watchdog BaFin issued a warning to the exchange for offering securities-tracking digital tokens without publishing an investor prospectus.

In June the FCA published a warning about doing business with Binance’s UK firm Binance Markets, noting that no entity in the Binance Group holds any form of UK authorisation, registration or licence to conduct regulated activity in the UK. More generally, the warning followed, “be wary of adverts online and on social media promising high returns on investments in cryptoasset or cryptoasset-related products.”

See:  Binance CEO says he’s willing to step down as world’s biggest crypto exchange welcomes regulation

By early July Barclays suspended UK card payments to Binance, citing the FCA warning to customers. In the same week, SEPA payments to Binance were halted and the exchange brought a new compliance director on board, poaching eToro’s Jonathan Farnell.

August saw news that London’s High Court ordered the exchange to identify hackers and freeze their accounts after AI company Fetch.ai alleged $2.6million of its assets were stolen.

Despite increasing clampdowns on Binance’s operations across the globe, with soaring download numbers and unmatched trading volumes it remains the clear leader in its field.

The Tai Chi document

In a recent Finextra long read, Arvin Abraham, UK Fintech lead attorney for McDermott Will & Emery explained that significant signs of potential regulatory and criminal malfeasance by Binance have been in the public record since at least 2018. At that time “Japanese regulators found that it was operating in the country without appropriate registrations to accept business from Japanese residents, ordering it to suspend operations.”

Abraham then points to the scandalous ‘Tai Chi’ document unveiled by Forbes which outlined Binance’s

“elaborate corporate structure designed to intentionally deceive regulators and surreptitiously profit from crypto investors in the United States.”

See:  More regulation coming: SEC Chairman signals stablecoins and other tokens could fall under its rules on security-based swaps

The document was reportedly created by former Binance employee Harry Zhou and was presented to Binance’s founder Zhao in late 2018.

The document was essentially a rough strategy with a few (eyebrow raising) objectives:

  1. Minimise the impact of US regulation – specifically mentioning the need to undermine “anti-money laundering and US sanctions enforcement” efforts which would detect criminal activity. One method of doing so was ‘distraction’, through participation in government programmes which set out to detect weaknesses in financial systems.
  2. Insulate the firm from US enforcement. By keeping key personnel outside of US locations and registering US based companies (one such entity named Tai Chi), the exchange would attempt to shelter its true parent company from regulatory repercussions – labelled by Abraham as a classic ‘bait and switch’ to US regulators.
  3. Calling for ‘strategic’ use of virtual private networks (VPNs) to obscure the locations of traders on the exchange in attempts to avoid scrutiny in jurisdictions unfavourable toward Binance.

In June this year Binance was subject to enforcement actions by the Securities Commission Malaysia for alleged illegal operations.  Crackdowns have also been seen in Thailand, India, and Japan where regulators issued similar warnings to the exchange tied to offering services in countries without the necessary authorisation.

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