Binance’s Money Laundering vs FTX’s Misappropriation

6 views 5:56 pm 0 Comments November 22, 2023

Cryptocurrency exchanges are crucial components of the digital asset ecosystem.

They facilitate the buying, selling, trading, transferring, and storing of both individual and institutional holdings of the more than 20,000 crypto tokens in circulation.

The role they play, however, is rarely without governmental scrutiny and increasingly legal consequences. From the U.S. Securities Exchange Commission (SEC) to the U.S. Department of Justice (DOJ), crypto exchanges worldwide trying to operate in America seemingly can’t help but run afoul of the laws and regulations protecting the financial industry they are looking to disrupt.

This is as legal realities are knocking at the world’s largest cryptocurrency exchange’s door barely a year after FTX’s criminal implosion and just weeks since FTX co-founder Sam Bankman-Fried was convicted on all counts.

Binance Holdings Limited (Binance), the entity that operates the world’s largest cryptocurrency exchange, Binance.com, on Tuesday (Nov. 21) agreed to pay over $4 billion to resolve ongoing DOJ investigations into its business failures related to the Bank Secrecy Act (BSA), failure to register as a money transmitting business and other financial and regulatory violations.

Changpeng Zhao, the founder and CEO of Binance, pleaded guilty to the charge of failing to maintain an effective anti-money laundering (AML) program. He is stepping down from Binance, paying a $50 million fine, and will face criminal sentencing at a date to be determined.

He faces a maximum prison sentence of 18 months and has been allowed to retain his majority ownership of Binance despite being blocked from returning to a role at the exchange for at least three years.

“In just the past month, the Justice Department has successfully prosecuted the CEOs of two of the world’s largest cryptocurrency exchanges in two separate criminal cases. The message here should be clear: using new technology to break the law does not make you a disruptor; it makes you a criminal,” said Attorney General Merrick B. Garland. “Binance became the world’s largest cryptocurrency exchange partly because of the crimes it committed — now it is paying one of the largest corporate penalties in U.S. history.”

“A corporate strategy that puts profits over compliance isn’t a path to riches; it’s a path to federal prosecution,” added Deputy Attorney General Lisa O. Monaco.

Binance users have pulled over $1 billion from the exchange in response to the news.

The Cost of (Non)Compliance in Crypto

The DOJ report found that due to Binance’s failure to implement an effective AML program, illicit actors used Binance’s exchange in various ways. One compliance employee at the exchange even wrote, “We need a banner ‘is washing drug money too hard these days – come to Binance we got a cake for you.’”

And come they did. The exchange “willfully failed to report” more than 100,000 suspicious transactions from a host of sanctioned groups and countries, including Hamas, al Qaeda, and North Korea.

According to a Bloomberg report, Binance’s then-Chief Compliance Officer, Samuel Lim, explained to a colleague that terrorists typically sent “small sums.”

Hamas could “barely buy an AK47 with 600 bucks,” the colleague responded in a chat message.

“Binance turned a blind eye to its legal obligations in pursuing profit. Its willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform,” Secretary of the Treasury Janet L. Yellen said in a statement.

Additionally, the charges specify that the compliance failures were by design: keeping the doors open to users of all stripes was crucial to Binance’s growth and provided a significant source of revenue. Making it more challenging for bad actors to use the exchange would mean that good actors, too, would choose not to transact on the platform due to increased friction.

“I made mistakes, and I must take responsibility … I may be open to privately being a coach/mentor to a small number of upcoming entrepreneurs. If for nothing else, I can at least tell them what not to do,” said Zhao on X/Twitter.

What’s in an Exchange, Anyway?

PYMNTS has previously reported similarities between the failed FTX exchange — which misappropriated and lost billions of dollars of customer assets, leading to its CEO’s criminal conviction — and Binance.

Binance found itself upright after FTX’s collapse, but the year since has been challenging for the exchange. It was never able to capitalize on its position atop the crypto hill due to macro events and ongoing uncertainty around crypto more generally.

Coming out of the plea agreement with the U.S., Binance quickly emphasized that there was no allegation by any agencies that “Binance misappropriated user funds or engaged in market manipulation.”

The company emphasized in a blog post that “users can withdraw 100 percent of their assets from the platform at any time.”

On Monday (Nov. 20), the SEC charged Kraken, another of the top crypto exchanges by volume, with running an unregistered business. Binance still faces a lawsuit from the SEC itself.

As Amias Gerety, partner at QED Investors, told PYMNTS, “The crypto community believed and had a real conviction what they were doing was so new that existing laws could not possibly apply.”