Binance Made Flawed Plan to Avoid US Crypto Control: WSJ

• Binance made a plan to evade US government scrutiny back in 2019, the Wall Street Journal revealed.
• The plan sought to create a US entity that was completely independent of Binance’s international operations.
• Any lawsuit from US regulators would be like “nuclear fallout” for Binance, an executive told colleagues.

Soon after its launch, Binance became so concerned about the “nuclear” threat from US prosecutors that it made a plan to avoid their scrutiny, according to a Wall Street Journal report.

Any lawsuit by US regulators would be like “nuclear fallout” for the crypto exchange’s business, a Binance executive told colleagues in a private chat in 2019, according to the WSJ report on Sunday.

The report is based on text messages and documents from between 2018 and 2020, as well as interviews with ex-Binance employees, the WSJ said.

Binance is facing a number of legal and regulatory probes, and the WSJ report comes just weeks after the company flagged it expected to pay fines and other penalties to settle investigations into the business.

The Department of Justice has investigated the company for potential violations of anti-money laundering rules, while the Commodity Futures Trading Commission is looking into whether it properly recorded any trading in crypto derivatives.

The plan years ago to protect Binance came as US regulators signaled their intention to crack down on crypto businesses based abroad, concerned about the risks to US consumers.

The crypto exchange, now the world’s largest, established its US arm Binance.US in 2019. Founded in 2017, Binance.com had largely operated in a free-flowing fashion out of hubs in China and Japan – an approach that drew some criticism for put it at a distance from regulatory oversight.

Binance’s strategy focused on creating the “bare-bones” US platform for a fifth of its customers based in the country, according to the WSJ. Binance.US would make use of the company’s technology and brand, but otherwise appear as a completely independent platform.

The plan, labeled “Insulate Binance from US Enforcement,” was presented by employee Harry Zhou in a 2018 presentation, the WSJ report said.

But Binance.com and Binance.US have been more intertwined than publicly disclosed, the report said, even though US customers were meant to be excluded from the larger company.

One mistake was that the two platforms mixed employees and finance, and shared a unit that traded cryptocurrencies, according to the WSJ. There were missteps that team members worried would raise red flags for US watchdogs, such as when an employee had trouble changing a Google Form intended for Binance.US customers from being linked to Binance.com.

The fear was that US authorities could determine the links that meant Binance had control over the US platform, which would open the larger company to enforcement.

In further attempts to shield itself from regulatory scrutiny, Binance tried to recruit SEC Chairman Gary Gensler back in 2018 and 2019, according to the report.

After the then-MIT academic declined, Zhou told colleagues, “I observe that while Gensler declined consulting, he was generous in sharing licensing strategies.”

The Securities and Exchange Commission has turned up the heat on crypto firms after the collapse of the crypto exchange FTX. Authorities have targeted firms including Gemini, Genesis, Kraken and Paxos for alleged sales of “unregistered securities”.