Binance faces mounting pressure as US crypto crackdown intensifies

For years, the giant cryptocurrency exchange Binance has had a reputation for dodging regulators and skirting financial rules, all without significant consequences.

Now the world’s largest crypto exchange is facing increasing legal pressure.

Changpeng Zhao, Binance’s founder and CEO, has hired defense lawyers at the law firm Latham & Watkins to represent him personally 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 looking into the company’s business practices. Last month, another agency, the Commodity Futures Trading Commission, sued Zhao, accusing him of compliance failures that allowed criminals to launder money on Binance.

The legal threats have come together to create the most precarious moment in Binance’s history. Criminal charges against Mr. Zhao or his company could set off mass panic in crypto markets, which are reeling from the collapse of the FTX exchange last year and the arrest of the firm’s founder, Sam Bankman-Fried. Binance is several times larger than FTX was, processing tens of billions of dollars in trades every day.

“It’s the biggest exchange for crypto, and if it gets squeezed, it’s going to be a big deal,” said Hilary Allen, a crypto expert at American University. “It’s hard to see the rest of the crypto industry remaining unscathed.”

Mr. Zhao, 46, has responded by hiring compliance officers with government credentials and vowed to help law enforcement agencies stop cryptocrime. Binance executives are meeting with reporters to trumpet the company’s compliance efforts, and the exchange’s US arm 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 the facts.” A spokesman for the company declined to comment on the other investigations. Representatives for the Justice Department, CFTC and SEC also declined to comment.

The mounting pressure on Binance has already sent tremors through the crypto market. The exchange’s US operation recently lost a major banking partner, Signature Bank, when the struggling lender went out of business last month. Binance also lost its external auditing firm, Mazars, last year after the company said it stopped working for crypto clients. (The spokesperson said Binance had engaged new audit firms, but declined to identify them.)

Some of Binance’s customers seem alarmed. Over seven days in late March, more than $2 billion in cryptocurrencies built on the popular Ethereum network were withdrawn from the exchange, according to crypto data tracker Nansen. So far this month, nearly $1 billion has left the platform. Binance is still sitting on an estimated $66.5 billion in customer inventory, says Nansen.

The CFTC lawsuit provided a wake-up call about the severity of Binance’s legal situation. The complaint, citing internal texts and emails, alleged that the company had allowed criminals to launder funds. Some customers were able to bypass critical background checks, the complaint said, using loopholes again to preserve the exchange’s profits. Privately, Binance employees joked about terrorists moving money on the platform and acknowledged that the company “facilitated potentially illegal activities,” the CFTC said in its complaint.

Aitan Goelman, a partner at law firm Zuckerman Spaeder who previously served as the CFTC’s director of enforcement, said the scale of the conduct described in the lawsuit sets Binance apart from its crypto peers.

“The abuse is so egregious that you’d think the Justice Department would be interested,” Goelman said.

The Justice Department’s criminal investigation is being led by the money laundering and asset recovery section, three people familiar with the investigation said. Those officials are working with prosecutors in the U.S. 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 number of law firms orchestrating its defense. Mr. Zhao has hired at least four Latham & Watkins lawyers, while the company has been represented by half a dozen Gibson Dunn lawyers in its discussions with the Justice Department and U.S. regulators, according to court records and people with knowledge of the matter.

Founded in 2017, Binance grew rapidly by providing a marketplace for a wide variety of experimental cryptocurrencies and allowing customers to make a type of risky, highly leveraged bet on crypto prices that remains illegal in the United States. About two-thirds of all crypto trades take place on Binance’s platform, according to CCData, a data analytics firm.

In the crypto world, Mr. Zhao is 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.

A Chinese-born Canadian citizen, Mr. Zhao has bounced from country to country and now largely splits his time 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 bypassed global money laundering rules and attempted to evade regulations in the countries where it operates. At times, the privately held exchange has operated from China, Malta and Singapore; a spokesman said the firm now has major regional offices in Dubai and Paris, with 8,000 full-time staff worldwide.

Binance is not authorized to operate in the United States, so Mr. Zhao has a smaller business for American users called Binance.US., which it says operates separately from the global exchange. But the company’s US-based customers have been able to access the main platform by using virtual private networks to hide their location.

Binance has been subject to US regulatory scrutiny 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 very good” about the discussions.

A month later, the CFTC filed the lawsuit.

The agency sued Binance affiliates based in the Cayman Islands and Ireland, saying those corporate entities were “directly or indirectly owned” by Zhao and linked to dozens of other business entities maintained by the exchange. The complaint said Zhao was personally responsible for Binance’s compliance failures, and described a meeting where he acknowledged the existence of a loophole that allows users to get around know-your-customer protocols.

The CFTC also sued Binance’s former top executive, Samuel Lim, alleging that he had helped US customers evade 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 named US trading firms to operate on its platform, despite rules prohibiting US firms 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 under investigation by federal authorities.

A spokesman for Jane Street declined to comment. Representatives for Radix and Tower Research did not respond to requests for comment.

Allegations that Binance allowed money laundering to proliferate also surfaced in a few private lawsuits, several of which have been dismissed in court. Some plaintiffs 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 Zhao’s firm.

“The truth will come out,” Mr. Silver said. “And Binance will be held guilty.”

The Binance spokesperson said the firm is working “closely with law enforcement to freeze funds identified as potentially illegally obtained.” Last year, Binance helped law enforcement “intercept cybercriminals in over 40,000 cases globally,” he said.

Binance has attempted to build a more robust compliance infrastructure. The company now has a compliance department of more than 750 employees, the spokesman said, with hundreds of employees hired in the past year. In January, a former federal prosecutor, Noah Perlman, was appointed as the new global compliance chief.

Binance has also recruited former law enforcement agents, including Tigran Gambaryan, a former Internal Revenue Service investigator who worked on several of the government’s highest-profile early crypto cases.

In an interview, Mr. Gambaryan said the accusations against Binance were holdovers from an earlier era when the exchange was a small startup focused on growth.

Binance “sees itself as a technology company,” he said, adding: “They’re breaking things. All the exchanges have done that.”