News: Challenges and Legal Scrutiny Loom for Cryptocurrency Exchange Giant, Binance

Inside Binance: The World's Largest Cryptocurrency Exchange Facing Regulatory Scrutiny and Legal Troubles - What's Next?

Binance, the world’s largest cryptocurrency exchange, is facing mounting legal pressure as the United States intensifies its crackdown on the crypto industry. Changpeng Zhao, Binance's founder and chief executive, has hired white-collar defense lawyers at the law firm Latham & Watkins to represent him personally, as he and his company face a tightening legal net. Justice Department prosecutors are investigating the exchange for money laundering violations, as the Securities and Exchange Commission is looking into the company’s business practices. Last month, another agency, the Commodity Futures Trading Commission, sued Mr. Zhao, accusing him of compliance failures that allowed criminals to launder money on Binance.

Binance has long had a reputation for dodging regulators and skirting financial rules. However, criminal charges against Mr. Zhao or his company could set off mass panic in the crypto markets, which are still reeling from the FTX exchange’s collapse 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 clamped down on, that’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.”

The legal threats have converged to create the most precarious moment in Binance’s history. Mr. Zhao, 46, has responded by hiring compliance officials with government credentials and pledging to help law enforcement agencies stop crypto crimes. Binance executives are meeting with reporters to trumpet the company’s compliance efforts, and the exchange’s U.S. arm has formed a political action committee to push its agenda in Washington.

Mr. Zhao called the C.F.T.C. lawsuit “unexpected and disappointing,” describing it as an “incomplete recitation of facts.” A company spokesman declined to comment on the other investigations. Representatives for the Justice Department, the C.F.T.C. and the S.E.C. also declined to comment.

The increasing pressure on Binance has already sent tremors through the crypto market. The exchange’s U.S. operation recently lost a major banking partner, Signature Bank, when the embattled lender went out of business last month. Binance also lost its outside auditing firm, Mazars, last year after the company said it was pausing work for crypto clients. (The spokesman said Binance had engaged new audit firms but declined to identify them.)

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

The C.F.T.C. lawsuit provided a wake-up call about the severity of Binance’s legal situation. The complaint, citing internal texts and emails, argued that the company had allowed criminals to launder funds. Some customers could bypass critical background checks, the complaint said, using loopholes left in place 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 C.F.T.C. said in its complaint.

Binance has an array of law firms orchestrating its defense. Mr. Zhao has hired at least four Latham & Watkins lawyers, while the company has been represented by a half-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 quickly in part because it was based in Malta, a small island nation in the Mediterranean that was aggressively courting crypto companies. Binance also did not require customers to verify their identities, making it easier for people to trade cryptocurrencies anonymously.

But Binance’s regulatory problems began to mount last year. In June, the Financial Conduct Authority, the British regulator, barred Binance’s local unit from conducting any “regulated activities” in the country. Several other countries have also taken steps to restrict or ban Binance’s activities, including Thailand, Japan, and Germany.

Binance responded by beefing up its compliance efforts, hiring former regulators and executives from traditional finance companies to help it navigate the shifting regulatory landscape. Last year, the company also launched a U.S. arm, Binance.US, which operates under stricter rules and has a smaller selection of cryptocurrencies.

But the regulatory crackdown has only intensified. In March, Gary Gensler, the chairman of the S.E.C., said the agency was considering regulating cryptocurrency exchanges like Binance. “I think that we need to do more to protect investors and consumers in this space,” he said in an interview with The New York Times.

Binance is not the only crypto exchange facing scrutiny. Coinbase, the largest U.S.-based exchange, has also faced regulatory inquiries, including from the S.E.C. and the C.F.T.C. The agency’s new chairwoman, Rostin Behnam, has said that crypto regulation is a priority for her.

But Binance’s size and global reach make it a particularly high-profile target. If the company were to face criminal charges, it could have ripple effects across the crypto industry, potentially spooking investors and prompting other exchanges to tighten their compliance efforts.

For now, Binance is fighting back against the allegations. The company has called the C.F.T.C.’s lawsuit “meritless,” saying it has a “robust” compliance program and works closely with law enforcement agencies. Binance also recently announced plans to introduce a new identity verification system for all customers, which it said would be “one of the most comprehensive KYC and AML verification programs in the industry.”

But the legal pressure on Binance is unlikely to abate anytime soon. The company’s fate could depend on whether it can convince regulators that it is serious about complying with the law and preventing money laundering and other criminal activity on its platform.

“Binance is going to have to show it can clean up its act and that it’s a good actor in the industry,” said Ms. Allen of American University. “If it can’t do that, it’s going to face a lot more legal trouble.” The future of Binance remains uncertain, but it is clear that the company will have to address the concerns of regulators and demonstrate its commitment to compliance if it wants to continue to operate and grow in the cryptocurrency space.

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