Cryptocurrency: Binance hit with CFTC complaint as cryptocurrency cops pounce on world’s biggest exchange

Cryptocurrency: Binance hit with CFTC complaint as cryptocurrency cops pounce on world’s biggest exchange

By Dominic Powell and Sarah Danckert Late last year, Changpeng Zhao, the enigmatic head of the world’s largest cryptocurrency exchange Binance, was set to make a rare trip to Australia. Interviews with select journalists had been booked with one major talking point on the list: regulation of the unruly crypto industry. But days before his visit, Zhao’s trip was abruptly cancelled and the interviews nixed. Months later it was rescheduled and cancelled again, leaving media questioning what was going on behind the scenes at one of crypto’s unshakeable titans. Last week, those questions were answered. Powerful US regulator Commodity Futures Trading Commission (CFTC) sued Binance and Zhao for operating an “illegal” exchange, alleging multiple “wilful” breaches of US trading law. Changpeng Zhao with his Binance tattoo in Paris. Credit: Bloomberg Perhaps most damaging for Binance, the case would shine a light on the group’s allegedly flagrant disregard for anti-money laundering and counter-terrorism laws – including dealings with suspected Russian criminals and Hamas financiers – and raise questions about its activities in Australia. Zhao this week in a blog post described the CFTC action as unexpected and disappointing, adding “the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterisation of many of the issues alleged in the complaint”. Since being founded by Zhao in China in 2017, Binance has grown to become the world’s biggest cryptocurrency exchange with revenue exceeding $US20 billion ($29.8 billion) and 30 million registered users, according to 2022 data. In Australia, it has 200,000 customers thanks to a massive marketing campaign and a large network of local influencers . But the group’s growth has also come at the expense of its reputation, with regulators in the UK, Italy, Japan, US, Australia, Canada, Thailand and Germany separately warning the group for potentially operating outside the law. This week, Binance’s reputation took another major hit with the CFTC action, sparking a $US2 billion run as customers raced to withdraw their funds. Most problematic for Binance in the CFTC complaint were the extracts of internal chats between senior executive Samuel Lim, Zhao and other staff at Binance, that US regulators allege show flagrant disregard for anti-money laundering and counter-terrorism laws and rules requiring financial groups to check the identities of its users. The complaint alleges: “For example, in February 2019, after receiving information ‘regarding HAMAS transactions’ on Binance, Lim explained to a colleague that terrorists usually send ‘small sums’ as ‘large sums constitute money laundering’.” Lim’s colleague replied: “can barely buy an AK-47 with 600 bucks.” “And with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: ‘Like come on. They are here for crime.’” Binance’s MLRO (money laundering regulatory officer) agreed that “we see the bad, but we close 2 eyes.” Concerns over Binance allegedly skirting regulation have not been limited to the company’s US operations. Jeff Yew, the former chief executive of Binance Australia, said his departure from the company in April 2021 was due to concerns over the company’s management and lax approach to regulatory compliance. Monochrome chief executive Jeff Yew – the former CEO of Binance Australia – says he left amid concerns about the group’s approach to regulation. “Back then, I had become increasingly concerned about the approach Binance was taking in relation to the management of Binance Australia,” Yew said. “Because it’s an unregulated industry, the interpretation of what regulation applies is very hard to agree on because there are no standards. “The alignment between local and international management of what was important to prioritise from a self-regulatory standpoint resulted in friction, and led to me feeling I could not continue my duties as CEO of the business.” Yew, who now runs regulated crypto investment firm Monochrome, believes the issues plaguing Binance in the US are not restricted to just one company, and that regulatory noncompliance is “endemic” throughout the industry – including in Australia. “Commitment to proper risk management and compliance practices is not consistent across digital currency exchanges globally. The alleged issues at Binance are likely not limited to their operations and similar or other issues may be under the surface at other unregulated crypto exchanges in Australia,” Yew said. ‘Crypto exchanges in Australia have been largely unregulated; however they often portray, in their own marketing materials, that they are heavily regulated. This is disappointing.’ A spokeswoman at Binance responded to the allegations: “Our priority is to serve and protect users by putting their interests first, and we will continue to do so. We are collaborative with regulators and government agencies all around the world.” Australia’s regulators have had Binance in their sights for some time, though there has been no formal action against the group or its executives here for any breaches of financial services laws. Australia’s transaction regulator Austrac, which conducted a review of Binance in 2019, declined to comment on the CFTC complaint and whether it raised concerns given Binance’s local entity is a registered digital currency exchange or on Binance specifically. A spokesperson for Austrac said: “Reporting entities must take steps to identify their customer (know your customer), check that they are who they say they are, report suspicious matters, and conduct additional verification checks (enhanced customer due diligence) when appropriate.” Sources close to ASIC, who are not permitted to speak publicly, said the regulator had been surveilling Binance for at least the past three years amid potential concerns about its sales practices in Australia. Binance is currently the subject of a targeted review by ASIC after it was discovered that it had misclassified some of its retail clients as wholesale investors. “We are unable to provide further comment while that review is under way,” a spokesman for ASIC said. A spokesperson for Binance Australia said the company identified the breaches after receiving notices from ASIC regarding the matter. There are other signs Australian regulators have been clamping down on Binance’s activities. In 2021, Binance abruptly stopped selling a range of complex derivative products to Australian customers amid concerns from ASIC that cryptocurrency operators were selling exotic products to normal Australian investors, an activity that could require them to hold an Australian Financial Services Licence (AFSL). In 2022, Binance obtained an AFSL, with company records showing it paid $4 million to acquire one from an existing holder allowing it to sell cryptocurrency derivative products in Australia. Binance has also had bingles with other regulators here. Late last year, the Australian Communications and Media Authority (ACMA) fined Binance’s Australian entity $2 million for sending 5.7 million spam emails to Australian-based consumers. A spokeswoman for Binance said the group had complied with the enforceable undertaking issued by ACMA and had trained its employees in accordance with the authority’s directives. Despite the claims against Binance, Yew believes the action is unlikely to have an immediate impact on the broader crypto ecosystem. He welcomed the wave of compliance action being taken both locally and abroad, and said it would level the playing field for those doing the right thing and snuff out those hoping to take advantage of the current situation. “Crypto exchanges in Australia have been largely unregulated; however they often portray, in their own marketing materials, that they are heavily regulated. This is disappointing, and arguably misleading, from a consumer protection and ethics standpoint,” he said. There is hope that the cryptocurrency industry in Australia will soon have more oversight. Earlier this year Assistant Treasurer Stephen Jones said that the government would reform the licensing and custody of crypto assets, particularly for the subset of crypto assets that currently fall outside the financial services regulatory framework. This week Liberal Senator Andrew Bragg lodged a private members bill in the Senate aimed at speeding up the government’s process. “The Digital Assets Bill will put Australia back into the race to regulate. This will protect consumers and promote investment,” Bragg said. “Australia can be a digital asset hub whilst protecting digital asset consumers. But we must act now.” The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning .

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