Binance, through clever use of international grey areas surrounding crypto regulation, has ascended to the throne of cryptocurrency exchanges within just a few years. Without a fixed headquarters, the marketplace quickly established itself as the number one trading platform. This regulatory arbitrage is now backfiring.
Some cryptocurrency exchanges have taken steps to adhere to legal regulations more strictly and create more transparency. Others, however, are accused of engaging in illegal activities or offering services to customers in countries where they are not authorized to operate. In the case of Binance, the allegations of evading US regulatory authorities are just the latest in a series of controversies that have plagued the company in recent years.
Binance intending to bypass US authorities
The currently largest cryptocurrency exchange originally operated from centers in Asia, but over the years, its customer base spread across the globe, with around 20% of Binance users coming from the United States. Towards the end of 2019, US regulators signaled a forthcoming crackdown on unregulated offshore actors, and Binance CEO Changpeng Zhao ("CZ") was determined to prevent any legal action against the crypto exchange.
In order to avoid potential prosecution, Binance developed a plan to neutralize US authorities, as revealed in leaked messages with other executives. The strategy focused on building a purely American platform (Binance.US) that would license the technology and brand from Binance but would otherwise be completely independent from Binance.com, similar to competitors Coinbase and Kraken.
However, according to the Wall Street Journal, Binance and Binance.US were much more closely intertwined than the companies had disclosed. They had mixed personnel and finances and shared a subsidiary that bought and sold cryptocurrencies as a market maker. Binance developers in China also maintained the software code of the Binance.US wallets, which could have potentially given the offshore company access to US customer data.
Penalties for the violation of regulations
The Securities and Exchange Commission (SEC), the US Department of Justice, and the Commodities and Futures Trading Commission (CFTC) have been investigating the relationship between Binance, a company without a headquarters, and Binance.US since at least 2020, according to public filings. The crypto exchange has acknowledged some wrongdoing in the early years of the US division, and penalties could be imposed in the coming months.
"Binance.US was founded specifically to serve U.S. customers with products and services that adhere to U.S. rules and regulations. We acknowledge that we did not have adequate compliance and controls in place during those early years. We are a very different company today when it comes to compliance." - Spokesperson for Binance.US
Spokespersons for both companies have stated that the relationship between the firms is governed only by licensing agreements. According to them, US customer data is stored in the US, and the US division has never shared user data with Binance.com. The crypto exchanges' relationships with two market makers, who were under the leadership of Binance CEO "CZ" until a year ago, reinforce some similarities with FTX and Alameda Research.