Subpoenas issued in ongoing federal investigation of crypto exchange Binance

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Federal prosecutors are examining US hedge funds’ dealings with cryptocurrency exchange Binance as part of a long-running investigation into possible money-laundering violations at one of the world’s leading crypto companies.

In subpoenas sent in recent months, the U.S. Attorney’s office for the Western District of Washington in Seattle directed investment firms to hand over records of their communications with Binance, according to two people who each reviewed one of the subpoenas and spoke on condition of anonymity to discuss the confidential things.

The subpoenas, which have not yet been reported, do not necessarily mean authorities are likely to file charges, legal experts said. Prosecutors are still discussing a possible settlement with Binance and weighing whether they have enough evidence to indict the company, Reuters reported last month.

In an interview, Binance’s chief strategy officer Patrick Hillmann said the company talks daily with “almost every regulator around the world,” but declined to comment on the status of any U.S. investigation. Joshua Stueve, a spokesman for the Justice Department, also declined to comment.

The federal investigation into Binance comes at a time of deep uncertainty in the crypto industry. The collapse of FTX, a popular trading platform that authorities say was a years-long scheme to defraud investors, has raised concerns about free, largely unregulated online markets where digital assets are bought and sold.

Collapses of crypto companies are increasingly common and interrelated. Celsius, the crypto platform that collapsed in July, lent large funds to FTX subsidiary Alameda Research, which went bankrupt five months later. Binance founder and CEO Changpeng Zhao was an early backer of FTX, and his decision to sell off a large portion of the company’s digital tokens helped panic buyers and trigger bank deposits that FTX could not meet.

As attention turns to Binance, the world’s largest crypto exchange, Zhao piles on criticism of FTX and calls himself an advocate for stricter oversight of the industry. “Regulators will rightfully scrutinize this industry much, much harder, which is probably a good thing,” Zhao said at a conference in Indonesia in November.

Binance, however, has long frustrated financial regulators and law enforcement agencies, legal experts say. For years, Binance allowed users to buy and sell cryptocurrencies on the platform without identifying themselves, giving criminals an easier way to launder ill-gotten gains, said John Ghose, a former Justice Department prosecutor who specialized in cryptocurrency cases before leaving and joined by the private sector in 2021.

While he was a prosecutor, Ghose said, “Binance did not have a reputation as a responsible exchange.”

Binance’s Hillmann acknowledged that the company had flaws in its approach to regulatory compliance in the first few years of its rapid expansion. But more recently, he said, Binance has invested heavily in compliance programs, worked closely with law enforcement and developed new technology to catch criminals on its platform.

“Over the last two years, the company has completely changed its attitude,” Hillmann said. “Now that we have these resources, we’re simply one of the most proactive parties to identify, freeze and recover funds” laundered by criminals, he said, adding that he believes the overall incidents of criminal activity in cryptocurrency are decreasing.

A report last year by data provider Chainalysis found that cryptocurrency crime reached a peak in 2021, with illegal addresses receiving $14 billion, up from $4.6 billion in 2017, the year Binance was founded. Over the same time period, as cryptocurrency adoption progressed, the share of total transactions that were illegal decreased significantly, Chainalysis found.

Based on his experience with such cases, Ghose believes prosecutors are looking into whether Binance violated the Bank Secrecy Act, which requires financial institutions to verify the identities of their customers and report suspicious activity that could be a sign of money laundering, tax evasion or other crimes.

The recent subpoenas could mean prosecutors are scrutinizing Binance’s dealings with U.S. investors, said Ghose, who cautioned that he had no first-hand knowledge of the Binance investigation.

“The basis of those allegations is whether there are US buyers,” he said. “If there are US buyers, there are fees to avoid money laundering claims.”

As part of its response to growing regulatory interest, Binance has gone on a charm offensive in Washington. The company formed a global advisory board this fall that is chaired by Max Baucus, a former Democratic senator from Montana and the Obama administration’s ambassador to China, and that includes former Obama senior adviser David Plouffe. Last month, he joined the Chamber of Digital Commerce, a Washington-based crypto lobbying association.

Baucus and Plouffe did not respond to requests for comment.

Meanwhile, Binance.US, the Palo Alto, Calif.-based trading platform owned by Zhao, hired two new outside lobbying firms and launched a political action committee, allowing it to raise funds from its own ranks and distribute proceeds as contributions campaign, federal records show. And he hired former FBI agent BJ Kang, who led high-profile investigations of insider trading on Wall Street, as his first investigator.

A spokeswoman for Binance.US said the company does not currently plan to make any PAC donations.

Zhao is “trying to do the right thing” by meeting with government leaders, advocating for regulation and offering to bail out other struggling crypto companies, said Carlos Gomez, chief investment officer at Belobaba Crypto Asset Fund, which invests on the Binance platform. “He’s trying to position himself as a trustworthy person.”

But there are signs that Zhao, a crypto superstar with 8 million Twitter followers, is losing the trust of some of his customers. During one 24-hour period in December, investors withdrew $3 billion more from Binance than they deposited, the most net withdrawals in one day from the exchange since June, according to crypto analytics firm Nansen.

“People are afraid,” said Carol Alexander, a crypto expert and professor of finance at the University Sussex. “Whales,” or professional traders, “are starting to move away from Binance as regulatory pressure builds,” she said.

Zhao said Binance has more than enough reserves to cover all user deposits, a fact he said was backed up by a review by an independent auditor last month. “Any user could withdraw their assets from Binance and the company will continue to operate as normal,” a Binance spokesperson said in an email.

However, nine days after publishing its assessment, Paris-based auditing firm Mazars said in a statement that it was suspending work with crypto companies “due to concerns about how the public understands these reports”. Although Binance called its work with Mazar a “third-party audit,” the auditor said its assessment did not constitute a legally binding guarantee or audit opinion.

“Providing an audit opinion or assurance review of Binance’s reserves would significantly increase Mazars’ risk of being sued if it later turns out that Binance does not have enough cash to cover customers’ assets,” said Vivian Fang, an accounting professor at the University of Minnesota.

One challenge that US prosecutors will face will be proving that Binance is subject to US law at all.

Zhao founded Binance in China, but later moved the company to Japan and then to Malta. As of 2020, he claims that the company does not have a single headquarters. Binance Holding Ltd., the shell company that operates several Binance subsidiaries, is based in the Cayman Islands, but Zhao is also linked to dozens of business units around the world, including the British Virgin Islands, Singapore, Ireland, Liechtenstein and the Seychelles. , according to Reuters.

Industry experts attribute part of Binance’s success to its marketing of risky financial products, such as crypto derivatives, which allow users to make highly leveraged bets on speculative digital tokens such as dogecoin. Such products are generally banned in the US, and as of 2019 Binance banned Americans from accessing its main offshore exchange where derivatives can be bought and sold. (Binance.US, the U.S. exchange owned by Zhao, offers a more limited selection of investment options for U.S. residents and says it operates independently of the main Binance exchange.)

Binance’s website lists the US as one of its “restricted jurisdictions”, along with Cuba, the Crimea region, Iran, Syria and North Korea.

Some Americans claim to be able to bypass Binance’s restrictions. In Reddit discussion threads and YouTube videos, crypto traders shared tips on how to access the site from the United States. One content creator known as Full Value Dan published a tutorial on “How I beat Binance KYC” — short for “know your customer” verification laws — that involved setting up a fake business in Taiwan and obtaining residency documents from that country.

In the video, Full Value Dan said he used those documents to get approval to trade on Binance despite being a US citizen. He did not respond to a request for comment.

Hillmann, Binance’s CEO, said the company had tested this and other alleged loopholes to access its trading platform and found they didn’t work. “Today, no user in the US can access Binance.com” without committing fraud, Hillmann said.

In interviews with The Washington Post, several large crypto-focused hedge funds in the United States said they either do not use Binance or only have accounts on the more limited trading platform Binance.US. Some said they preferred Coinbase, a publicly traded crypto exchange that provides investors with quarterly financial reports.

The CEO of a New York investment firm, which manages $2.5 billion in assets, said his firm trades on the offshore exchange Binance through corporate entities it owns outside the United States. Although Binance strictly prohibits US citizens from trading, “corporations and citizens are very different,” said the executive, who spoke on condition of anonymity because he was concerned about raising his company’s profile with regulators.

Binance said it complies with all US laws and is assisting law enforcement agencies in their investigations. But he did not register Binance.com, his primary offshore exchange, with the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, a basic requirement to comply with the Bank Secrecy Act, records show.

Because Binance.com does not operate in the U.S., it does not believe it needs to register with the Treasury Department, Hillmann said. FinCEN spokesperson declined to comment.

That defense failed for others. Last year, the three co-founders of BitMEX, another offshore crypto exchange, pleaded guilty to “intentionally” failing to verify the identities of their customers. According to the indictment, BitMEX courted thousands of American investors, despite posing as a Seychelles-based exchange with no American users.

BitMEX agreed to pay as much as $100 million to settle the charges, and the co-founders were ordered to pay $10 million each. Arthur Hayes, who stepped down as CEO after the indictment, was sentenced to six months of house arrest and two years of probation.

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