Binance Holdings Ltd. is being investigated by the Justice Department and the Internal Revenue Service, entangling the world's largest cryptocurrency exchange in U.S. efforts to root out illicit activity that has thrived in the volatile but largely unregulated market.
Officials investigating money laundering and tax offences have requested information from individuals with knowledge of Binance's company as part of the investigation, according to people with knowledge of the matter who requested anonymity because the investigation is ongoing. Binance, led by Changpeng Zhao, a charismatic tech executive who enjoys promoting tokens on Twitter and in media interviews, has surpassed competitors since its inception in 2017.
The business, like the industry it serves, has thrived largely beyond the purview of government regulation. Binance was founded in the Cayman Islands and has an office in Singapore, but the company claims to lack a single corporate headquarters. Binance earned more funds connected with illegal activity than any other cryptocurrency exchange, according to Chainalysis Inc., a blockchain forensics company whose clients include federal agencies throughout the United States.
In an emailed statement, Binance spokeswoman Jessica Jung said the company "takes our legal responsibilities very seriously and works constructively with regulators and law enforcement," but "doesn't comment on specific matters or inquiries." “We worked hard to create a strong compliance programme that combines anti-money laundering principles with financial institution tools for detecting and reacting to suspicious activity.”
The Justice Department and the Internal Revenue Service both declined to comment.
Officials in the United States have expressed concern that cryptocurrencies are being used to conceal illegal transactions such as theft and drug deals, and that Americans who have made a fortune betting on the stock market's rapid rise are avoiding paying taxes. Such concerns have hampered the industry's mainstreaming, even as Wall Street embraces Bitcoin and other tokens amid a global investing frenzy.
The cyber-attack against Colonial Pipeline Co. earlier this month, which resulted in fuel shortages across the Eastern United States, is the latest example of what's at stake. Colonial charged a nearly $5 million ransom in untraceable cryptocurrency to Eastern European hackers within hours of the breach, according to Bloomberg News, citing two people familiar with the situation.
Bitcoin's losses worsened on Thursday after Bloomberg posted on Binance's investigation.
Although the Justice Department and the Internal Revenue Service investigate possible criminal offences, the details of what the departments are looking at are unknown, and not all investigations result in charges of misconduct.
Prosecutors from the Justice Department's bank integrity unit, which investigates complicated cases involving financial institutions, and agents from the US Attorney's Office in Seattle are among those involved. IRS agents have been investigating Binance for months, with their inquiries indicating that they are looking into the actions of both its consumers and staff, according to another source.
According to Bloomberg in March, the US Commodity Futures Trading Commission is looking into whether Binance allowed Americans to make illicit trades.In that case, authorities are investigating whether Binance allowed investors to buy derivatives linked to digital tokens. Residents of the United States are prohibited from buying such goods unless the companies selling them are licenced with the CFTC.
Binance, according to Zhao, strictly adheres to US regulations, blocks Americans from its website, and employs cutting-edge technology to analyse transactions for signs of money laundering and other illegal activity. According to crypto trade publications, the firm warned last year that US residents would have their accounts frozen if they were found trading.
The investigations are in response to a Chainalysis study on illegal activity involving digital tokens. In 2019, the firm tracked $2.8 billion in Bitcoin that criminals allegedly transferred to trading platforms. According to Chainalysis, approximately 27% of the funds, or $759 million, ended up on Binance. Binance responded by saying that it complies with all anti-money laundering laws in the jurisdictions in which it operates and that it develops its programmes with partners including Chainalysis.
Authorities in the United States have been cracking down on exchanges for breaking financial crime prevention rules, using the websites used by terrorists and hackers as justification. The government recently obtained a court order requiring Kraken, a San Francisco-based exchange, to reveal its US clients.
In October, federal prosecutors in Manhattan charged the founders of BitMEX, a Seychelles-based exchange, with violating the Bank Secrecy Act by allowing thousands of US customers to trade while publicly claiming to limit their access. The charges included failing to register as a futures broker with the CFTC and failing to have effective anti-money laundering controls. Three BitMex employees have pleaded not guilty, and a trial date has been set for March 2022. One is also on the loose.
With the United States circling, Binance has increased its presence in Washington and hired a former Treasury Department official and top white-collar defence lawyers to represent it in legal cases and regulatory matters. In March, the firm hired former US Senator Max Baucus, a Democrat from Montana, to advise it on policy and government relations.
Binance collaborated with BAM Trading Services Inc. in September 2019 to launch Binance.US, which caters to American customers. Brian Brooks, who headed the Office of the Comptroller of the Currency during the Trump administration as a top banking regulator, was appointed CEO of Binance.US earlier this month.
Despite the recruiting frenzy, the organisation has been linked to illegal activity in the United States. Two Florida men were arrested in February on charges of operating an online fentanyl distribution ring, with one of them allegedly depositing the proceeds in a Binance account. In the same month, the Justice Department requested the seizure of $450,000 in cryptocurrency linked to ransomware attacks on many U.S. businesses and kept in a Binance account held by a 20-year-old Ukrainian national. In neither legal action, the government accused Binance of misconduct.
The Justice Department, along with the CFTC, is likely to investigate Binance's efforts to hold US citizens off its trade. Prior to the launch of Binance.US, Americans were advised to use a virtual proxy network, or VPN, to hide their positions while trying to access the exchange, according to a source familiar with the company's operations.
According to Jung, the Binance spokeswoman, the exchange has never allowed U.S. citizens to circumvent its rules by using VPNs, as doing so would be “contrary to our company's principles.” In January, Zhao tweeted that even if Americans try to communicate via one of the networks, Binance's security systems would block them.
“We introduced strong access controls that have been externally audited and are under constant review and evaluation by Binance to ensure that the relevant restrictions are in place and are effective,” Jung said.