Within a year, Binance’s trading volume had surpassed all competitors and CZ regularly told employees that it might become the first trillion-dollar company, according to a person who heard the remark. Still, Binance wasn’t public and CZ controlled the equity.
The company had other unusual characteristics. Binance workers lacked employee benefits, classified as contractors of an entity registered in the Cayman Islands, people familiar with the matter said.
Staff were also advised to keep any affiliations to Binance off professional websites like LinkedIn. Expenses were at times reimbursed from CZ’s personal bank account, according to two people familiar with the matter. When the BNB token was less liquid, some workers recall its price spiked just before paydays, resulting in fewer Binance-created coins to meet payroll.
U.S. Problem
By 2018, Binance had a developing U.S. problem. It wasn’t registered with the Securities and Exchange Commission, CFTC or Treasury Department yet nearly 40% of its business was in America. That’s fine if exchanges are just letting U.S. customers trade Bitcoin, which mostly falls outside regulators’ oversight. But Binance offers derivatives tied to tokens, according to its website, a no-no unless firms have proper authorizations.
Evidence separately emerged that criminals were flocking to Binance. After examining a number of transactions, Chainalysis Inc. concluded that more funds tied to illicit activity flowed through Binance than any other crypto exchange, according to a report that the blockchain forensics firm released in January 2020. Chainalysis, in a more recent report, said people can readily purchase accounts for Binance and other exchanges on the dark web.
Binance said in a Bloomberg story published in May that it adheres to anti-money laundering requirements in the jurisdictions in which it operates and works with firms like Chainalysis to improve its compliance systems.
References to hackers allegedly using Binance to move funds from ransomware attacks and other crimes have also popped up in U.S. court dockets filed by federal prosecutors. And Binance workers realized at one point that the company’s exchange was being used by Iranians, a possible violation of U.S. sanctions, two people familiar with the matter said. CoinDesk reported in November 2018 that Binance sent an email alert to customers who appeared to be based in Iran, demanding that they withdraw their assets.
“Regulators around the world are positioning their departments to scrutinize carefully exchanges, especially those with the reach, popularity and trading volume of an exchange like Binance,” said Tonya Evans, a professor at Penn State Dickinson Law School who teaches a course on cryptocurrencies. “Exchanges that turn a blind-eye to the regulatory concerns regarding money laundering, unregistered securities and payments for illegal activities, do so at their peril.”
Aiding Watchdogs
Binance says abiding by the rules is a top priority, a point underscored by its hiring of more than 200 compliance professionals in the past year. Last month, CZ took to Twitter to note that Binance was praised by Russian and Ukrainian law enforcement agencies for the company’s help in tracking down cybercriminals.
Binance later issued a press release detailing how it worked with several nations, including U.S. authorities, to investigate a criminal organization known as FANCYCAT that it said is linked to more than $500 million in ransomware damages.
CZ has also tried to emphasize Binance’s efforts to keep Americans off its main exchange. During the March Clubhouse session, he said Binance does an extensive analysis of blockchain transactions to prevent unlawful activity. “I believe we have the most advanced U.S. person-detection algorithms in the industry, not just the crypto industry,” CZ said, adding that the technology is so good that it sometimes inadvertently blocks customers who’ve merely visited the states.
Those restrictions didn’t stop Keif Atwood, a Little Rock, Arkansas-based investor whose handle is CryptoKeif. On June 15, Atwood traded on Binance for hours straight, live-streaming himself as more than 1,000 people watched on Twitch and cheered him on—at one point he fell asleep in his chair as the camera kept rolling. Atwood was buying and selling Bitcoin futures, products that should have been off-limits.
In an interview, Atwood said he learned how to access Binance by watching online videos in which traders explained how they used virtual private networks, or VPNs, to disguise their locations. Atwood added that he’s lost as much as $80,000, but was hoping to make some of it back through KeifCoin, a token he used Binance to create. “I am concerned about it, but I never had anyone to talk to about it,” Atwood said when asked if he’s worried that his trading may have violated rules.
U.S. Crackdown
Navigating the U.S. is something Binance has long grappled with. Harry Zhou, a former Wall Street lawyer, delivered a PowerPoint presentation to CZ and other executives in 2018 that detailed how they could create a U.S. entity but still let Americans access Binance’s unregulated services through shell companies and other means, said two people familiar with the matter. Binance, in court filings, said it never implemented the proposal. In 2019, Zhou helped incorporate Binance.US, a separate firm that caters to American clients, according to company filings.
A phone number for Zhou is no longer active and spokespeople for Binance and Binance.US declined to provide contact information for him.
In a sign that authorities are getting more aggressive, the U.S. Justice Department filed criminal charges last year against four executives at BitMEX, a rival cryptocurrency exchange. The allegations included failing to implement controls to prevent money laundering and terrorism financing, and allowing U.S. residents to unlawfully trade Bitcoin futures. Three of the men charged have pleaded not guilty while a fourth remains at large.
—With assistance from Joanna Ossinger.
This article was provided by Bloomberg News.