Binance Saga Shows No Hiding Place For Businesses With Weak Compliance

Tom Burroughes Group Editor 27 November 2023

Binance Saga Shows No Hiding Place For Businesses With Weak Compliance

Last week's US punishment of the crypto exchange, adding to a run of stories about problems in this industry, highlights how there's no hiding place for businesses deemed to skirt around the law.

Bankers and regulatory experts said compliance controls are at a premium in the sector following last week’s $4.3 billion punishment of the Binance exchange. The proposed settlement and remedies are subject to court approval.

Changpeng Zhao, chief executive of Binance, last week pleaded guilty to laundering charges by the US Department of Justice, Financial Crimes Enforcement Network, Office of Foreign Assets Control and Commodity Futures Trading Commission (CFTC), according to a statement. As part of the ruling, Zhao must pay $150 million to the CFTC.

In its statement, the CFTC said Zhao and his various companies agreed to a proposed consent order for permanent injunction, civil monetary penalty, and equitable relief which, if entered by the US District Court for the Northern District of Illinois, will resolve all charges the CFTC brought against Zhao and Binance for “knowingly disregarding provisions of the Commodity Exchange Act” to operate an “illegal digital assets derivative exchange.”

The saga, coming within weeks of the conviction of FTX chief executive Sam Bankman-Fried for fraud, shows how authorities, particularly in the US, are determined to crack down on what they see as an unruly sector that is prone to dishonesty and slack practices.

“The Binance settlement with US regulators underscores the need for adequate compliance controls. Binance ignored their legal obligations from regulators and didn’t have proper compliance controls in place, thereby allowing money to flow to criminals,” Keith Berry, general manager, financial crime and compliance, Moody’s Analytics, said in a comment on the case. “The rapidly growing yet relatively nascent crypto market has increasingly been targeted and implicated in financial crime due to its borderless nature, which creates the perception that it can be used to obfuscate illicit activities.”

“However, the nature of crypto transactions is that they are traceable and transparent, due in part to the blockchain. Following the money should mean crime can be tackled successfully. And many crypto companies choose to operate with high standards of due diligence and know your customer checks,” Berry added. 

JP Morgan has reportedly argued that the US action against Binance “would see significant reduction of a potential systemic risk emanating from a hypothetical Binance collapse,” (source: Coindesk, 24 November). 

The action reinforces an “ongoing shift towards regulated crypto entities and instruments which has been the objective of US authorities post FTX’s collapse,” the US bank said.

This news service has chronicled how wealth management, cryptocurrencies and digital assets intersect. Among the challenges is a patchwork of different regulatory regimes around the world. In Switzerland, for example, there are concerns about how FINMA, the federal regulator, intends to police the practice known as “staking”. 

In June, this news service exclusively reported that a study of 50 wealth managers holding a total of $1.026 trillion of assets found that 94 per cent of them think that digital assets – a term covering entities ranging from bitcoin to “smart contracts” – can diversify portfolios. On the downside, a number of respondents worry that red tape prevents them from getting access, according to Laser Digital, a digital assets arm of Nomura. 

In its statement, the CFTC said the proposed consent order requires Binance to disgorge $1.35 billion of ill-gotten gains and pay a $1.35 billion civil monetary penalty to the CFTC and, as stated above, also obliges Zhao to pay a $150 million civil monetary penalty to the CFTC. 

“In addition, the order permanently enjoins Zhao and Binance from willfully evading the CEA; acting as an unregistered futures commission merchant (FCM); operating an illegal digital asset derivatives exchange; and failing to have adequate know-your-customer compliance controls among other illegal activities in the order,” it said. “The defendants must also certify that certain remedial measures have been implemented and Binance must further certify it will take certain remedial steps in the future, including no longer allowing `sub-accounts’ to circumvent Binance’s newly-implemented compliance controls,” the US regulator said. 

The regulator last week submitted the proposed consent order to US District Judge Manish Shah for review.

The US Department of Justice and the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) announced charges against Binance Holdings.

“Binance’s activities undermined the foundation of safe and sound financial markets by intentionally avoiding basic, fundamental obligations that apply to exchanges, all the while collecting approximately $1.35 billion in trading fees from US customers,” CFTC chairman Rostin Behnam said. “American investors, small and large, have demonstrated eagerness to incorporate digital asset products into their portfolios. It is our duty to ensure that when they do so, the full protections afforded by our regulatory oversight are in place, and that illegal and illicit conduct is swiftly addressed.” 

“Today’s [24 November] proposed resolution of the CFTC’s action against Zhao and his company makes clear that Binance miscalculated the cost of its corporate strategy of regulatory evasion,” CFTC’s director of enforcement Ian McGinley, said.

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