Messages and documents from within digital currency exchange Bitcoin show how the company tried to get around requirements that would bring it under the purview of U.S. regulators, The Wall Street Journal found.
Review of these materials from between 2018 and 2020, along with interviews with former employees, revealed how the company “set out on a plan to neutralize U.S. authorities,” the Journal reported.
Regulators have intensified their scrutiny of the $1 trillion crypto sector in the wake of recent events such as the collapse of crypto exchange FTX.
The world’s biggest crypto exchange, Binance has operated from hubs in China and then Japan. One fifth of its customers were in the United States, possibly attracting the attention of U.S. regulators. To avoid the regulators’ scrutiny, the company built an American platform, Binance.US, that would license Binance’s technology and brand but otherwise appear to be wholly independent of Binance.com. But, according to the Journal’s reporting, the two entities were entangled; as Binance software code was maintained by Chinese developers supporting Binance.US users’ digital wallets, Binance could have access to U.S. customer data. That would give U.S. regulators the authority to police the company’s previously opaque business.
The Securities and Exchange Commission (SEC) and the U.S. Department of Justice have been investigating Binance, the Journal reported, and a bipartisan group of U.S. senators—Elizabeth Warren (D-Mass.), Chris Van Hollen (D-Md.) and Roger Marshall (R-Kan.)—sent the company a list of questions to answer.
“Your companies’ apparent attempts at evading the enforcement of anti-money laundering laws, securities laws, information reporting requirements, and other financial regulations cast serious doubt on the stability and legitimacy of Binance and its related entities, and on your commitment to your customers,” they wrote. “Your actions have called into question the legitimacy of your business and the safety of your customers’ assets and raised concerns about the potential impact of these activities on the stability of the crypto market and the broader financial system.”
A September 2019 exchange on the messaging app Telegram demonstrated the closeness between Binance and Binance.US when a Binance staffer in Shanghai turned on trading for the U.S. platform a few minutes before it was meant to launch. The company founder and CEO, Changpeng Zhao, answered that the start was an operating mistake by “a guy here in Shanghai.”
Licensing agreements govern the companies’ relationship, spokeswomen for Binance and Binance.US told the Journal. The Binance.US spokeswoman said that U.S. customer data is stored in the United States and that Binance and Binance.US did not commingle their user data.
As Binance expanded in its first two years, 2017 and 2018, customers accessed Binance.com from anywhere in the world, not subject to the know-your-customer checks conducted by banks and brokerage firms. Private chats published by the Journal show the concerns by executives of possible exposure to legal action by U.S. regulators.
A 2018 presentation by an employee of a Binance-financed Bitcoin trading company proposed setting up an American business that would attract U.S. enforcement and regulatory-agency inquiries, protecting Binance itself from their attention. The presentation contained a section entitled “Insulate Binance from US Enforcement,” in which this business would be positioned as a separate operation with its own management and employees. Another section recommended launching “major PR efforts demonstrating US operation’s willingness to exceed SEC expectations and serve as an industry resource for the SEC” as a means of engaging regulators.
The Binance spokeswoman told the Journal that the presentation was rejected and never implemented.
When Binance.US was formed in 2019, it said it would offer only basic cryptocurrency trading. Platforms that trade derivatives in the United States must be registered with the Commodity Futures Trading Commission (CFTC) or the SEC. But private messages obtained by the Journal show that executives and officials tried to find ways around the strictures. In one exchange , the company’s compliance chief suggested that Binance retain the largest U.S. clients by having them “be creative and VPN” so that they would appear to be located in another country.
Three months later, Binance.US’s first chief executive, Catherine Coley, told the staff in a separate, Binance.US Telegram chat to send progress updates for her to forward to Binance’s then-CFO Wei Zhou and to CEO Zhao.
At one point, an employee tried to create a Google form for new Binance.US customers, but he was using an account for Binance and had difficulty changing the creator of the form from Binance.com to Binance.US. That led employee Harry Zhou to write that “It is particularly concerning here because this form has to do with opening client accounts. … If I were an AG, I would cite this as evidence that it is in fact Binance, an ‘unregistered foreign-based [money services business],’ onboarding the US clients.”
The company also tried to cultivate U.S. regulators, most notably Gary Gensler, then the former chair of the CFTC who was teaching at MIT in 2018 and 2019 when he was approached by a Binance employee about becoming an adviser to the company. Gensler was “likely back in a regulators seat if Dems win the 2020 election,” a Binance employee told colleagues on a chat.
Ella Zhang, then head of Binance’s venture investing arm, and Harry Zhou met Gensler in October 2018. He wrote in a chat: “I observe that while Gensler declined advisor-ship, he was generous in sharing license strategies.”
Gensler met with Binance’s founder and CEO Zhao in March 2019 in Tokyo, a source close to Gensler told the Journal, and interviewed him over video the following summer for a cryptocurrency course at MIT.