Binance is feeling the regulatory walls closing in as authorities question the reputational damage of appearing to approve of the controversial digital asset exchange.
Last week, the Australian Securities & Investments Commission (ASIC) announced that it had cancelled the Australian financial services (AFS) licence held by Oztures Trading Pty Ltd trading as Binance Australia Derivatives.
In February, ASIC launched a “targeted review of Binance financial services business in Australia, including its classification of retail and wholesale clients.” On March 29, ASIC issued a notice of hearing under s915C of the Corporations Act 2001 “to consider whether ASIC should cancel or suspend” Binance’s financial services license.
That section allows ASIC to cancel or suspend licenses based on a variety of regulatory shortcomings, including failure to comply with license obligations; having “reason to believe that the licensee is likely to contravene their obligations;” the licensee failing to satisfy ‘fit and proper person’ criteria; and whether the license application contained false material or omitted a material matter.
In February, Binance abruptly announced that it had “incorrectly classed” around 500 of its Aussie derivatives traders as ‘Wholesale Investors’ (or ‘qualified investors’ in U.S. parlance). These traders had their positions immediately closed and Binance promised to “fully compensate them for their losses incurred while trading derivatives on Binance.”
ASIC chairman Joe Longo stated that it is “critically important that AFS licensees classify retail and wholesale clients in accordance with the law.” Among other things, retail clients trading in crypto derivatives have the right to pursue external dispute resolution through the Australian Financial Complaints Authority.
ASIC stated that the license cancellation “was effected today in response to a request to cancel received from Binance yesterday.” Binance boss Changpeng ‘CZ’ Zhao tweeted his claim that the cryptocurrency exchange opted to “withdraw” their license because “the platform have [sic] exactly 104 users.” Which is basically CZ’s face-saving version of ‘you can’t fire me, I quit,’ plus it temporarily relieves Binance from allowing ASIC greater insights into its operations.
Binance’s existing Australian derivatives clients won’t be able to open new positions or increase existing positions as of April 14, while all positions will be closed by April 21. Binance remains under obligation to report suspect activity to the Australian Financial Complaints Authority until April 8, 2024.
Binance’s Aussie derivatives license was acquired in traditional company fashion, by buying a dormant company (Oztures) that held an Aussie license. Binance’s mainstay exchange—which the company claims has over a million users—previously backed into Australia by acquiring the Australian-licensed AFS Markets.
ASIC’s Longo added that the regulator’s “targeted review of these matters is ongoing, including focus on the extent of consumer harms.” The announcement cited the civil lawsuit filed against Binance by the U.S. Commodity Futures Trading Commission (CFTC) for “calculated” violations of U.S. regulations. ASIC also cited Binance facing “regulatory warnings and action” from regulators in seven other jurisdictions.
Dubai-bye-bye
The United Arab Emirates (UAE) wasn’t on ASIC’s list but that may change soon enough. Bloomberg reported that the UAE’s Virtual Assets Regulatory Authority (VARA) is asking Binance to submit more detailed information on its ownership structure, governance and auditing procedures. VARA is reportedly seeking such information from all its crypto licensees, which include Crypto.com, GC Exchange, Hex Trust and Komainu.
Binance told Bloomberg it had “disclosed all necessary answers to VARA on a proactive basis” but Binance’s disclosures to regulators in other jurisdictions have traditionally been neither complete nor transparent.
The UAE is reportedly keen to get its name off the Financial Action Task Force (FATF) ‘jurisdictions under increased monitoring’ list. The FATF’s most recent report in February urged the UAE to increase both the number and quality of suspicious transaction reports filed by local operators and to demonstrate “a sustained increase in effective investigations and prosecutions of different types of [money laundering] cases.”
The fact that CZ has put down domestic roots in Dubai—he stated on an ‘Ask Me Anything’ session Thursday that he was “not just visiting. This is my base”—offers a unique test of his famously nomadic modus operandi.
In a June 2019 internal meeting detailed in the CFTC suit, CZ—who likes to claim that Binance’s HQ is wherever he is at the moment—told senior managers that “the main reason [Binance.com] does not land anywhere” is to “keep countries clean” of violations of local laws.
When Irish eyes are rolling
The CFTC suit named two Ireland-based units of Binance’s sprawling corporate cabal—Binance Services Holdings and Binance Holdings IE—both of which listed CZ as director. The Irish Times reported that documents filed with Companies Registration Office in Dublin show that CZ has resigned his seats at both companies.
While the documents were filed this week, they show CZ’s resignations occurred on January 18. A Binance spokesperson claimed CZ “proactively resigned … to help focus his attention on leadership of the Binance group as co-founder and CEO.”
CZ’s Irish directorships have been assumed by Kaiser Ng, Binance’s senior VP of finance. Until January 2022, Ng was CFO at U.S.-based exchange Kraken. In 2019, Nathan Runyon, one of Ng’s former underlings sued Kraken after he claimed he was fired by Ng for refusing to fabricate financial documents. Ng was personally named in the suit.
Runyon’s allegations were later cited as sparking a federal probe into whether Kraken allowed Iran-based customers to trade on the exchange in violation of economic sanctions. Last November, Kraken reached a $362,000 settlement with the U.S. Treasury Department’s Office of Foreign Assets Control based on these claims.
Six months after Ng joined Binance, Reuters reported that the exchange had also allowed Iran-based customers to trade digital assets. As tempting as it is to draw a straight line between Ng’s arrival and Binance’s misdeeds, the latter’s sanctions-flouting dates back to at least 2019.
There goes the Sun
CZ famously declined to bail out Sam Bankman-Fried’s FTX exchange last year after the extent of Sam’s dipping into his customers’ deposits became too great to hide. Reports emerged this week that CZ similarly declined to rescue another struggling crypto bro whose dodgy reputation nearly matches that of CZ and SBF.
On Wednesday, CoinDesk reported that Binance turned down an offer from Tron founder Justin Sun to buy out his stake in the Huobi exchange. Binance reportedly dismissed Sun’s offer based on Huobi’s extensive ties to China, a link that Binance is keen to downplay when it comes to its own operations.
In the past two weeks, both CNBC and the Financial Times reported that Binance continued to service mainland Chinese customers long after the country made it clear that this was illegal. CZ responded with his usual mix of bluster and bafflegab but clearly doesn’t want to pour gas on this fire by adding Huobi to his portfolio.
Sun reportedly acquired a controlling stake in Huobi last year, although in typical Sun fashion he avoided confirming it publicly. In response to the CoinDesk report, Sun issued a highly specific denial that he’d made any such proposal to CZ “in the past week or so.”
While rumors of the two exchanges’ shared ownership have circulated for years, CZ recently drew closer to Sun by replacing Binance’s proprietary stablecoin BUSD (after the U.S. government moved to halt its further issuance) with the Tron-issued stablecoin TUSD. The latter has seen its market cap double over the past month while BUSD’s has been cut in half over the same period. Seems that when one unbacked stablecoin scam door closes, another opens.
This really isn’t Sun’s year, as he’s been unceremoniously ousted from his ceremonial position as Grenada’s Ambassador to the World Trade Organization. That public announcement closely followed Sun being hit with charges of selling unregistered securities by the U.S. Securities and Exchange Commission (SEC), although reports claimed that Sun’s ambassador gig actually concluded following local elections last June. With Sun’s perceived ‘diplomatic immunity’ no longer valid, he apparently feels the need to raise some cash and lower his profile.
Easy as 1-2-3
Meanwhile, the three unnamed U.S.-based institutional clients that the CFTC fingered for doing business with Binance have been officially outed. Bloomberg reported Wednesday that the three firms are Radix Trading (‘Trading Firm A’ in the CFTC suit), Jane Street (‘B’) and Tower Research (‘C’).
The CFTC hasn’t (yet) alleged any criminality by the firms, but cited them as examples of how Binance worked to allow U.S.-based VIP clients to circumvent restrictions on accessing Binance.com—usually via virtual private networks (VPN)—despite their proximity to the U.S.-registered Binance.US sock puppet exchange.
The three firms often used offshore entities to trade with Binance.com, but the CFTC noted that, in Radix’s case, the Chicago-based firm was “the real economic party to its trading activity on Binance.” When Radix ‘outed’ itself to Binance as a U.S. company in 2020, Binance’s VIP team instructed Radix to open a new account on the exchange using a Netherlands-based shell company that the CFTC says was “100% capitalized” by Radix.
Radix was previously named in a Wall Street Journal report late last month but co-founder Benjamin Blander told Bloomberg that he didn’t believe his firm had broken any laws in its dealings with Binance. Radix is reportedly cooperating with the CFTC’s investigation.
Similar dodges occurred at the other two firms, with Binance always in on the game and advising the firms how to migrate and structure accounts to avoid future hiccups.
The New York-based Jane Street has become infamous for having given SBF his start in the world of quantitative trading. Other Jane Street alumni also appeared in the FTX drama, including former Alameda Research CEO Caroline Ellison. Two former Jane Streeters also formed the Modulo hedge fund, to which SBF transferred over $400 million after his crippled crypto empire began circling the drain. (The funds have since been returned via FTX’s bankruptcy proceedings.)
Banking on disaster
One of the more jaw-dropping revelations from CZ’s AMA session was his suggestion that Binance was considering buying its own bank to ensure consistent fiat on/off-ramps. CZ said Binance is “talking with different regulatory bodies about applying for banking licenses, buying banks, and also operating full depository banks. So one-to-one reserves; no lending. We’re exploring. We have people working on these initiatives.”
You have to give it to CZ. His capacity for arrogance and denial is so staggeringly vast that, if he was in the band on the deck of the Titanic as it was sinking, he wouldn’t have suggested the band keep on playing; he’d have suggested they learn an entire new set of tunes then and there. (He’d also probably confess that he was lip-syncing his part the whole time.)
But getting into banking means CZ’s in for a rude awakening that will make the icy North Atlantic waters seem comparatively inviting. In this current climate, when traditional banks that are household names are coming under increased regulatory scrutiny, the idea of any banking regulator reading the CFTC suit and thinking CZ was a good fit for a banking license is beyond laughable.
This week, a rumor briefly circulated online that Interpol had issued a Red Notice alerting global law enforcement to detain CZ on sight. The rumor turned out to be false, but the fact that everyone appeared to accept that it was possible—even likely—speaks volumes. Binance is a menace to any financial system it touches, so the less it touches, the better.
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