Thanks to a wave of disgruntled customers and enthusiastic regulators, Binance has been garnering all the wrong types of attention over the past 24 months.

Bloomberg reported in March that the firm was under investigation by the US Commodity Futures Trading Commission, with the regulator seeking to determine whether cryptocurrency derivatives were bought and sold by US citizens on the Binance platform. This was followed by another report in May that the US Justice Department and IRS were also investigating the Group.

Around the same time, German watchdog BaFin issued a warning to the exchange for offering securities-tracking digital tokens without publishing an investor prospectus. 

In June the FCA published a warning about doing business with Binance’s UK firm Binance Markets, noting that no entity in the Binance Group holds any form of UK authorisation, registration or licence to conduct regulated activity in the UK. More generally, the warning followed, “be wary of adverts online and on social media promising high returns on investments in cryptoasset or cryptoasset-related products.”

By early July Barclays suspended UK card payments to Binance, citing the FCA warning to customers. In the same week, SEPA payments to Binance were halted and the exchange brought a new compliance director on board, poaching eToro’s Jonathan Farnell.

August saw news that London’s High Court ordered the exchange to identify hackers and freeze their accounts after AI company Fetch.ai alleged $2.6million of its assets were stolen.

A Fetch.ai spokesperson explains: “Fetch.ai’s account on Binance was hacked and a sum of $2.6 Million was wrongfully traded by an unidentified hacker. In order to freeze the wrongfully traded assets and initiate investigation against the hack, Fetch.ai submitted a formal court order requesting Binance to assist in this matter. Fetch.ai is working closely with Binance and local law enforcement to identify the hacker and recover the wrongfully traded funds. In compliance with legal proceedings and due to the sensitive nature of the matter, Fetch.ai will keep the community posted on the status of the issue once investigation and case is complete.”

Despite increasing clampdowns on Binance’s operations across the globe, with soaring download numbers and unmatched trading volumes it remains the clear leader in its field.

Binance at a glance

• Founded in 2017 by Chinese-Canadian entrepreneur Changpeng Zhao, Binance is the world’s largest cryptocurrency exchange by volume.
• The exchange offers trading in over 500 cryptocurrencies and virtual tokens, it also offers services around trading, listing, fundraising and de-listing or withdrawal of cryptocurrencies.
• At the time of writing, it boasted a 24h trading volume in excess of $25 billion, significantly overshadowing its closest competitor, Coinbase, seeing just $3.5 billion in the same period.
• Founded originally in China, Binance is reported to be registered in the Cayman Islands, however regulators have denied this.

Where does the scrutiny of Binance originate?

Binance’s corporate governance may be best understood in the somewhat entertaining open letter penned by founder Zhao in July, in which he states “compliance is a journey.” The letter seems also to have foreshadowed the August departure of CEO Brian Brooks: “this vision won’t be possible without the support and guidance of regulators and policymakers who understand that innovation has the most long-term sustainable impact when tempered with frameworks to protect all participants.”

“We humbly welcome more constructive guidance to help us to grow better.”

“We humbly welcome more capable talents and experienced advisors to join us to build better.”

These are noble sentiments, but a little tough to swallow given the stories of frustrated customers across the world, and a questionable approach to reportedly evading rather than complying with jurisdictional regulations.

When questioned about Binance’s recent move to reduce the maximum leverage permitted on the platform for retail futures trading contracts to 20x from the previous peak of 125x, Zhao also told Techcheck that rather than being driven from a place to improve consumer protection, he likened this leverage rate as more of an advertising tool – along the same lines as cameras competing to have the highest number of pixels.

“With a lot more regulatory structure coming into this industry we just thought that this wasn’t really necessary anymore.”

So what led to Binance taking the role as unstoppable outlaw of the crypto world?

The Tai Chi document

In a recent Finextra long read, Arvin Abraham, UK Fintech lead attorney for McDermott Will & Emery explained that significant signs of potential regulatory and criminal malfeasance by Binance have been in the public record since at least 2018. At that time “Japanese regulators found that it was operating in the country without appropriate registrations to accept business from Japanese residents, ordering it to suspend operations.”

Abraham then points to the scandalous ‘Tai Chi’ document unveiled by Forbes which outlined Binance’s “elaborate corporate structure designed to intentionally deceive regulators and surreptitiously profit from crypto investors in the United States.”

The document was reportedly created by former Binance employee Harry Zhou and was presented to Binance’s founder Zhao in late 2018.

The document was essentially a rough strategy with a few (eyebrow raising) objectives:

1. Minimise the impact of US regulation - specifically mentioning the need to undermine “anti-money laundering and US sanctions enforcement” efforts which would detect criminal activity. One method of doing so was ‘distraction’, through participation in government programmes which set out to detect weaknesses in financial systems.
2. Insulate the firm from US enforcement. By keeping key personnel outside of US locations and registering US based companies (one such entity named Tai Chi), the exchange would attempt to shelter its true parent company from regulatory repercussions - labelled by Abraham as a classic ‘bait and switch’ to US regulators.
3. Calling for ‘strategic’ use of virtual private networks (VPNs) to obscure the locations of traders on the exchange in attempts to avoid scrutiny in jurisdictions unfavourable toward Binance.

In June this year Binance was subject to enforcement actions by the Securities Commission Malaysia for alleged illegal operations. It was ordered specifically to disable Binance.com and mobile applications in the country within 14 business days from June 26. It was also told to stop media and marketing targeting Malaysian consumers and to restrict access to Binance Telegram group.

Crackdowns have also been seen in Thailand, India, and Japan where regulators issued similar warnings to the exchange tied to offering services in countries without the necessary authorisation.

May 19th market crash

The crash on May 19th saw Bitcoin’s dollar price drop by more than 30%, while Ethereum plunged by over 45%. The sell-off was largely driven by a cluster of negative news including the dissipation of public support from once devout proponents like Elon Musk, a clampdown on crypto in China, and wider regulatory concerns – particularly those expressed by the SEC’s new commission chair Gary Gensler.

This was not only one of the largest one-day price declines in cryptocurrency history, but also one of the largest-ever liquidations of traders’ positions.The entire platform crashed at 13.30 UTC, re-opening just after 15.00 UTC by which time crypto prices had recovered to pre-crash levels and short positions were no longer in the money.

Carol Alexander, professor at the University of Sussex, is determined to lift the lid on what she (and many supporters) believes may have been a cover up of client liquidations during the crypto crash.

“On 19 May the BTC/USDT price fell by more than 30 percent, yet Binance reported liquidations of merely 24 million USDT,” explains Alexander in her latest piece on the saga.

“I do not believe these data because on 19 May other exchanges together reported $8.6bn liquidations, Binance is larger than all the other exchanges combined, the trading volume on Binance’s BTC/USDT perpetual alone reached almost $100bn on May 19, and there are numerous press reports of huge losses experienced through liquidations on Binance on 19 May,” she adds.

She argues that the May 19th crash would have fully depleted Binance’s insurance fund, yet, the exchange reported that it was not. “In fact, if the futures platform has not closed, I believe that Binance would have had to subsidise its insurance fund by a billion USDT or more.” The findings, if true, make the crash of the Binance platform a little too convenient for comfort.

How is Binance recovering from Brian Brooks’ departure?

Brooks’ fleeting tenure as Binance CEO lasted just four months. Brooks stepped into the role in early 2021, following a stint as Acting Comptroller of the Currency and chief legal officer at Coinbase.

The former regulator was seen as a key tool for Binance’s expansion into the US. On August 9th he told his Twitter and Linkedin following that “despite differences over strategic direction, I wish my former colleagues much success.”

When asked what the next plans are for US expansion now that Brooks is no longer in the picture, Zhao told TechCheck that Binance’s “general strategy all over the world is to continue to hire ex-regulators, very senior people to augment our team, and we’ll continue to grow the compliance team very aggressively.”