Binance is the world’s largest cryptocurrency exchange by daily trading volumes. The company has blazed the trail for years as far as digital assets are combined, providing access to different services and opportunities for traders to earn. Finally, however, there seems to be a probe that could rock it to its foundations.
Earlier this month, news sources reported that the Internal Revenue Service (IRS) and the Department of Justice (DOJ) were investigating Binance over possible money laundering and financial crimes.
Everyone Wants to Know What is Going On
According to a report from Bloomberg, the investigation is tied to tax offenses and money laundering accusations. Officials handling both crimes have reportedly taken a particular interest in Binance over the past couple of months, with possible allegations and charges ready to go.
The report added that the two government agencies were looking into Binance Holdings Ltd., the exchange’s holding company, and allegations of illegal activity on its platform. Officials have been gathering information from company employees and customers, but there is no significant allegation or accusation just yet. The agencies were reportedly tipped off by customers who asked to be anonymous.
Illegal Derivatives Trading
Binance has always had a bit of a weird story. The exchange was founded in 2017, and it was incorporated in the Cayman Islands - although it also maintained an office location in Singapore. According to the Bloomberg report, the Commodity Futures Trading Commission (CFTC) has been investigating whether Binance made it possible for American traders to make illegal trades via its platform.
The CFTC investigation has reportedly been looking into whether Binance allowed American traders to buy derivatives linked to cryptocurrencies. Ideally, Americans would only be able to purchase these derivatives through a CFTC registered broker. However, Binance has said in the past that it restricts Americans from making any illegal transactions on its platform, adding that it would freeze the accounts of anyone found to be in violation of the rule.
Still, the proof has been damning. Chainalysis, one of the top analytics firms in the crypto space, reported that $2.8 billion worth of criminal transactions involving Bitcoin was conducted last year. Of that amount, about $756 million was conducted through Binance.
A spokesperson for Binance pointed out that the company won’t comment on any inquiries or matters involving the courts. However, they take these matters seriously.
“We have worked hard to build a robust compliance program that incorporates anti-money laundering principles and tools used by financial institutions to detect and address suspicious activity. We have a strong track record of assisting law enforcement agencies around the world, including in the United States,” the spokesperson said.
Changpeng “CZ” Zhao, Binance’s chief executive, also said on Twitter that the company will be working with law enforcement to fight “bad players,” as opposed to being the subject of an investigation.
The Tai Chi Entity
Binance has always claimed to block U.S. users from entering its site. However, a Forbes article from last October claimed that CZ had encouraged users to simply evade sanctions with a Virtual Private Network (VPN). As Forbes reported, a document detailing an unnamed U.S.-based company called the “Tai Chi entity” - a nod to the Chinese martial art that aims to “yield and overcome.”
Forbes added that Binance.US, Binance’s American-facing annuity, would essentially serve as a front for this “Tai Chi entity” and allow derivatives trading. The Tai Chi document, which Forbes claimed that all Binance senior executives saw, contained a plan to execute an elaborate bait and switch. Regulators would be distracted with a ploy to feign compliance, while Binance will implement measures to move revenue in the form of licensing fees and others to its parent company, Binance Holdings.
At the same time, the company will look into ways to teach customers how to use VPNs to evade sanctions and gain access to derivatives trading.
Regulators Clamp Down on Illegal Derivatives Trading
The Binance saga is just the latest in efforts from regulators to tackle illegal derivatives trading in the crypto space. Back in March, Singapore-based crypto derivatives exchange ByBit announced that it would be suspending services for its U.K. customers. The announcement came after the Financial Conduct Authority (FCA) banned crypto derivatives trading.
ByBit told customers that they would have until March 31 to close their positions and withdraw their funds. The exchange added that it hoped to continue working with regulators to see the possibility of continuing operations in the country.
“We request your immediate cooperation in this matter. We regret this situation, and will seek dialogue with regulators to explore options. We hope to be able to earn the privilege to serve you again in the future," stated the announcement.
Other regulators may soon begin looking into crypto exchanges and trading platforms about their activities and the rules they could be violating.