The largest crypto exchange by a wide margin, Binance, is having a bad week both optically and legally. On Monday, two stories emerged within a few hours of each-other, accusing Binance of wrongdoing.
First, it was reported that the SEC is investigating the exchange around whether the company should have registered the initial coin offering (ICO) of Binance Coin (BNB) as a security.
Then, an investigative report from Reuters was released accusing Binance for serving as a conduit for the laundering of at least $2.35 billion in illicit funds.
Either of these would have been damaging, but together, they may just be detrimental.
SEC Investigates Binance
First, some context… Binance is the world’s largest exchange and it’s native token, BNB, is the 5th largest token by market cap – currently at $47 billion. For those readers that weren’t around, 2017 was rampant with hype for ICOs. This hype led to some of the largest fundraising events in crypto history with projects raising hundreds of millions and even billions of dollars in days. The BNB ICO occurred at the height of this boom with Binance looking to entice crypto traders to use BNB by offering lower fees when using the exchange.
Although it was a time of fast money, over the past few years the SEC has begun taking action (some would argue inconsistently) against some of the world’s largest ICOs such as EOS (~$4.2 billion), BitConnect ($2 billion), Telegram ($1.7 billion), XRP ($1.3 billion), and AriseCoin ($600 million).
Although Binance only raised $15 million during the ICO, the size and scope of Binance today has made it a target for regulators.
Beyond BNB, the SEC is also probing the exchange around:
- Possible trading abuses by company insiders
- Whether the American arm of the exchange BinanceUS, is appropriately separated from the parent company
- A potential conflict of interest between Binance’s CEO, CZ, and market makers that the exchange uses
- Whether the exchange has conducted broker-dealer activities
Accusations of Complicit Money Laundering
Now, although the above section relates to investigations by federal task forces, the following are currently only accusations. With that being said, if the accusations are true, and if regulators do get involved, the blowback could be severe.
Although Binance has been accused of being complicit in money laundering in the past, this week Reuters published an investigation stating that the exchange was used to process at least $2.35 billion of illicit funds, including crypto stolen by the North Korean Lazarus group.
Lazarus group, which the US government sanctioned in 2019, has been accused of regularly engaging in cyberattacks designed to support North Korea’s weapons program. The group was behind the largest DeFi hack of all time, when it stole $600 million from Axie Infinity’s Ronin sidechain. Blockchain research firm Chainalysis estimates that Lazarus had stolen more than $1.75 billion of crypto by 2020.
Reuters claims that interactions between the exchange and illegal actors are part of a much larger picture of illicit activity. Besides laundering Lazarus group money, Reuters claims that “buyers and sellers on the world’s largest darknet drugs market, a Russian-language site called Hydra, used Binance to make and receive crypto payments worth $780 million.”
In response to Reuters’ investigation, Binance published a lengthy blog post attempting to debunk the claims.
Overall, it was a bad week for Binance, with everything occurring at the same time that the company is attempting to extend its reach into traditional businesses in the US with a $200 million investment into Forbes and committing $500 million to Elon’s bid to take over Twitter.