It's been a bad start to the week for Binance, the world's largest cryptocurrency exchange by volume.
The platform is the subject of a barrage of bad news.
The Securities and Exchange Commission recently opened an investigation into whether Binance Holdings broke securities-related rules when the firm launched its native BNB token as part of an initial coin offering (ICO) five years ago, Bloomberg reports.
The SEC considers ICOs, which involve issuing virtual coins to raise money, as securities, which obliges their issuers to respect certain precise rules. Investigators are examining if the 2017 initial coin offering amounted to the sale of a security that should have been registered with the agency.
BNB token is the world's fifth-biggest cryptocurrency by market value, according to data firm CoinGecko.
"It would not be appropriate for us to comment on our ongoing conversations with regulators, which include education, assistance, and voluntary responses to information requests," Binance said in a statement.
It added that: "We will continue to meet all requirements set by regulators."
$2.35 Billion linked to Fraud, Hacks and Illegal Drug Sales
Back in July 2020, Binance founder and CEO Changpeng "CZ" Zhao wrote, in a blog post, that:
"In January 2019, we changed the wording around 'buy-backs' and the association with '20% profits.' This was done based on a third-party legal counsel advice indicating the potential for being misunderstood as a security is higher in certain regions, and it was not accurately describing the fact that we don’t need to 'buy-back'."
"We hold BNB as explained above. We explained this to inquiring reporters and our community back then."
But the most serious critique of Binance comes from a Reuters investigation published on June 6 that raises doubts about the platform.
Reuters reported that Binance processed $2.35 billion in transactions stemming from investment fraud, hacks and illegal drug sales. The transactions allegedly took place between 2017 and 2021, before Binance implemented measures to combat money laundering.
Reuters pointed to the hacking of Eterbase, with some of the proceeds being laundered through Binance by North Korean hacker group Lazarus, and Binance’s association with Russian-language drug mart Hydra.
Binance counters that only a very small percentage of crypto transactions involve illicit activities. It points to a report from blockchain analysis company Chainalysis, according to which, of all transactions made with cryptocurrencies in 2021, 0.15% were associated with some type of illicit activity.
By contrast, the United Nations estimates that between 2% to 5% of traditional fiat (cash), about $800 billion to $2 trillion in current US dollars, was associated with some type of illicit activity, according to the report.
"Crypto is incredibly transparent, infinitely moreso than the traditional cash economy, and this is well-documented. So you tell us where the real issue is regarding money laundering?" Binance wrote in a blog post response to the investigation.
In its post, Binance published exchanges with Reuters that took place between May 23 and May 30. On many points, we see that the two sides did not manage to agree, and in particular on the figures mentioned by Reuters. For example, according to Reuters, Binance was allegedly used to make and receive $780 million in cryptocurrency payments through a darknet site, called Hydra.
"You are most likely conflating 'direct' with 'indirect' exposure and including deposit data, which obviously a platform can only be held responsible for after a potentially illicit deposit is made," Binance told Reuters.
'We're Not Perfect'
"For instance, imagine a drug dealer walks up to your house and slips a bag of illicit material into your mailbox. You obviously couldn’t have prevented them from depositing the illicit materials, but it’s incumbent on you to do the right thing by contacting law enforcement and providing them the info they need to catch the perpetrator."
"That is why Binance has spent tens of millions of dollars hiring and resourcing the most sophisticated cyber forensics team on the planet, composed of more than 120 security and industry experts across the globe including former senior law enforcement investigators from the IRS, FBI, U.S. Secret Service, Europol, Dutch National Police, and agencies in the U.K., Singapore, and Brazil."
Subsequently, CZ also posted critical messages about the Reuters investigation on Twitter. Messages from the CEO suggest that he is aware of the negative consequences this investigation may generate.
"We're not perfect. We've made mistakes in the past, just as you’d expect from a young company operating in a disruptive new industry," CZ said. "But that doesn’t give them [Reuters] the right to ignore their obligations to tell an objective story. It doesn’t even have to be balanced. Just fair."
Binance is already the subject of several investigations in the United States and around the world. The U.S. Commodity Futures Trading Commission (CFTC) began an investigation of the exchange’s trading practices last year.
Binance Markets, its United Kingdom branch, was ordered by the Financial Conduct Authority to cease activities in 2021.
The company is not listed on the stock exchange at the moment. CZ has seen his personal fortune, which is tied to his stake in Binance, melt by almost $80 billion since January, according to Bloomberg Billionaires Index. The collapse is due to the crash of the crypto market. His net wealth is currently estimated at $16 billion as of June 8.
