Crypto laid bare: What U.S. federal charges against Binance’s CEO expose about the industry’s deceit

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At this point there is no more guessing, and no more sugar coating, what the cryptocurrency titans were really up to. Sometimes it was outright fraud. In others it was, at best, outlandish naiveté fuelled by Silicon Valley’s oft-stated desire to “move fast and break things” – even if that meant moving money in and out of countries sanctioned by the United States.

This week the U.S. government hit Binance, the largest crypto exchange of them all, with a US$4.3-billion fine and laid federal charges against founder Changpeng Zhao, who is Canadian. In its statement of allegations, the Justice Department accused Mr. Zhao of prioritizing Binance’s growth over compliance with U.S. law., and claimed he told employees it was “better to ask for forgiveness than permission.”

Because the crypto industry has had such a rough go over the past two years, with the total value of digital assets peaking at US$3.2-trillion in November, 2021, it is tempting to write it all off as one more COVID-19-era hallucination, just another meme-stock-style rally that is finally facing its reckoning. Cryptocurrency prices plummeted; FTX, led by one-time wunderkind Sam Bankman-Fried, has collapsed; and multiple companies have filed for bankruptcy protection, leaving their investors out tens of billions of dollars combined.

Yet the industry is far from fizzling out. The price of bitcoin, the best-known cryptocurrency, is rebounding, up 125 per cent this year, and a number of major financial institutions, including giant BlackRock Inc., have filed the paperwork to launch crypto exchange-traded funds in the U.S. The total value of digital assets may be down 56 per cent from its peak, but there’s still US$1.4-trillion invested.

It’s why the charges against Binance and its chief executive officer matter so much. There have now been federal charges laid against at least seven different crypto founders and CEOs, and Binance was the largest of them all, processing US$9.5-trillion worth of cryptocurrency trades in 2021 – roughly half of all transactions on crypto exchanges. This is about much more than a traditional bubble. Something much more nefarious transpired, and it was widespread.

According to U.S. authorities, the company willfully violated the Bank Secrecy Act and knowingly operated a financial platform without basic anti-money-laundering safeguards. The details are astonishing. “For years, Binance allowed users to open accounts and trade without submitting any identifying information beyond an email address,” the Justice Department said.

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Not only did Binance facilitate terrorist financing by failing to report transactions associated with terrorist groups, including Al Qaeda, the Islamic State in Iraq and Syria (ISIS) and Hamas’s Al-Qassam Brigades, it also facilitated the exchange of money made from ransomware attacks, websites devoted to selling child sexual abuse materials and large-scale hacks.

From 2017 to 2022, Binance willfully handled more than US$898-million in trades between U.S. users and residents of Iran, and permitted direct transfers of approximately US$106-million in bitcoin from Hydra, a once-popular Russian darknet marketplace that was frequently used by criminals, according to the U.S. government.

It wasn’t as though Binance executives didn’t have at least a general idea of what was going down, either. After the U.S. started cracking down on crypto exchanges in 2022, Binance tried to help some VIP clients avoid the government’s scrutiny. In one instance, Binance’s chief compliance officer tried to assist a client who held a U.S. passport by asking if someone else with a non-U.S. passport could re-register for them.

Despite the severity of these charges, Binance’s Mr. Zhao said in a statement Tuesday that he was “proud to point out that in our resolutions with the U.S. agencies they do not allege that Binance misappropriated any user funds, and do not allege that Binance engaged in any market manipulation.”

What he was subtly suggesting was that Binance was no FTX, whose founder, Mr. Bankman-Fried, was found guilty on seven criminal charges three weeks ago. Mr. Bankman-Fried was accused of stealing client money and moving it to his own trading firm, Alameda Research. He was also accused of manipulating the price of a FTT, a cryptocurrency he invented. The U.S. Securities and Exchange Commission has alleged that Alameda used FTT as collateral to borrow billions of dollars from outside lenders.

It is a bizarre benchmark to use – not fraud like FTX, just money laundering. Mr. Zhao is now likely to face jail time, and will be sentenced in February.

As for the charges against five other crypto CEOs, whose companies are Genesis Global, Voyageur Digital and Celsius Network, the allegations in each case vary, including falsely claiming that customers’ accounts were insured by the Federal Deposit Insurance Corporation (FDIC), to making loans that were undersecured and highly concentrated with one entity.

Whether or not those CEOs ever face jail time, many of their companies have already collapsed, and clients are out tens of billions of dollars. More than that, one crucial fact has also become clear: The crypto industry’s dreams of being viewed as a safe and sophisticated alternative to centralized banking have been shattered.