Industry Insights

Binance's Quagmire

By
Ospree Team
August 30, 2021

Has Binance encountered a regulatory slog because it refused to name a Headquarters?

In an interview in May, Changpeng Zhao, Binance founder and CEO famously known as "CZ", was asked where Binance's corporate headquarters is located. CZ became very philosophical, asserted that Binance was decentralized, and that various employees worked in various places. Binance had no headquarters.

National regulators were not amused. It turns out a company's location for its corporate headquarters remains a rather straightforward question: it is wherever the company has it registered. Beginning in late June and extending into July, Binance has withstood an onslaught of regulatory scrutiny. The UK's Financial Conduct Authority warned Binance Markets Limited is unauthorized to operate there, the EU's Single Euro Payments Area cut off Binance, at least temporarily, and Japan's Financial Service Agency clarified that Binance was not registered to do business within Japan. That was not all. Binance Group and Binance Holdings Ltd. experienced a setback when the Cayman Islands announced neither were authorized to operate within the country. The Monetary Authority of Singapore declared it was closely watching the regulatory developments surrounding Binance as Barclay's, Nationwide, Silvergate Bank, Faster Payments, Santander, and Clear Junction curtailed or cut off access to Binance (but not necessarily Binance.US)

Interestingly, Coinbase had taken a similar position to Binance in May and had declined to specify a locus for its headquarters. Nonetheless, things seem to be business as usual for Coinbase. So CZ's refusal to register a headquarters for Binance's various entities appears to account for less than all of the precipitation that would accumulate into the current maelstrom. Do the sudden regulatory woes amount to a coordinated assault on Binance, perhaps even a sally at the entire cryptocurrency market?

A significantly high number of businesses are not meeting the required standards under the Money Laundering Regulations, UK's Financial Conduct Authority (FCA)

The Binance centralized exchange is no small enterprise: it trades anywhere from $6 billion to $9 billion on average in real volume each day and holds nearly $15 billion in crypto reserve assets. And these figures do not account for Binance's distinct US exchange or its decentralized exchange offshoots. The wave of regulatory scrutiny against Binance counts as a substantial negative instance on the entire crypto market; it is 'FUD' on par with Elon Musk's reversal from Tesla's pledge to accept BTC as payment for its products, eclipsed only by outright and categorical prohibitions that Chinese provinces have imposed on Bitcoin mining activities themselves. As Binance goes, so too may crypto, especially as Binance's business practices could be a more conspicuous representative of the habits and practices of smaller centralized exchanges, to say nothing of decentralized finance.

A “significantly high number”

To the UK's FCA, Binance may well seem representative. In June, the leading regulatory body found that only five of ninety-five cryptoasset firms had come into minimal compliance with UK anti-money laundering and counter-terrorist financing standards. As a result, the FCA kicked the deadlines for the remainder out to March, 2022. Those ninety shelters under temporary registration rules that would have sunset on 9 July but for the extension through March. Coinbase, however, achieved registration status with the FCA in March of 2018, whereupon it boasted of becoming the first crypto-exchange with UK Faster Payments scheme support.

To the US Justice Department, Binance may seem exceptional. In the wake of the Colonial Pipeline extortion, in which Colonial poneyed up $5 million through crypto after hackers cut the flow of fuel, prosecutors from the Justice Department’s bank integrity unit probed Binance in connection with money-laundering and criminal financing. According to Chainalysis, Inc., more funds are associated with criminal activity shuttled through Binance than any other crypto exchange. This may be, at least partly, a consequence of Binance's considerable daily volume.

Regulatory concerns appear to arise from substandard anti-money-laundering protocols. Know-Your-Customer procedures remain as necessary as they are well-known. But they are far from enough. As the industry and regulations evolve to become more technology-driven, companies are forced to have a more advanced and comprehensive approach to mitigate the risk for wrong-doers to fund malicious activities or commit crimes; including money laundering and terrorist financing. 

Related content: US experts push back against charges that crypto poses Ransomware risks

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