The United States government is continuing to ramp up its crackdown on illegal cryptocurrency activity, this as yet another prominent exchange comes under fire after a string of recently-uncovered unethical activities. Both the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have stepped forward and taken separate legal action against illegal activity in the realm over the past month, sending Bitcoin and other notable currencies into a downward spiral after climbing to new annual highs just weeks before. This past week, the SEC filed a lawsuit against Binance and its billionaire founder and CEO Changpeng Zhao for their involvement in what has been termed as operating “a web of deception”, the move coming just two months after fellow U.S. regulator – the Commodity Futures Trading Commission (CFTC) – officially filed their own suit against Binance Holdings Ltd. and two of its key executives for knowingly violating U.S. trading and derivatives laws, alleging that the operators of the firm was engaged in nefarious financial activity while knowingly contributing to the active evasion of U.S. law.

            Reuters writes that the SEC has alleged, “Binance artificially inflated its trading volumes, diverted customer funds, failed to restrict U.S. customers from its platform and misled investors about its market surveillance controls.”² The SEC is also claiming that CEO Zhao was directly behind much of the nefarious activity at his firm, personally controlling customers’ assets and allowing them to blend, while also diverting investor funds “as they pleased.” Under Zhao’s leadership, Binance also created separate U.S.-based entities as part of an elaborate scheme to evade U.S. federal securities laws. Given that Binance remains grossly unregulated and is barred from conducting business with American clients directly, these entities were created as nothing more than a means to get around regulators without officially being under the ‘Binance’ company umbrella. Via these deceptive activities, Binance effectively created a loophole that allowed American customers to trade on their global platform under the stipulation that they withdrew less than two bitcoins per day. At the same time, these customers were not subject to any due-diligence checks, measures that aim to prevent money laundering and fraud.

            Over a three-year period and during the height of the crypto-craze, one of these subsidiary firms under Zhao’s command, Sigma Chain, was found to have engaged in “wash trading” which saw the company artificially inflate the trading volume of crypto asset securities on the Binance.US platform, creating millions of dollars in revenue in the process. These profits were ultimately found to have backed the purchases of several high-key luxury goods and products by unnamed actors (likely Zhao and his higher-profile associates), including the purchase of a multi-million dollar yacht.  

In response to the civil suit, Binance.US issued the following statement on Twitter last week:

“Today, the SEC filed civil claims against Binance.US in what is the latest example of regulation by enforcement under the current Commission. To be clear, we believe the lawsuit is baseless and we intend to defend ourselves vigorously” while adding that they have actively cooperated with the SEC from the moment the allegations were levied.²

            In wake of the turmoil surrounding this sector over the last year as well as proposed regulatory changes that could be incoming to harbor the crypto space on the global scale, representatives from the U.S. Justice Department issued a statement noting that they intend to continue the crackdown on illegal crypto activity using their own unique approach. Eun Young Choi, the director of the National Cryptocurrency Enforcement Team (NCET), vowed to target exchanges that allow “criminal actors to easily profit from their crimes and cash out” a trend she acknowledged has grown significantly over the past four years alone.¹ The goal is to create an environment where no one can beat the system by taking part in financial crime and simply walking away before attention is attracted. As the head of crypto enforcement, Choi intends to focus her team’s oversight and enforcement efforts on businesses that try to circumvent current anti-money laundering (AML) and/or know-your-customer (KYC) regulations, as well as those that do not partake in due diligence practices and risk mitigation appropriately. “We hope that by focusing on those types of platforms, we’re going to have a multiplier effect,” she said.¹

            NCET also intends to take more action against investment scams, specifically those where scammers attempt to build relationships with their victims for several months before finally going for the kill (coined “pig butchering” schemes). Investment fraud remains one of the most lucrative avenues of financial crime today, with the Federal Bureau of Investigation (FBI) estimating that roughly $3.31 billion was stolen from people through investment fraud in 2022, with crypto-related scams accounting for over $2.5 billion of that figure.¹ Thus far, NCET has seen excellent results in their recent efforts to mitigate these efforts, announcing that they busted six similar scams valued at around $112 million last month alone. All told, the uptick in crypto oversight and enforcement comes as part of a move from the Biden Administration to boost national security in wake of ongoing geopolitical conflicts seen across the world and efforts by Russia and China among others to circumvent U.S. sanctions and boost their fundraising efforts.

Citations

1. Crawley, Jamie. “U.S. DOJ’s Crypto Enforcement Director Promises Crackdown on Illicit Behavior on Exchanges: FT.” CoinDesk Latest Headlines RSS, 15 May 2023. 
2. Stempel, Jonathan, Hannah Lang, et al. “US Sues Binance and Founder Zhao Over ‘Web of Deception.’” Reuters, 6 June 2023.