“Regulators are circling like vultures.” Why is the US interested in Binance and what does this threaten it with?

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The largest crypto exchange in the world, Binance, seems to have serious new problems. As found out The Wall Street Journal , the international business of the crypto exchange could be connected with the American one (Binance US) much more closely than the company indicated. US regulators are investigating. If they believe that Binance controlled Binance US, this will give them a reason to take over the entire business of the crypto exchange (which many investors consider a “black box”) and personally founder Changpeng Zhao.

What's happened

Established in 2017 and quickly becoming the world's largest crypto exchange, Binance is primarily based in China and Japan. But a fifth of its clients are in the United States, whose authorities are attacking the crypto market. In order to protect its core business from claims from the US authorities, since 2019 Binance has been serving customers in the US through a separate Binance US platform, which it has positioned as completely independent and fully compliant with US laws.

But, according to the WSJ, Binance and Binance US were much more closely connected. This is what American regulators are interested in - if they manage to prove that the Chinese Binance controlled the American platform, this could result in a large-scale investigation and lawsuits. On this news, the Binance token - BNB - has fallen in price by 5.3% over the past week. And in February, investors on fears of tightening control over Binance by the United States withdrew more than $6 billion from BNB.

What connected Binance and Binance US

The WSJ learned about the links between the Chinese business of Binance and its American division from the internal documents of the crypto exchange for 2018-2020 and conversations with former employees. According to the publication, the company's management developed a plan in advance, which directly spoke of the need to "protect Binance from the attention of US regulators." It envisaged the creation of the Binance US platform, with which Binance would have a “purely contractual” relationship, so that the American company would be positioned as completely independent, with its own management and employees.

The plan stated that Binance US should conduct “large-scale PR activities that demonstrate a willingness to exceed SEC expectations” and cooperate with regulators in every possible way. The purpose of the plan was to divert the attention of the US authorities to Binance US, thereby protecting the core business of the crypto exchange, which many investors consider a “black box”.

But in reality, writes WSJ, Binance and Binance US were much more closely connected. Documents reviewed by the newspaper indicate that the Binance US software was supported by developers in Shanghai until at least the summer of 2021, dressed as employees of the Chinese Binance, not the American one. They had both US platform codes and potential access to US users' digital wallets.

The fact of close cooperation between Binance and Binance US is proved, in particular, by the correspondence of employees of the crypto exchange in Shanghai dated September 2019, which was at the disposal of the WSJ. It followed from it that one of the Chinese employees launched trading on the American platform ahead of the agreed time.

In addition, some evidence indicates that Binance controlled at least part of the budget of the US division, and the operator of Binance US, BAM Trading Services, was controlled by Changpeng Zhao through a number of entities registered in the Cayman Islands and the British Virgin Islands.

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What does it threaten

Any lawsuit from US regulators would be like radioactive contamination for the entire business of Binance and its employees, the chief executive of the crypto exchange warned colleagues in 2019 in an internal chat. Moreover, a lawsuit against Binance could be a “nuclear explosion” for the crypto market, which has experienced several high-profile crashes in the past year.

If US regulators come to the conclusion that the Chinese Binance controls the US company, this will give them an excuse to take over the entire business of the crypto exchange, as well as the finances of the founder and CEO of Binance, Changpeng Zhao.

Now the connection between Binance and Binance US is being studied by the Securities and Exchange Commission (SEC) and the US Department of Justice, and the preliminary investigation has been ongoing since at least 2020, writes WSJ. In addition, the SEC was interested in Binance US's relationship with two firms associated with Zhao - Merit Peak and Sigma Chain. The increased attention to them is understandable: the collapse of FTX was facilitated by improper relations between the exchange and Alameda Research, an affiliated company with it, recalls WSJ.

Last week, a group of senators asked Binance to answer a series of questions, accusing the company of “withholding important financial information from its customers and the public.” But that's not all: Binance is under the gun of regulators in several other countries, where the exchange was accused of operating without a license. “Regulators are circling over her like vultures,” the newspaper describes the situation.

What Binance Says

The crypto exchange, on the one hand, carefully denies the accusations made against it, on the other hand, it expresses its readiness to cooperate with American regulators. "Binance US was created specifically to provide US customers with products and services that comply with US rules and regulations," China's Binance said in a statement. And at the same time, she added that “in the early years, the company did not have proper control over compliance with the requirements,” but “today it is a completely different company that complies with the law. And Binance’s chief strategy officer said last month that the exchange was willing to pay fines to settle existing U.S. claims.

The company also does not deny information about the plan to create Binance US to divert the attention of American regulators from the main business of the crypto exchange. They acknowledged that such a plan was presented by one of the employees, but in the end it was rejected. Merit Peak no longer cooperates with Binance US, according to the press service, but they refused to talk about Sigma Chain.

Why is it important

Binance is by far the largest cryptocurrency platform that has survived the collapse of several market giants such as FTX. The precipitous collapse of the latter has forced US regulators to step up their efforts to rein in the $1 trillion crypto sector. How Binance handles (or does not) deal with the latest industry turmoil and growing regulatory pressure at the same time will set an example for future players in the cryptocurrency market.