Binance lured by Malta’s unregulated blockchain limbo, US SEC charges show

The shady activities of the world’s cryptocurrency exchange during its unregulated grace period in Malta between 2018 and 2019 are expected to come to light after the United States Securities and Exchange Commission formally filed a demand for a jury trial Binance founder and CEO Changpeng Zhao and a number of his companies.

The SEC has brought charges against Binance related to misleading investors, operating in the US securities markets without being properly registered, and securities fraud – which encapsulates the time when it operated with free rein in Malta.

Binance landed in Malta in March 2018, and in October of that year, Malta approved blockchain legislation that allowed crypto companies to apply for licenses to operate from the country.

Binance operated in Malta between October 2018 and October 2019, when cryptocurrency companies moving to Malta had one year, until October 2019, to seek authorization by complying with the regulations.

Until that period and their applications were processed, Binance and others were essentially exempt from the need for authorization or even the need to comply with anti-money laundering laws.

And the SEC’s 136-page court filing this week shows Binance’s appetite for weak or non-existent oversight and regulation provided by Malta during the Blockchain Island craze promoted by the Joseph Muscat administration as one of its economic cures.

The eventual trial is expected to shed light on Binance’s shady activities in Malta, at least as far as US investors and institutions are concerned.

First, the filing quotes a Binance Chief Compliance Officer boasting in December 2018 correspondence, just two months after carte blanche Malta gave it and other crypto operators at the time.

The CCO, according to the filing, “generously admitted” to another Binance official: “We operate as an unlicensed stock exchange in the United States, bro.”

The US was a major market at the time, and it is believed that Binance’s unregulated activities in Malta in 2018 and 2019 helped it offer its business illegally to US customers.

The SEC alleges in its lawsuit that beginning in 2018, “determined to evade the registration requirements of the federal securities laws, the defendants designed and implemented — under Zhao’s control — a multi-step plan to surreptitiously evade U.S. laws.”

Tellingly, the SEC quotes the CCO as saying at the time, “We will not [Binance].com to ever be regulated.”

In fact, Binance quickly got out of Malta when the year-long period of lax or no regulation ended and stricter rules were introduced in 2019.

It is not known how much Binance earned while in Malta, but according to the SEC, between June 2018 and July 2021, Binance earned at least $11.6 billion in revenue, most of which came from transaction fees.

Strictly speaking as an average, Binance would have earned €3 billion a year in Malta, but it never paid a cent in taxes.

Since at least 2018, the SEC says Binance also allowed customers to fund their accounts and buy cryptoassets with US dollars or other fiat currencies by, among other things, linking credit cards through a third-party processor, or through bank accounts or payment services. It also had corresponding methods to allow customers to withdraw in fiat.

“Zhao and Binance understood that they were operating the Binance.com platform in violation of numerous US laws, including federal securities laws, and that these ongoing violations posed existential risk to their business,” the SEC alleges.

While in Malta, in 2018, the SEC alleges that Zhao and Binance hired several advisers to advise them on managing their US legal exposure. One of these advisors was a consultant who ran a crypto asset trading firm in the US.

A recent Reuters investigation showed how a stream of illegal funds flowed through Binance between 2017 and 2021. It found that during this period, Binance processed transactions totaling at least $2.35 billion from predicate crimes such as hacking, investment fraud and the sale of contraband . Binance’s tenure in Malta falls in the middle of that.

Binance has processed at least $10 billion in payments for criminals and companies evading US sanctions, Reuters found in a series of articles last year based on blockchain data, court and company records.

The criminal investigation is reported to have started in 2018, just as Binance landed on ‘Blockchain Island’. These investigations are focused on Binance’s compliance with US anti-money laundering laws and sanctions.

But despite its departure from Malta at the end of the temporary, loosely regulated “grandfathering” period, Binance continued to leverage the coverage it received in Malta to inform users worldwide that it was “governed under the laws of Malta.”

This led to the MFSA clarifying on two occasions, once in February 2020 – following the resignation of Joseph Muscat, Keith Schembri and Konrad Mizzi from government – ​​and again in July 2021, that Binance is not authorized to operate under Maltese law.

“Binance is not licensed or authorized by the MFSA to conduct VFA-related activities in or from Malta and therefore falls outside the MFSA’s regulatory oversight,” the regulator said.

Although Binance disappeared from Malta, it left behind two companies that are still active: Binance Marketing Services Limited and Binance Europe Services Limited. Both were set up in April 2018, are directed by Guangying Chen and owned by Binance founder and CEO Changpeng Zhao. These companies are not listed in the US lawsuit.