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The world’s largest cryptocurrency exchange, Binance, and its founder and former CEO, Changpeng Zhao (CZ), are now defendants in a new class-action lawsuit from three crypto investors. These plaintiffs are charging Binance and CZ because they were unable to retrieve their stolen crypto and are blaming it on the major exchange’s culpability in money laundering activities that made the assets untraceable.
Globally, the crypto sector has been targeted by government authorities through enforcement action, leading to fines and lawsuits. These authorities seem focused on established assets and entities allegedly guilty of several violations in different jurisdictions. However, there are several new crypto projects that users are now paying attention to because of their potential as an investment channel and the likelihood that they will return remarkable profits to users. Many of these news assets have specific utility in various ecosystems, including staking and play-to-earn (P2E) gaming.
The plaintiffs filed the lawsuit in the United States District Court for the Western District of Washington, Seattle. According to the lawsuit, Binance willfully ignored essential laws and regulations, like the Bank Secrecy Act (BSA). It also states that the exchange deliberately caused several violations of economic sanctions and disregarded know-your-customer (KYC) rules for profit.
The lawsuit explains a blockchain’s typical function. According to the filing, the blockchain holds a permanent record of transactions that is permanently traceable on the ledger. This helps protect against transaction security threats and ensures that all data are publicly accessible. Further explaining, the suit states that without a tool to launder money, authorities would eventually track down cyber criminals by retracing their steps. However, Binance enabled money laundering and cost them their money:
“Because CZ and others at BInace put profits before the law, Defendants, through the operation of Binance.com, generated substantial amounts of proceeds by offering bad actors a way to remove the connection between the ledger and their digital assets so the digital assets would no longer be traceable.”
The plaintiffs in this case are Philip Martin, Yatin Khanna, and Natalie Tang. According to an X post from Consensys lawyer Bill Hughes, they are accusing Binance and CZ of actions that violate the Racketeer Influenced and Corrupt Organizations Act (RICO). Hughes says the plaintiffs are represented by experienced lawyers with deep pockets, who have represented others in major lawsuits against giant organizations like Wells Fargo and Facebook.
Binance and Its Legal Problems
Binance has had its fair share of law enforcement issues, comprising lawsuits that indict the company and CZ. Last November, the Binance founder pleaded guilty to money laundering, which forced him to step down as CEO. Binance also paid a hefty $4.3 billion fine to the US government.
In June, CZ began a four-month jail term following his guilty plea, currently being served in California’s Lompoc city at a low-security federal prison. Notably, sentencing guidelines recommend 12 to 18 months for the case, much lower than the three-year term federal prosecutors initially requested. However, the Binance founder got a sentence even lower than standard recommendations. In addition to his jail term and the Binance fine, the judge ordered CZ to pay a $50 million personal fine.
Binance has also faced regulatory hurdles in several countries. For instance, the exchange is one of several offshore platforms that received compliance notices from the Indian Ministry of Finance’s Financial Intelligence Unit (FIU). Last December, the FIU issued notices to nine foreign crypto service providers, including Binance, Kraken, Bittrex, Huobi, Bitfinex, Gate.io, Bitstamp, Bittrex, and MEXC Global for operating without fulfilling appropriate requirements. The Binance app was then removed from Apple’s App Store and the Google Play Store in India.
India requires crypto firms operating in the country to align with specific regulatory requirements, including registering as a Reporting Entity with the FIU. After the registration, the company must adhere to all rules in the Prevention of Money Laundering Act (PMLA) of 2022, which outlines obligations like KYC requirements and several others designed to combat money laundering.
Recently, Binance announced its return to the Indian market. It has also taken a few steps to solidify its presence in India, including paying the FIU a $2.25 million fine. In addition, Binance has directly expressed its willingness to comply with regulations by maintaining KYC, anti-money laundering (AML), and Countering the Financing of Terrorism (CFT) requirements. Furthermore, the exchange promised to create a Financial Crimes Compliance unit to help law enforcement with crypto-related investigations. However, the company is still facing an $86 million tax demand from the Directorate General of Goods and Service Tax Intelligence (DGGI) as a fine for tax avoidance.
Regulatory Action Against Digital Asset Service Providers
Several authorities have come down hard on the cryptocurrency sector, targeting several major organizations, including large exchanges. In the US, agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have filed lawsuits against Binance, Coinbase, and Ripple.
In June, the SEC sued blockchain software company Consensys in a New York federal court. According to the lawsuit, the SEC alleges that Consesnsys “acted as an unregistered broker” and “engaged in the offer and sale of securities” through its crypto wallet, MetaMask. In June, a Consensys statement noted that the SEC’s Enforcement Division has decided to discontinue its investigation into Ethereum 2.0 and will no longer use enforcement action against Consensys.
Many companies, crypto stakeholders, and enthusiasts have criticized the SEC for its preference for enforcement action. In its June statement, Consensys wrote:
“It is imperative that the SEC abandon its unprincipled and opaque regulation-by-enforcement campaign in favor of much-needed regulatory clarity for an industry that serves as the backbone to countless new technologies and innovations…No company or individual should find itself in our position, having to resort to costly litigation to obtain clarity about what is and is not lawful.”
Last June, the SEC filed a lawsuit against Coinbase, alleging that the exchange was operating as an unregistered securities exchange. It specified that Coinbase offered the public an unregistered security through its staking-as-a-service program. The case has dragged on with several updates as both entities advance in their positions.
For instance, Coinbase recently sued the SEC and the Federal Deposit Insurance Corp (FDIC), accusing both agencies of refusing to respond to requests sent under the Freedom of Information Act (FOIA). The lawsuit, filed in the US District Court for the District of Columbia, highlighted requests for information about the SEC’s position on Ethereum’s move to a proof-of-stake (PoS) consensus mechanism. Coinbase also wants details of closed investigations the SEC has conducted into companies and stakeholders associated with crypto.
However, the SEC has denied access to the requested information, stating that it could be harmful to ongoing enforcement. In addition, the exchange accused the FDIC of using “pause letters’ sent to financial services institutions to discourage them from engaging with crypto service providers.