Binance attracted to Malta’s unregulated blockchain limbo, US SEC charges show

The shady activities of the world’s cryptocurrency exchange during its unregulated period of grace 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 trial by jury Binance founder and CEO Changpeng Zhao and a number of his companies.

The SEC has levelled charges against Binance related to misleading investors, operating in the US securities markets without being properly registered, and securities fraud – encapsulating the time in which it operated with a 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 was operational in Malta between October 2018 and October 2019, when cryptocurrency companies that shifted to Malta had one year, until October 2019, to seek authorisation by becoming compliant with regulations.

Until that period and their applications were processed, Binance and others were essentially exempt from the need for authorisation 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 regulations as provided by Malta during its Blockchain Island craze propagated by the Joseph Muscat administration as one of its economic cure-alls.

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

For starters, the filing quotes a Binance chief compliance officer bragging in correspondence in December 2018, just two months into the carte blanche Malta gave it and other crypto operators at the time.

The CCO, according to the filing, “bluntly admitted” to another Binance compliance officer: “We are operating as a fking unlicensed securities exchange in the USA bro.”

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

The SEC alleges in its court filing that starting in or around 2018, “determined to escape the registration requirements of the federal securities laws, Defendants—under Zhao’s control—designed and implemented a multi-step plan to surreptitiously evade US laws.”

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

In fact, Binance got out of Malta quickly once the yearlong period of lax or no regulation expired and more stringent rules kicked in in 2019.

It is not known how much Binance earned while it was 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 derived from transaction fees.

Taken strictly as an average, Binance would have made revenues of €3 billion in its year in Malta, but it never even paid a cent of tax.

Since at least 2018, the SEC says Binance also allowed customers to fund their accounts and purchase crypto assets 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 of permitting customers to withdraw in fiat.

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

When in Malta, in 2018, the SEC alleges that Zhao and Binance hired several advisors to advise them to manage their US legal exposure. One of these advisors was a consultant who operated a crypto asset trading firm in the United States.

A recent Reuters investigation showed how a torrent of illicit funds flowed through Binance between 2017 and 2021. It found that over that period Binance processed transactions totalling at least $2.35 billion from predicate crimes such as hacks, investment fraud and contraband drug sales. Binance’s period in Malta falls right in the middle of that.

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

That criminal investigation is reported to have begun in 2018, just as Binance landed on ‘Blockchain Island’. Those 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 interim, loosely-regulated  ‘grandfathering’ period, Binance kept exploiting the coverage it received in Malta to inform its users around the world that it was “governed under the laws of Malta”.

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

“Binance is not licensed nor authorised by the MFSA to conduct any VFA-related activities in or from Malta and therefore falls outside the MFSA’s regulatory oversight,” the regulator said.

Although Binance vanished 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 are owned by Binance founder and CEO Changpeng Zhao. Those companies are not listed in the US court filing.