The world’s largest cryptocurrency exchange is targeted by regulators around the world in a coordinated crackdown.
Binance wants to join the system
“Binance UK is fully regulated by the FCA,” the cryptocurrency exchange’s chief executive, Changpeng Zhao, said during a Zoom event on 23 June last year.
This statement piqued my interest. I had been looking at how cryptocurrency exchanges, especially those that had long sought to operate outside the rules, were now seeking to fit into the traditional financial system.
And Binance, the world’s largest crypto exchange, reportedly making $1bn a year in profit, was the biggest fish of all.
I also knew that Binance had recently been given the cold shoulder by Maltese authorities, which had said the exchange wasn’t authorised to operate on the island.
By reputation, Malta is one of the shadier European financial centres. It was recently put on the greylist of the Financial Action Task Force—a list of centres suspected of facilitating global money laundering. Entering the greylist is one step short of being made subject to full US sanctions.
So for Binance to get a green light from the UK securities regulator to operate a crypto exchange in the country would be a big deal.
No records found
But when I searched on the UK Financial Conduct Authority’s register for ‘Binance’, nothing came up. This seemed to contradict Zhao’s statement on the Zoom call.
I asked Teana Baker-Taylor, Binance’s then UK director, to explain. Baker-Taylor left Binance in October.
Baker-Taylor said Binance was in the process of buying a UK firm that had already been authorised. And this would enable the crypto exchange to enter the UK market.
“Binance has acquired EddieUK Limited, a FCA-regulated entity,” she told me.
“And EddieUK is now renamed as Binance Markets Limited. The change of control of the entity has been approved by the FCA, and the name change on the FCA register will be made in due course,” Baker-Taylor went on.
“We expected the register to be updated by now, so there is just a slight information lapse, which should be rectified soon,” she said.
I found EddieUK on the FCA website and had a look at what the company did. In the register, it was described as ‘a hybrid peer-to-peer and crowdfunding platform’.
Confirmation of takeover
I went to the UK Companies House website, where details for all UK companies are held, to find out more about Binance.
At Companies House, I found details for a company called Binance Markets Limited. And in its records there was a filing, dated June 10 2020, showing the company had indeed changed its name from EddieUK Limited.
Two days earlier, another filing said that Binance’s CEO, Changpeng Zhao, had become a ‘person with significant control’ of the company. That meant Zhao was now the owner or controller of Binance Markets Limited.
Zhao’s place of residence was given as Malta and his nationality as Canadian
All this was apparent confirmation of what Binance had said about its takeover.
Permissions to do business
But what could the crypto exchange actually do with the UK company it had just bought?
As a ‘hybrid peer-to-peer and crowdfunding platform’, Eddie.UK had obtained a series of ‘permissions’ from the FCA. Those permissions, for example, enabled it to hold the money of UK residents and to do loan business with them.
But the permissions hardly seemed right for an exchange seeking to enable UK residents to buy and sell cryptocurrency, one of the most volatile financial assets.
I asked the Financial Conduct Authority (FCA) whether the authorisation it had granted to EddieUK would automatically pass over to Binance Markets Limited, and whether the individual permissions it had given EddieUK would do so too.
No, the FCA told me, when a new controller acquires control of a regulated firm, the regulated activities performed by that firm do not automatically pass over to the new owner.
But the regulator declined to comment on its interactions with Binance, what approvals it had (or had not) given to the exchange, and whether it had even approved the crypto exchange’s takeover of EddieUK.
However, in the following weeks the FCA register entry for EddieUK was updated to read ‘Binance Markets Limited’, implying that some form of approval had taken place.
Binance’s UK-based head of compliance, Lynn McConnell, is a former regulator, having worked as a bank supervisor at the FCA’s predecessor, the Financial Services Authority.
Other legal entities in the UK
The cryptocurrency exchange has set up other legal entities in the UK.
Together with Binance Markets Limited, there are six companies with ‘Binance’ in their name on the UK Companies House register.
As EddieUK, Binance Markets Limited was incorporated in 2015.
But the other five—Binance Limited, Binance Ltd, Binance Coinbase Limited, Binance Digital Limited and Binance Europe Ltd—were set up between 2019 and 2021.
None of these five has published financial accounts. Binance Markets Limited—in its previous existence as EddieUK—has done so.
But for the latest financial year on file, ending March 2020, its turnover came to a paltry £2500, far short of the sums one might expect for a cryptocurrency exchange that earlier this year reported $80bn of trading volume in one day.
It’s unclear to what purpose Binance intended—or intends—to put these UK companies. One—Binance Limited—was in existence for a mere eighteen months before being dissolved and replaced shortly afterwards by the similar-sounding Binance Ltd.
But the cryptocurrency exchange has been accused in the past of using networks of connected companies to evade regulations.
In October the crypto exchange sued Forbes magazine and two of its journalists after Forbes reported Binance had engaged in an elaborate scheme to evade US regulation by using such a network.
Citing an internal Binance document, Forbes said that the crypto exchange “had conceived of an elaborate corporate structure designed to intentionally deceive regulators and surreptitiously profit from crypto investors in the United States”.
In February this year, Binance retracted the lawsuit, without saying why.
In April, Binance announced it had hired a former top regulator, Brian Brooks, to head its US affiliate.
About-turn on AML registration
Crypto firms wanting to enter the traditional financial system also have to make it past the sector’s formidable anti-money-laundering (AML) rules, aimed at preventing dirty money flows.
Last June, Binance’s then UK director, Teana Baker-Taylor, told me that Binance Markets Limited would soon file its anti-money-laundering registration with the FCA, ‘in line with the new regulatory requirements for cryptoasset firms’.
From January 2020, firms carrying out specific cryptoasset activities in the UK—such as operating a crypto exchange, running a custody business or a bitcoin ATM—have needed to register with the FCA to avoid accusations of helping criminals.
But when the FCA released details in January 2021 of the more than 100 firms that had applied for this form of registration, Binance was nowhere to be seen.
I asked Simon Matthews, Binance’s European PR director, why the firm had not sought to join the FCA’s register.
He declined to comment, adding ‘there’s not really a story here’.
Earlier today, the Financial Times reported (paywall) that Binance Markets Limited had applied last summer to join the FCA register, but that Binance had pulled that application in May 2021 “following intensive engagement from the FCA.”
The FT was citing a spokesperson for the watchdog and two unnamed people familiar with the situation.
FCA puts a stop to Binance
Now, a year after Binance’s CEO said it was opening shop in the UK, the cryptocurrency exchange’s initiative has come to an abrupt and premature end.
Yesterday, the FCA issued a consumer warning on Binance Markets Limited and the Binance Group, banning them from operating in the country without its permission.
The FCA also reminded UK consumers that no other entity in the Binance Group holds any form of UK authorisation, registration or licence to conduct regulated activity in the country.
However, the regulator warned, the Binance Group is apparently serving UK clients via its main website, www.binance.com, where the exchange has always operated effectively without regulation, since it doesn’t declare where it is located.
The terms of use on the binance.com website say that clients enter into an agreement with ‘Binance operators’ of unspecified locations. These operators may change as Binance’s business adjusts, the website says.
Binance’s CEO, Changpeng Zhao, told Bloomberg in April that the exchange deliberately operates without a single corporate headquarters and that he prefers to operate out of hotel rooms or apartments rented via AirBNB, rather than staying in any country for long.
Accelerating crackdown
The UK’s crackdown on Binance is the latest in a series of escalating interventions by regulators, banks and payments systems around the world.
The exchange is reportedly under investigation from the US Commodity Futures Trading Commission (CFTC) for having permitted US residents to buy and sell derivatives without permission from the regulator.
In May, the Verge reported that the US Department of Justice and the Internal Revenue Service had also opened probes into Binance.
In March, the exchange was accused of having operated illegally in Brazil.
In April, Germany’s financial watchdog warned Binance over its issuance of unregulated stock tokens.
A week ago, UK bank TSB said it had stopped its clients transferring money to Binance and another cryptocurrency exchange, Kraken.
According to the Times, 849 TSB savers had reported losing money to scammers with Binance accounts in one month alone, and when TSB tried to raise concerns with the exchange, it received no response.
Last week, Dutch e-commerce payments platform iDEAL said it had stopped its users depositing funds on Binance.
On Friday, Binance said it was quitting Ontario in Canada after a crackdown by the local securities commission on unregulated cryptocurrency exchanges.
Also on Friday, Japan’s Financial Services Agency said Binance isn’t registered to do business in the country.
***This article was edited after publication to clarify the date when Teana Baker-Taylor left Binance, to include details of Changpeng Zhao’s nationality and place of residence, to include a reference to Lynn McConnell and the FT article and to mention Japan’s recent prohibition***
Sign up here for the New Money Review newsletter
Click here for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes
Related content from New Money Review
Largest crypto exchange enters US equity trading
