Day traders flock to Binance as regulators try to pinpoint how it operates and where

It pays its people in a digital token of its own devising. It is based wherever its founder happens to be. A growing list of countries want no part of it. And Binance Holdings might just be the biggest, craziest thing in the big, crazy realm of cryptocurrencies.

Welcome to the world of Changpeng Zhao, the elusive, flip-flop-wearing software developer everyone calls CZ – and the brains behind Binance. For now, it is the largest cryptocurrency exchange on the planet in terms of daily trading volume, even though the UK just booted an affiliate and Thailand filed a criminal complaint against the company for operating without a licence.

Founded in China, Binance today is officially domiciled in the Cayman Islands and, unofficially, headquartered precisely nowhere. The platform lives on the internet and so far has seemed to elude regulators’ attempts to pinpoint exactly how it operates and where. At its heart is Mr Zhao, a crypto cult figure with about three million Twitter followers and a stated desire to minimise government oversight. Lately, he’s been living in Singapore.

Only now, the authorities in several countries want to know more about Mr Zhao’s four-year-old experiment in crypto-commerce. The UK rebuke is one of the biggest blows so far: Binance Markets can’t offer products or even advertise – a move that prompted Barclays to block debit-card payments to the exchange.

The US Justice Department and its Internal Revenue Service were already investigating whether Binance is a conduit for money laundering and tax evasion. The Commodity Futures Trading Commission is probing whether Binance let Americans place trades that broke US regulations. Germany’s financial regulator said it is concerned the company broke rules by selling tokenised shares of Tesla and other companies.

Binance says it is committed to following the rules and strives to be a partner to watchdogs in rooting out misconduct, a message the company has delivered consistently.

The scrutiny shows that in the Wild West of cryptocurrencies – make that the Wild East, North and South, too – getting a handle on Binance presents myriad challenges. Last year, a federal judge dismissed a lawsuit filed by a Binance contractor in Portland, Oregon, because the company has neither offices nor managers in the US. The court ruled that it lacked jurisdiction.

The case was one for our meme-filled, crypto-denominated times. Mr Zhao’s acolytes refer to themselves as Binancians and, like all good Binancians, Steve Reynolds had been paid not in dollars, euro or yen but in BNB, the company’s crypto token. After Mr Reynolds fell out with Binance, he alleged Mr Zhao threatened to hurt him financially. Then, when Mr Reynolds checked his Binance account, it was empty. About $300,000-worth of BNB had been spirited out, he claimed.

“CZ personally stole money from me,” Mr Reynolds says, reiterating allegations he made in his lawsuit. “There are people who have worked for Binance who believed and got screwed.”

Binance denies it has done anything wrong. Its lawyer, Roberto Gonzalez, suggested during a hearing that the company had good reason to seize Mr Reynolds’s funds, without offering specific details. Binance has used jurisdiction arguments in other litigation – thus far, keeping adversaries from probing internal company records for any signs of ties within the US.

In a blog post on July 15, Mr Zhao conceded that Binance hasn’t “always got everything right, but we are learning and improving every day”. He added that cryptocurrencies need more regulation, so that more people feel safe participating in the market. He declined to be interviewed for this story.

With Bitcoin’s meteoric rise, Binance has attracted legions of day traders eager to spend hours on computer screens swapping tokens.

It’s also arguably the nightmare of the US Federal Reserve and other central banks: A thriving financial ecosystem where governments can’t control the printing of money or easily monitor transactions, including for possible crimes.

Binance operates everything from digital wallets to its own blockchain that lets people build crypto trading apps to a popular cryptocurrency-tracking website, which listed the BNB token as the fourth-biggest digital coin in the world last week after it surged a whopping 1,700 per cent over the past year.

“We take our legal obligations very seriously,” Binance said in an emailed statement. “Our company is less than four years old and is evolving. We are proud of the compliance steps we’ve taken in this short period and look forward to building more robust structures in the months and years to come.”

For a self-professed crypto billionaire, Mr Zhao doesn’t show it. The 44-year-old typically wears T-shirts and shorts but upgrades to Binance-branded apparel when appearing at crypto events or doing television interviews.

He grew up in China’s Jiangsu province and his family moved to Vancouver, Canada when he was a teenager. After studying computer science at Montreal’s McGill University, one of his first jobs was working for a trading platform at Bloomberg.

By 2014, Mr Zhao was the chief technical officer of OKcoin, then China’s biggest Bitcoin exchange. He helped launch an overseas trading platform with features that would later become hallmarks of Binance: it was easy to use and offered customers lots of tokens to buy and sell. The platform also undercut rivals through lower transaction fees and freebies for Chinese residents.

In June 2017, Mr Zhao founded Binance, surrounding himself with an inner circle of Ivy League-educated lawyers and bankers who were eager for the chance to make fortunes by getting in on the ground floor of a start-up. The company’s rise was fast, fuelled by Binance letting clients open an account with nothing more than an email address. No identification was required.

Within a year, Binance’s trading volume had surpassed all competitors. Still, Binance wasn’t public and Mr Zhao controlled the equity.

By 2018, Binance had a developing US problem. It wasn’t registered with the Securities and Exchange Commission, CFTC or Treasury Department yet nearly 40 per cent of its business was in America. That’s fine if exchanges are just letting US customers trade Bitcoin, which mostly falls outside regulators’ oversight. But Binance offers derivatives tied to tokens, according to its website, a no-no unless companies have the proper authorisation.

Evidence separately emerged that criminals were flocking to Binance. After examining a number of transactions, Chainalysis concluded that more funds tied to illicit activity flowed through Binance than any other crypto exchange, according to a report that the blockchain forensics company released in January 2020. Chainalysis, in a more recent report, said people can readily purchase accounts for Binance and other exchanges on the dark web.

In May, Binance said it adheres to anti-money laundering requirements in the jurisdictions in which it operates and works with companies like Chainalysis to improve its compliance systems.

References to hackers allegedly using Binance to move funds from ransomware attacks and other crimes have also popped up in US court dockets filed by federal prosecutors.

“Regulators around the world are positioning their departments to scrutinise carefully exchanges, especially those with the reach, popularity and trading volume of an exchange like Binance,” says Tonya Evans, a professor at Penn State Dickinson Law School who teaches a course on cryptocurrencies. “Exchanges that turn a blind eye to the regulatory concerns regarding money laundering, unregistered securities and payments for illegal activities, do so at their peril.”

Abiding by the rules is a top priority, Binance says, a point underscored by its hiring of more than 200 compliance professionals in the past year. Last month, Mr Zhao took to Twitter to note that Binance was praised by Russian and Ukrainian law enforcement agencies for the company’s help in tracking down cybercriminals.

Binance later issued a press release detailing how it worked with several nations, including the US authorities, to investigate a criminal organisation known as FANCYCAT that it said is linked to more than $500 million in ransomware damages.

Mr Zhao has also tried to emphasise Binance’s efforts to keep Americans off its main exchange. During a session on social media platform Clubhouse in March, he said Binance does an extensive analysis of blockchain transactions to prevent unlawful activity.

“I believe we have the most advanced US person-detection algorithms in the industry, not just the crypto industry,” Mr Zhao said at the time, adding that the technology is so good that it sometimes inadvertently blocks customers who have merely visited the US.

Those restrictions didn’t stop Keif Atwood, a Little Rock, Arkansas-based investor whose handle is CryptoKeif. On June 15, Mr Atwood traded on Binance for hours, live-streaming himself as more than 1,000 people watched on Twitch and cheered him on – at one point he fell asleep in his chair as the camera kept rolling. Mr Atwood was buying and selling Bitcoin futures, products that should have been off-limits.

In an interview, Mr Atwood said he learnt how to access Binance by watching online videos in which traders explained how they used virtual private networks, or VPNs, to disguise their locations. Mr Atwood added that he has lost as much as $80,000, but was hoping to make some of it back through KeifCoin, a token he used Binance to create.

“I am concerned about it, but I never had anyone to talk to about it,” Mr Atwood said when asked if he is worried that his trading may have violated rules.

However, in a sign that the authorities are getting more aggressive, the US Justice Department filed criminal charges last year against four executives at BitMEX, a rival cryptocurrency exchange. The allegations included failing to implement controls to prevent money laundering and terrorism financing, and allowing US residents to unlawfully trade Bitcoin futures. Three of the men charged have pleaded not guilty while a fourth remains at large.