Binance’s cryptocurrency exchange has been embroiled in controversy almost since the beginning of 2017, and five years later the dust continues. On June 6, it was announced that the US Securities and Exchange Commission was investigating whether Binance Holdings violated US securities rules in bringing the digital tokens to market. At the same time, on the same day, Reuters published a 4,700-word “special report” entitled “How the cryptocurrency giant Binance became a hub for hackers, fraudsters and drug smugglers.
Binance responded almost immediately to Reuters with his own blog post in which he warned “authors and sages who choose data, rely on a convenient unprovable” leak “from regulators, and feed into the cult of cryptocurrency paranoia for fame or financial gain. In good faith, it published “Our Email Exchange with Reuters” – a comprehensive list of questions it had received from Reuters reporters Angus Berwick and Tom Wilson for their special report, along with answers from Binance spokesman Patrick Hillman.
All in all, donnybrook raised two questions between two heavyweights from different industries, not only about Binance – the largest cryptocurrency exchange – but also the global industry, including the extent to which money laundering is a problem in the cryptocurrency industry and what it means if one of the industry’s major providers is in constant hot water with regulators and investigative journalists?
Maybe Binance is being targeted in an unfair way, but if not, are all cryptocurrency and blockchain players now being tarnished by the actions of one player’s apostasy?
It is worth recalling that after the report was published, other parties took issue with its findings. The New York Times columnist Paul Krugman, for example, asked in an opinion column what kind of cryptocurrencies a party is very good at:
“Okay, criminals seem to find cryptography useful; A recent Reuters investigation revealed that over the past five years, Binance’s cryptocurrency exchange has laundered at least $ 2.35 billion in illegal funds. But where are the legitimate applications? ”
Is there a cryptocurrency problem with money laundering?
The $ 2.35 billion that “resulted from hackers, investment fraud and illegal drug trafficking” from 2017 to 2021 reported by Reuters sounds like a lot of money – but is it really, at least in the context of the $ 1 trillion industry?
Chainalysis researched all cryptocurrencies in 2021 and found that only 0.15% participated in illegal email addresses “despite the fact that the raw value of illegal transactions has reached an all-time high. In addition, the amount of money laundering worldwide in a single year – not just in the cryptocurrency sector – is 2-5% of GDP, somewhere between $ 800 billion and $ 2 trillion, according to the United Nations, which dwarfs cryptocurrency.
That may not be the case, though. “Let’s not forget that from the early days of Bitcoin, cryptocurrency has in itself had a reputation for being a money laundering tool – and rightly so,” said Markus Hammer, a lawyer and principal at Hammer Execution. Samtelegraph. That is no longer the case. According to Hammer, the industry has cleaned up its act incredibly well with anti-money laundering (AML) measures, which are probably even more effective now than those in the traditional financial world. Nevertheless, the fact that “the encryption reputation was negative in that sense from the beginning” cannot be ignored.
Perception is important and in that regard Binance has not really helped in the field of control. At times, the stateless stock exchange was clearly not an “early adopter” in the rule, although Hammer would not go so far as to say that Binance had damaged the industry’s reputation in any lasting way. It attracted attention, yes, because of misconduct, but perhaps also because of its size – regulators might have been looking for large cryptocurrencies to set an example.
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Regarding money laundering, “the numbers in the cryptocurrency industry are not large,” Merav Ozair, a fintech faculty member at Rutgers Business School, told the Cointelegraph, “but we do not want them to grow either. Binance is the industry’s largest stock exchange, “and we want them to be more consistent.” It bothers her that Binance has been one of the last major cryptocurrencies to embrace Know Your Customer (KYC) and AML regulations worldwide – as an industry leader, they should be one of the first to set an example.
Is Binance responsible for indirect deposits?
Binance, for its part, denies that there is a money laundering problem. A serious dispute arose between Binance and Reuters’ e-mail correspondence over the true nature of money laundering and the extent to which Binance was blamed for indirect deposits.
“Through the questions posed to Binance, Reuters has mixed direct and indirect exposure,” Binance complained to Reuters reporters, presenting an imaginary scenario that used the drug Web site, Hydra, as an example:
“A well-known Hydra dealer sells something on Hydra and gets 1 BTC in his wallet. They then send this BTC to someone else for some reason, not necessarily illegal. That person then transfers some of the BTC to someone else who does not know its history. This third party then deposits some of it into their Binance account. Binance now has indirect exposure to Hydra. “
Binance claims that it has no KYC / AML liability with respect to Hydra. It can not control indirect deposits. “This is completely true,” Alireza Siadat, a member of the law firm Annerton, told the Cointelegraph. “Current KYC requirements require the obligation to run KYCs and IDs when the user opens an account. Terms and conditions require the user to use the account only for their own purposes and not on behalf of a third party. “But the law does not ask to verify whether the person who opened the account is the same person who uses the account and does the business.
However, the exchange could do more, suggested Ozair. Indirect funds can alternate indirectly, from person A to person B, C and D, and yes, the stock exchange is responsible for checking person D who is actually opening the new account – but not A, B and C. But , it should still have its antenna set in the case of person D. Does this person come from a suspicious area or IP address that is known to be associated with bad players? Is an encoder possibly possible? “There are ways to understand,” Ozair said.
The privacy coin puzzle
Much of Binance’s and Reuters’ significant e-mail communications were devoted to a single cryptocurrency, Monero (XMR), a so-called privacy currency that Binance has supported in its exchange since 2017. It is the view of many law enforcement agencies that Monero and other privacy currencies offer almost complete anonymity. for money laundering, and for that reason some countries have banned them and other cryptocurrencies will not support them. You can not trade Monero on Coinbase or Gemini, for example.
Reuters, for its part, searched darknet forums for evidence that these fears were justified and found that “over 20 users wrote about buying Monero on Binance to buy illegal drugs,” according to its report. And it included one user who wrote that “XMR is essential for anyone buying drugs on the dark web.”
Reuters asked Binance half a dozen written questions in which Monero was specifically mentioned. Binance chose not to respond specifically to most of this, but generally responded that “There are many legitimate reasons why users demand privacy – for example, when NGOs and opponents of dictatorships are denied secure access to funds.” It also added elsewhere that it, Binance, was “against anyone using cryptography, blockchain technology or cash to buy or sell illegal drugs.
The privacy issue is one that cryptocurrencies continue to struggle with. According to Ozair, there is always a fine line between maintaining privacy and allowing illegal trade, “and the ecosystem is working hard to make that clear,” while Hammer noted in passing that “Binance’s continued acceptance of privacy coins as Monero speaks for. itself. “It should be emphasized that Reuters’ XMR results were unfair, not conclusive evidence of wrongdoing.
Elsewhere, there is some evidence that Binance is finally getting serious about correlation.
“Over the past eight months, Binance has stepped up its efforts to make AML globally compliant,” Siadat told Cointelegrph. “In France, Binance has recently been registered as a digital asset service provider. This is an AML registration, also known as a virtual property service provider registration, he explained, as the applicant must demonstrate full transparency with respect to corporate organization and detailed compliance with AML requirements.
“Binance now also aims to become fully controlled in Germany,” added Siadat, who believes the stock exchange has deliberately chosen jurisdictions with strong regulatory frameworks such as France and Germany “to show international regulators that it is prepared to comply with the recommendation. FATF and international AML regulations. “
It has been adding staff too. In August 2021, it hired Greg Monahan, a former criminal investigator at the US Treasury Department, as an international money laundering investigator, while in May, it hired Joshua Eaton, a former federal prosecutor in California, as the first deputy attorney general.
Hammer pointed out, however, that the company’s problems could be fundamental: its platform and business model, as originally designed, were designed to bypass the current financial industry. “However, they had overlooked the fact that their platform was still clearly central and provided, among other things, tracks. These fiat ramps meant that surveillance surveillance had to come “sooner or later”.
It will be very difficult to change such infrastructure, business models and corporate culture in a short time, he said, “even with deep pockets” and hiring a team of experts.
Where are the legitimate use cases?
What about the economist Krugman’s bigger question regarding cryptocurrencies? “Where are the legitimate applications?” Is it fair to ask such a question a dozen or so years after Bitcoin appeared?
“I do not understand why some reputable economists make statements about the lack of legitimate use of cryptocurrencies,” Carol Alexander, a professor of finance at the University of Sussex, told the Cointelegraph. After all:
“Ether is essential for Ethereum’s operations, as DOT is for Polkadot and SOL is for Solana, etc. These layer-1 blockchains already support the proper functioning of our Internet and without them a huge part of the world economy would simply collapse.”
“Unchangeable symbols have also come to be,” she added, and many will serve useful public purposes. “Taking ownership of real property such as paintings and music as smart contracts in public blockchains effectively prevents fraud and enables artists to receive appropriate commissions. Clever deals also completely stop the black market for concert and sports tickets, and the symbolic economy enables start-ups to have better access to crowdfunding now than ever before.
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Critics like Krugman “do not understand the logic behind distributed financial technology and blockchain,” tools that provide trust and full transparency if used properly, Siadat said, adding:
“In fact, the Financial Action Task Force recommended using DLT for digital identification and then using digital identification for KYC purposes. Once the digital ID has been verified by the blockchain, organizations can use / utilize existing KYC information without operating their own KYC.
At the same time, Bitcoin (BTC) remains “a highly efficient P2P payment system, providing payment services to non-bank residents,” added Hammer, a view shared by Ozair.
“We need to go back to the roots where it started,” Ozair said, referring to Satoshi Nakamoto’s original white paper, which preached the age of cryptography. What Satoshi was proposing was just a digital payment network – a system run by people for people. Maybe it should serve as a point of contact now.
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