Binance sued for allegedly facilitating money laundering with 'lax KYC'

Published at: Sept. 15, 2020

Binance’s famously light Know Your Customer requirements are being targeted by the current owners of Zaif, a Japanese cryptocurrency exchange that got hacked in 2018.

Plaintiffs are claiming that its weak KYC requirements and high daily withdrawal limit facilitated the laundering of $60 million stolen from the exchange. The lawsuit was filed in the Northern District of California by representatives of Fisco cryptocurrency exchange, which acquired Zaif soon after the hack.

Fisco is accusing Binance of helping launder $9 million in cryptocurrency, and is seeking compensation for these alleged losses. The plaintiffs maintain that Binance had the power to identify and stop the stolen assets due to the traceable nature of blockchain.

A significant portion of the case document seeks to demonstrate why Northern California is the proper jurisdiction for suing Binance, which has a globally distributed team and is likely to be legally based in a tax haven country.

The first line of argument is that Binance’s servers are located in California because it uses Amazon Web Services. The document concedes that the cloud provider has global coverage that can be switched at will, but it still makes the claim that most of the infrastructure is in California. Though it is possible that Binance’s Californian AWS servers hold more data than others, the website itself is served from the location closest to the user.

A further argument is that Binance uses California-based custodians for cold storage. This claim comes from reports that Binance-acquired Swipe uses Coinbase and BitGo, while FTX — where Binance is just an investor — reportedly uses Coinbase. There are no indications as to which service is used by Binance itself, and it may well be developed in-house.

Finally, other arguments include the presence of job postings and employees in San Francisco, though most of them are related to Trust Wallet, a company acquired by Binance.

It is unknown if these arguments will persuade the court as they seem to be built on somewhat shaky foundations. Binance is notoriously hard to pin down, which makes it difficult to sue. A previous class-action lawsuit against the exchange was filed in the Southern District of New York.

Fisco is accusing Binance of several counts of crimes related to facilitating money laundering, seeking the return of 1,457 Bitcoin (BTC) that was allegedly laundered through Binance, plus punitive damages and legal expenses. 

The plaintiffs are also accusing Binance of unfair competition due to its “lower than standard” Anti-Money Laundering practices. The exchange has similarly been singled out by the Financial Action Task Force for its frequent jurisdiction hopping, which the regulators maintain was motivated by a wish to avoid more stringent regulation.

Binance did not immediately respond to a request for comment.

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