Crypto Noise puts further focus on Binance

Regulatory Scrutiny The dramatic post FTX implosion has created a crisis of confidence among other industry players.

Perhaps no other company has been harder hit than rival cryptocurrency exchange Binance, itself responsible in no small measure for the chain of events that led to last November’s multi-billion dollar FTX evaporation.

This comes as the world’s largest cryptocurrency exchange publicly admitted that the management of its client funds “wasn’t always perfect,” and a Reuters report published on Tuesday (January 24) revealed that Binance had served as one of the main thoroughfares for crypto exchanges for years Bitzlato, who recently received a federal citation.

The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) stated in its order “Imposition of Special Measure Prohibiting the Transmittal of Funds Involving Bitzlato” that Binance was among the top three counterparties based on the volume of digital assets received between May 2018 and September 2022 owned by Bitzlato.

Binance gets an “F” for its finances

Binance was the only major cryptocurrency exchange on the list of top counterparties, according to the FinCEN report, which also listed Russian-language dark web drug marketplace Hydra Market, a smaller exchange called LocalBitcoins, and Russia-based Finiko as Bitzlato’s largest partners by transaction volume.

FinCEN described Finiko as an “alleged crypto Ponzi scheme” in the special measures order.

Hydra, which has since been seized and shut down, was the world’s largest and longest running dark web marketplace, according to a US Department of Justice (DOJ) report. The platform allowed users to buy illegal drugs and other services anonymously using cryptocurrency.

“The Department of Justice will not allow darknet markets and cryptocurrencies to be a safe haven for money laundering and the sale of hacking tools and services,” Assistant Attorney General Lisa O. Monaco said in a press release announcing the closure of Hydra would.

Not the most reassuring company for Binance, especially since the US arm of the global exchange is currently under investigation for unlicensed money transfer, conspiracy, and violating federal criminal sanctions.

Buyers and sellers on Hydra’s dark web marketplace used Binance to make crypto payments totaling more than three-quarters of a billion dollars, or $780 million, according to a separate Reuters investigation last June that referenced available blockchain data do and receive.

The enigmatic exchange, which doesn’t reveal the location or headquarters of its parent company, has reportedly processed at least $10 billion in payments to date for criminals and corporations trying to evade US sanctions.

Binance has not responded to a request for comment from PYMNTS as of this writing.

In total, $346 million worth of digital assets passed between Binance and Bitzlato via around 205,000 transactions. According to the Reuters report, the figures were compiled by leading US blockchain researcher Chainalysis, which regularly works with governments on crypto industry data and analysis.

More than a quarter of that amount, or $90 million, was transferred after Binance announced that its users will be required to present valid ID to conduct transactions through its platform, thereby helping to combat funding and money laundering from illegal activities.

As reported by PYMNTS, Bitzlato’s assets have been seized and its founder was arrested in Miami last week (January 17).

Sending funds to Bitzlato by the US and other financial institutions will effectively cease as of February 1, according to the FinCEN filing.

Read more: Binance Skeptics Seek Answers About Similarities to FTX Crypto Business Model

Crypto firms’ management of their clients’ custodial reserves has become a hotly debated topic for the digital asset industry after FTX allegedly misappropriated its own user base’s assets to foment bad bets, resulting in a catastrophic bankruptcy of several Billions of dollars resulted and a historic dissolution of wealth.

This context is what makes it so surprising, and possibly troubling, that Binance has also reportedly held collateral for tokens in the same wallet as client assets.

That’s according to a PYMNTS report on Tuesday (January 24), which also said the exchange is aware of the issue and plans to change its procedures to address asset commingling.

This is as New York’s top financial watchdog, the New York State Department of Financial Services (NYDFS), warns crypto firms against segregating clients’ cryptocurrency assets from their own, something traditional financial leaders, including Stifel CEO and Chairman Ron Kruszewski, are calling for in the crypto industry as well to do.

“DFS virtual currency regulation has protected New Yorkers since 2015,” said NYDFS Superintendent Adrienne Harris. “[Agency] Guidance reminds DFS-regulated virtual currency entities of our expectations regarding the safe custody of client assets.”

While leading crypto players have repeatedly said they are aware of their mistakes, it remains to be seen if they have learned from them.

PYMNTS Data: Why Consumers Are Trying Digital Wallets

A PYMNTS study, New Payments Options: Why Consumers Are Trying Digital Wallets, finds that 52% of US consumers have tried a new payment method in 2022, with many choosing to try digital wallets for the first time.


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