The Wall Street Journal: Internal chat records show that the relationship between Binance and Binance.US is more complex than disclosed

Original Title: Texts From Crypto Giant Binance Reveal Plan to Elude U.S. Authorities

Original Authors: Caitlin Ostroff, Patricia Kowsmann

Translation: Qianwen, ChainCatcher

Binance made a striking entrance into the cryptocurrency stage in 2017 and has since developed into the world's largest digital currency exchange. But it soon faced challenges.

Binance is primarily operated from headquarters in China and Japan, but one-fifth of its customers are located in the United States. U.S. authorities signaled that they would soon crack down on these unregulated offshore cryptocurrency players. In a private chat in 2019, an executive at Binance warned colleagues that any lawsuit from U.S. regulators would have the power of "nuclear waste" on Binance's business and employees.

According to information, documents, and interviews with former employees reviewed by The Wall Street Journal from 2018 to 2020, Binance was concerned about being sued and began to formulate a plan to eliminate the influence of U.S. authorities.

At the core of this strategy was the establishment of a completely independent U.S. platform, "Binance.US," which would license Binance's technology and brand but otherwise appear completely independent from Binance.com. This would shield the original Binance.com exchange from scrutiny by U.S. regulators and separate U.S. users.

However, according to interviews and information and documents reviewed by this newspaper, the relationship between Binance and Binance.US is more complex than the two companies have disclosed. There is employee and financial interconnection between the two entities, subordinated to the same entity that trades cryptocurrencies. Binance's developers in China maintain the software code that supports Binance.US users' digital wallets, allowing Binance to potentially access data from U.S. customers.

If U.S. regulators determine that these connections imply Binance has control over a U.S. company, they could demand regulation of Binance's entire business. For many investors, Binance has been a black box from the start. This would also subject Binance's founder and CEO Changpeng Zhao, who holds billions in assets, to stricter scrutiny of his financial situation. Recently, a financial regulator in Texas stated in a court document that Binance.US did not obtain permission to operate in the state because it was unwilling to provide financial information about its largest shareholder, Changpeng Zhao.

According to subpoenas and sources familiar with the matter, the U.S. Securities and Exchange Commission and the Department of Justice have been investigating the relationship between Binance and Binance.US since at least 2020, and Binance has not disclosed its headquarters. The Department of Justice and the U.S. Securities and Exchange Commission declined to comment.

On Thursday, a bipartisan group of senators demanded that Binance answer a series of questions, stating that it "hides essential financial information from customers and the public." Binance has also come under scrutiny from several other countries, accused of operating without a license.

Binance is the largest cryptocurrency platform to date, and the collapse of other platforms like FTX last year plunged the digital currency world into chaos. The rapid downfall of FTX forced U.S. regulators to change their plans, and they are now working hard to control the $1 trillion cryptocurrency industry. Whether Binance can navigate the industry's turmoil and respond to U.S. regulators will be a test for the future of cryptocurrency.

Binance's Chief Strategy Officer Patrick Hillmann stated last month that the exchange expects to pay financial penalties in response to ongoing investigations by U.S. regulatory and law enforcement agencies into its business.

A female spokesperson for Binance said, "We acknowledge that we did not have sufficient compliance and controls in earlier years. However, we have made many changes in compliance today."

A female spokesperson for Binance.US said, "Binance.US is designed specifically for U.S. customers, offering products and services that comply with U.S. rules and regulations."

The close relationship between Binance and Binance.US was evident in September 2019 when an employee in Shanghai initiated trading on the U.S. platform just minutes before it was supposed to launch, leading to discussions in Binance's Telegram chat group.

Ninj0r [Binance's software developer] said: "Why did trading start?? It's not time yet!! Who started the trading? We set the trading timer? Who started the trading?"

Followed by other messages, including another urgent message from Ninj0r: "Someone started trading early. Who did it? At 8:56:09.822 someone manually started trading. Who? Why?"

Ultimately, the company's founder and CEO Changpeng Zhao responded: "It was a person in Shanghai, an operational error."

According to The New York Times, at least until the summer of 2021, developers in Shanghai were maintaining key software functions for Binance.US. According to a person familiar with these agreements, the contracts for these developers in Shanghai were signed with Binance and not with the U.S. platform.

Spokespeople for Binance and Binance.US stated that the relationship between the two companies is governed by licensing agreements that include Binance's technology. The spokesperson for Binance.US said that U.S. customer data is stored in the U.S., and the company does not mix user data with Binance.

According to The New York Times, the U.S. Securities and Exchange Commission has also been reviewing the relationship between Binance.US and two trading companies, both connected to Changpeng Zhao, namely Merit Peak Ltd. and Sigma Chain AG.

Prosecutors stated that the improper relationship between the now-defunct FTX platform and its affiliated trading company Alameda Research led to billions of dollars in customer fund losses. The spokesperson for Binance.US stated that compared to FTX, "Binance.US has never— and will never— trade or lend customer funds."

She said that Merit Peak ceased all activities on Binance.US in 2021 and declined to comment on Sigma Chain.

In the first two years of Binance's operation, in 2017 and 2018, the exchange expanded rapidly without government regulation. Customers could access Binance.com from around the world without the KYC that banks and brokers must conduct in most places.

Private chat records reviewed by The Financial Daily show that Binance executives were concerned that if they did not take preventive measures to anticipate regulatory scrutiny, the business could face lawsuits from U.S. regulators.

According to a report seen by this newspaper, at the end of 2018, an employee of a Bitcoin trading company funded by Binance, Harry Zhou, submitted a proposal to Binance executives suggesting the establishment of a U.S. entity to attract inquiries from U.S. law enforcement and regulatory agencies so that Binance would not be under their scrutiny.

In a section titled "Shielding Binance from U.S. Law Enforcement," the plan called for Binance to establish a "purely contractual" relationship with its U.S. entity, meaning the latter would operate independently with its own management and employees.

Another part of the report titled "Regulatory Engagement Plan" suggested that Binance "invest heavily in public relations to show that this U.S. entity is willing to operate beyond the SEC's expectations and become an industry resource for the SEC." Details of the plan were previously reported by Forbes and Reuters.

A spokesperson for Binance stated that the proposal was rejected and never implemented.

In February 2019, Binance's then CFO established a company in Delaware called BAM Trading Services Inc., which quickly became the operator of a company named Binance.US. Zhou Wei informed employees in a Telegram chat that BAM Trading Services Inc. had been established, along with BAM Management US Holdings Inc. and BAM Technology Services Inc.

In June of the same year, Binance announced a partnership with BAM Trading to create Binance.US, which could license Binance's technology and brand. Binance.US registered as a money service business with the Financial Crimes Enforcement Network of the U.S. Treasury.

According to documents reviewed by this newspaper, Binance did not disclose at that time that its founder and CEO Changpeng Zhao had registered an entity in the Cayman Islands and the British Virgin Islands to control BAM.

The spokesperson for Binance did not respond to requests for comments from Changpeng Zhao. Harry Zhou and Zhou Wei did not respond to requests for comments.

Binance.US will only offer basic cryptocurrency trading, without leverage or complex derivatives that can be traded on Binance.com. Platforms trading derivatives in the U.S. must register with the Commodity Futures Trading Commission or the U.S. Securities and Exchange Commission.

Binance announced that it would stop accepting U.S. customers on its platform. However, a Binance employee internally discussed how Binance could keep U.S. customers on the original exchange, allowing them to trade cryptocurrency derivatives there, a popular and profitable business.

In Binance's Telegram group chat, an employee pointed out that over 18% of page views on Binance.com came from U.S. users. Samuel Lim, then Binance's compliance officer, also claimed that U.S. regulatory lawsuits would bring "serious consequences," suggesting that Binance could retain its largest U.S. customer base, even though Binance had committed to not allowing U.S. users to trade on the global platform.

"Let them use a VPN, they will know how to use it." He said in a Telegram chat in June 2019. A VPN, or virtual private network, makes computer users appear to be in other countries.

Binance Academy had also provided guidance on how users could trade, releasing a VPN usage guide in 2020. However, that content was later removed.

Lim also discussed internally whether U.S. customers could rely on offshore entities to access Binance. Lim did not respond to requests for comments.

Catherine Coley, the first CEO of Binance.US, stated in a podcast shortly after trading began, "We are a very independent entity," unlike Binance, "we are just licensing the software."

Three months later, she instructed employees in a separate Telegram chat for Binance.US to forward updates to Binance's then CFO Zhou Wei and CEO Changpeng Zhao.

"Everyone please post your weekly reports before 7 pm EST/4 pm PST tonight, so Zhou Wei will know what we have done. Saturday is the time for weekly updates. Please send me 2-5 bullet points, clearly stating what you think CZ/Zhou Wei should know about your work over the past week," Coley wrote.

Coley left in the spring of 2021, and her lawyer did not comment.

At one point, an employee attempted to create a Google form for new customers of Binance.US, but he used the global exchange's account, making it difficult to change the creator of the form from Binance.com to Binance.US.

Harry Zhou wrote in Binance's Telegram chat, "This will definitely be caught by the media and cited in adversarial legal proceedings as direct evidence to pierce the corporate veil."

He wrote, "This is particularly concerning because this form relates to opening customer accounts." If I were the Attorney General, I would use this as evidence to prove that it is actually Binance, this 'unregistered foreign [money service business],' that is opening accounts for U.S. customers."

Harry Zhou also reminded employees to avoid using Binance's tone when drafting copy for the Binance.US website. "This is a good suggestion! When drafting, approach it from the perspective of Binance.US," replied Zhou Wei, then Binance's CFO.

Employees were also looking for ways to approach U.S. regulators. In mid-2019, then Binance Chief Strategy Officer Gin Chao learned that his high school classmate Sigal Mandelker was in charge of managing the U.S. Treasury's Office of Foreign Assets Control. He pointed this out in a chat group and mentioned that he might run into her at a class reunion that fall.

Binance executives discussed whether they should try to attend a conference where Ms. Mandelker was speaking and then decided that Changpeng Zhao should message her on LinkedIn. Mandelker left the Treasury at the end of 2019. The chat messages did not indicate whether any Binance executives had spoken with her. According to a person familiar with Mandelker's account, they had not.

In 2018 and 2019, Binance employees approached Gary Gensler, then chair of the Commodity Futures Trading Commission and now chair of the U.S. Securities and Exchange Commission, hoping he would serve as an advisor. Mr. Gensler was teaching at MIT at the time, and "if the Democrats won the 2020 election, he was likely to return to a regulatory position," a Binance employee told colleagues in a chat.

According to chat records, Binance's head of venture capital Ella Zhang and Harry Zhou met with Gensler in October 2018. Zhou Wei wrote, "What I observed was that while Gensler declined the advisory role, he generously shared information on authorization strategies."

During his tenure at MIT from 2018 to 2021, several companies, including Binance, approached him to invite him to serve as an advisor, but he declined the requests. Sources say that in March 2019, Gensler met with Binance's founder in Tokyo and later video-conferenced with him during the summer, which coincided with MIT's cryptocurrency course. Mr. Gensler became SEC chair in April 2021.

Some messages in the Binance.US Telegram chat indicate that Binance at least manages part of its budget.

In January 2020, employees of Binance.US and Binance vacationed together at a secret ski resort in South Korea. Before the trip, then CEO Coley told her employees to think about "the constraints you face (projects that require SH answers, access, approvals, funding in your work)." A person familiar with the information said that SH referred to Shanghai.