Binance Faces New Class-Action Lawsuit Over Alleged Role in Money Laundering Scheme

Binance, one of the world’s largest cryptocurrency exchanges, and its former CEO Changpeng “CZ” Zhao, are at the center of a new legal battle. Three crypto investors have filed a class-action lawsuit against the exchange, accusing Binance of failing to prevent money laundering, which they say led to their stolen assets becoming untraceable.

The lawsuit, filed on August 16 in the United States District Court for the Western District of Washington, Seattle, alleges that the plaintiffs’ cryptocurrency was stolen and then transferred to Binance by the perpetrators. According to the lawsuit, the thieves used Binance to obscure the link between the stolen assets and the blockchain ledger, making it nearly impossible for the victims to recover their funds.

The plaintiffs argue that one of the core features of cryptocurrency transactions is the immutable record on the blockchain, which should, in theory, make all transactions traceable. The lawsuit contends that without a platform like Binance to facilitate the laundering of stolen crypto, authorities would be able to track down the perpetrators by following the digital trail on the blockchain.

“Therefore, without a place to launder crypto, such as Binance.com, if a bad actor steals someone else’s crypto, there is a risk the authorities would eventually track them down by retracing their steps on the blockchain,” the lawsuit states. The plaintiffs allege that Binance’s involvement in this process violates the Racketeer Influenced and Corrupt Organizations (RICO) Act.

This lawsuit adds to the growing legal troubles for Binance and CZ. In November 2023, CZ pleaded guilty to violating U.S. money laundering laws and stepped down as CEO as part of a settlement with authorities. Binance agreed to pay $4.3 billion in fines to resolve various civil regulatory enforcement actions. In April, a federal judge sentenced CZ to four months in prison, a sentence notably shorter than the three years federal prosecutors had requested. CZ began serving his sentence in June and is expected to be released in September.

The lawsuit also draws attention to ongoing concerns about the traceability and security of cryptocurrency transactions on centralized exchanges like Binance. While the blockchain is designed to provide a permanent record of transactions, the use of centralized exchanges introduces vulnerabilities. In contrast, decentralized exchanges operate on-chain and emphasize self-custody, making it more difficult for bad actors to obscure their tracks.

The U.S. Securities and Exchange Commission (SEC) has also taken legal action against Binance, filing a suit in June 2023. The SEC accused Binance and CZ of misleading the agency about its market surveillance controls and artificially inflating trading volumes. A court has allowed most of the SEC’s case to proceed, further intensifying scrutiny on the exchange.

As the cryptocurrency industry continues to evolve, the need for robust regulatory oversight is becoming increasingly clear. The rise and fall of FTX, the now infamous crypto exchange, highlighted the risks associated with insufficient checks and balances. As major financial institutions like BlackRock, Fidelity, and State Street enter the space, there is hope that new guardrails will be established to protect investors and prevent similar incidents in the future.

With the growing interest in the tokenization of real-world assets, ensuring the security and traceability of digital transactions is crucial. As the industry matures, centralized exchanges will need to address these vulnerabilities or risk facing further legal challenges and loss of trust among investors.

James Cullen
Digital Assets Desk