Binance Struggling to Find Banking Partner Following Regulatory Scrutiny

Binance Struggling to Find Banking Partner Following Regulatory Scrutiny

Binance U.S., the American subsidiary of the world’s largest cryptocurrency exchange by trading volume, is faced with the tough task of finding itself a banking partner to handle customer deposits. The issue could heavily impact the platform’s dollar deposit services in the United States. 

Binance Faces Difficulty Finding U.S. Banking Partner, Could Impact Dollar Deposits

The problem began after Binance U.S.’s main banking partners Signature Bank and Silvergate Bank shut down operations after facing a liquidity crisis last month, which severely affected the banking industry in U.S. and Europe.

Both banks operated fiat-to-crypto payment rails that allowed crypto firms to convert customers’ dollar deposits into digital assets. However, the failure of two of the largest crypto-friendly banks led to many of its suitors rushing to find new banking partners. 

Usually, crypto exchanges like Binance send customers’ dollar deposits to accounts held by Silvergate or Signature Bank. These banks keep the accounts for user deposits and trading separate from those that are used for corporate operations, like payroll and one-off expenses. Now Binance is finding it difficult to find a suitable banking partner for its operations in the United States.

Binance Faces Difficulty Finding U.S. Banking Partner, Could Impact Dollar Deposits

The crypto exchange had sought to establish direct banking relationships with New Jersey-based Cross River Bank, which serves several crypto and fintech firms, and Pennsylvania-based Customers Bancorp Inc. However, both banks declined to offer their services to Binance U.S. citing regulatory risk associated with the platform. 

Last month, the Commodity and Futures Trading Commission (CFTC) filed a lawsuit against Binance U.S.’s parent company Binance Holdings Ltd., CEO Changpeng ‘CZ’ Zhao, and former chief compliance officer Samuel Lim, for evading U.S. regulations and violating compliance rules designed to prevent illicit financial activity.

The regulator alleged that between 2018 and 2021, company executives asked employees to advise Binance U.S. customers on how to mitigate its compliance requirements to continue trading derivatives in the country, an activity that is required to be registered with the CFTC. 

The Securities and Exchange Commission (SEC) and the U.S. Department of Justice have been investigating the relationship between Binance U.S. and Binance, which according to legal obligations are entities that operate separately from each other, since at least 2020. 

As a stopgap measure, Binance U.S. has been using Prime Trust LLC, a crypto-services firm, to store funds on its behalf at middleman banks ever since its main banking partners collapsed.

However, maintaining funds at middleman banks can slow down the process of sending and transferring money. Prime Trust declared that any funds it receives from crypto clients are stored in accounts maintained with its network of banking partners.

Recently, a spokesperson for Binance U.S. said the exchange was working with multiple U.S.-based banking and payment service providers and will continue to onboard new business partners while it upgrades its internal systems to create a more stable fiat platform and offer additional services. 

The lack of direct bank deposits has led to service disruptions for Binance’s U.S. customers. On Sunday, Binance U.S. posted an update on its website stating that the exchange will be transitioning to new banking and payment service providers over the next several weeks. The company also added that some dollar services, including wire deposits and withdrawals, and deposits via Apple Pay and Google Pay would be temporarily unavailable. 

The crypto industry has been facing tough regulatory action since the collapse of Sam Bankman-Fried’s FTX crypto exchange in November. Federal regulators have grown sceptical of banks that offer their services to crypto firms, while some banks, like Signature Bank, had pulled back from doing business with digital asset service providers. 

Some regional banks in the U.S., such as Cross River Bank, Fifth Third Bancorp, and Customers Bancorp, have picked their spoils from Signature and Silvergate’s scramble to establish business relationships with crypto companies. Meanwhile, megabanks like JP Morgan & Chase, and Bank of New York Mellon (BNY Mellon), which continue to do business with clients from the crypto industry, are now selective of their crypto customers and what services they offer to them. 

However, Binance’s troubles didn’t stop there. 

Binance Loses Operational License in Australia While Dubai Government Asks the Crypto Exchange to Provide More Details on its Operations

Earlier last week, the Australian Securities and Investments Commission (ASIC) cancelled the regulatory license held by Oztures Trading Pty. Ltd., an Australian associate of Binance that conducted digital asset derivatives trading on the crypto exchange’s behalf in the country. 

The decision came after the regulator launched a probe into Binance in February to review its financial services business in Australia which found that the company had “mistakenly” classified around 500 retail derivatives traders as wholesale investors.

Binance Loses Operational License in Australia While Dubai Government Asks the Crypto Exchange to Provide More Details on its Operations

To save its face, the crypto exchange requested to cancel its Australian Financial Services (AFS) license a day before ASIC suspended the trading license. Binance boss Changpeng ‘CZ’ Zhao stated that his company opted to withdraw the license because its derivatives unit in the country did not have enough customers. 

In a similar fashion, the Virtual Assets Regulatory Authority (VARA) of Dubai has asked Binance to submit more information detailing its ownership structure, governance, and auditing procedures.

The UAE regulator’s measure is not singled towards Binance, as rival exchanges, GC Exchange, Hex Trust, and Komainu, have also been asked to provide more information about their business structure. 

CZ Resigns as Director from Binance’s Irish-based Subsidiaries

The CFTC lawsuit had named two units of Binance’s crypto empire, the Ireland-based Binance Service Holdings and Binance Holdings IE, as defendants. CZ served as director for both the companies. Documents filed with the Companies Registration Office in Dublin last week revealed that CZ had resigned from the helm of both companies. 

A spokesperson for Binance claimed that CZ had “proactively resigned” from directorship on January 18 “to help focus his attention on the leadership of the Binance Group as co-founder and CEO.” Kaiser Ng, the senior vice president of finance at Binance and former CFO at U.S.-based crypto exchange Kraken, has been named the new Director of Binance Holdings IE and Binance Service Holdings. 

All things are turning the heat up to the max for the world’s largest cryptocurrency exchange. 

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