Binance processes $9.5 trillion in deals in 2021, making it the largest cryptocurrency exchange in the world in terms of volume and assets. But, China bans crypto due to the country’s 2021 prohibition on cryptocurrency trading.
Binance’s founder, Changpeng “CZ” Zhao, has said that the exchange’s know-your-customer processes, or KYC, are worth a billion dollars. Customers from countries like China who aren’t authorized to use the service will be denied access.
Binance’s official Chinese-language chatrooms reveal, however, that users from China and other countries often circumvent these measures to conceal their true place of origin.
CNBC collected, translated, and examined a large number of conversations from a Binance-run Discord server and Telegram group. More than 220,000 people had signed up for both organizations, and anyone could have joined for no cost. As there were no restrictions on access until late March, CNBC was able to go back and read letters from 2021-2023.
CNBC looked through communications from accounts that were either verified as belonging to Binance staff or verified as belonging to Binance-trained volunteers called “Angels.” By exchanging these conversations, they divulged methods for bypassing Binance’s know your customer, resident, and verification checks.
Worker and volunteer knowledge given includes falsifying bank papers and providing fictitious addresses. Some of these methods only entail manipulating Binance’s infrastructure.
Binance’s crypto could be converted into fiat currency and used like a checking account thanks to video instructions and documentation that were circulated amongst employees, volunteers, and customers showing mainland citizens how to fake their country of residence and get Binance’s debit card.
However they do it, Chinese Binance users are taking a major risk: Cryptocurrency exchanges were banned in China in 2017, and cryptocurrencies themselves were banned in 2021. Many of the items Chinese citizens want to buy are also prohibited by Chinese legislation.
The methods clients discuss among themselves also cast doubt on how well Binance combats money laundering. Binance, like many other worldwide companies, recognizes the need of Know Your Customer (KYC) and anti-money laundering policies in preventing its consumers from funding terrorism or other criminal activity.
Financial regulation experts are concerned that Binance’s Know Your Customer and Anti-Money Laundering measures are vulnerable to circumvention.
Professor at Duke University and former FDIC chief innovation officer Sultan Meghji told CNBC, “If I had an eight out of ten concern about Binance from a regulatory standpoint and from a national security perspective, this elevates it to a 10 out of 10.”
Meghji’s worries about Binance’s sloppy enforcement of KYC standards go beyond the borders of China. He said that when hearing about the methods described, his mind immediately went to the national security implications: “I think explicitly about the ways in which terrorists, criminals, money launderers, cyber people in North Korea, Russian oligarchs, etc., could use this to get access to this infrastructure.”
The methods used to circumvent Binance’s KYC standards may have wider ramifications than just China, according to James Richards, an official at Wells Fargo in charge of combating money laundering. What about demand from countries like North Korea, Russia, and Iran? Asked Richards.
We have taken action against workers who may have broken our internal procedures, including incorrectly soliciting or offering recommendations that are not authorized or in accordance with our standards,” a Binance spokesman told CNBC in response to questions about the article’s findings. All users must provide us with information about their country of residence and other forms of identification in order to pass our stringent KYC procedures.
A representative for the company further said, “Binance staff are specifically barred from recommending or aiding customers in evading their local laws and regulatory rules, and would be promptly terminated or audited if found to have broken such policies.”
CNBC also contacted the Binance staff members and Angels quoted here. One of them recommended that CNBC get in touch with Binance’s public relations group. Some people did not respond.
Obey openly, deceive hidden before the China bans crypto
According to Bloomberg, Binance stopped accepting Chinese mobile phone numbers for account registration in 2021, when Beijing outlawed cryptocurrencies. According to Bloomberg, the business has also barred access from Chinese IP addresses.
Even Nevertheless, Chinese clients have persisted in looking for ways to trade on Binance, such as through following the guidance of Binance staff and volunteers. Virtual private networks (VPNs) are utilized in some of these guides as a means to circumvent China’s Great Firewall and access blocked websites.
A member on Binance’s Discord server questioned “How can mainland people register now?” in the help channel in May 2022.
They were instructed by someone going by the name Yaya who claimed to work for Binance to transfer their nationality to Taiwan, activate their VPN, and then switch back to China. An other piece of advice from the worker was to stay away from VPN servers located in the “United States, Singapore, and Hong Kong.” Access to some Binance goods is formally restricted in those jurisdictions.
User #1: How can mainland users register now?
yaya.z: [How to register for mainland clients]:
Clients need to use a VPN that excludes IP addresses from restricted regions such as the United States, Singapore, and Hong Kong. Then use overseas email (Outlook, Gmail, ProtonMail) to register. Please choose Taiwan as a place of residence; then switch back to China at the authentication phase, then upload the mainland ID card.
Exchanges may and should take measures to limit the use of virtual private networks, according to Neel Maitra, a partner at Wilson Sonsini and a former senior special counsel for cryptocurrency matters at the Securities and Exchange Commission.
“Most best practices by exchanges also account for prevalent evasive behaviour,” Maitra told CNBC. Although it is true that an exchange may not be able to avoid or effectively police every potential type of evasion, I believe that the vast majority of regulators would nevertheless demand that they do so in order to protect investors.
When asked by CNBC how it was able to identify individuals from “restricted and sanctioned locations that have access to sophisticated masking technologies such VPNs,” Binance said it had used “advanced detection methods.”
When a VPN is not required, the recommendation is given.
Stella, who is listed as a Binance community manager on the company’s website, made server-wide announcements in December 2022, telling users that they could access Binance services without needing a virtual private network connection by going to a dedicated “VPN-free” domain and installing a custom app.
CNBC was sent the app’s download link from a binance.com email address. A reporter in China was able to successfully download the app and sign up using a Chinese phone number and IP address without resorting to a virtual private network. You may buy cryptocurrency from other Binance users at rates denominated in Chinese yuan using the widely used Chinese applications WeChat or Alipay, and the app is hosted by Tencent, a major Chinese cloud computing provider. Optional Chinese identity document submission for Know Your Customer checks are also available.
According to CNBC’s interview with Binance, the exchange does not provide a Chinese-language version of its mobile app. ” According to a company representative, “there is currently no ‘Binance Chinese Android app.” Only the “official” Binance app should be used.
CNBC’s investigation of internal business correspondence shows that staff often send queries concerning Know Your Customer (KYC) to Binance Angels, leaving the firm vulnerable to regulatory infractions. Angels “are not representatives of Binance,” as Binance has said.
An Angel said, “Our position is restricted, and we do not speak on Binance’s behalf” in an official Binance blog post.
A Binance employment website claims that the training period for Chinese-speaking Angels may last for up to a year. They are screened, given training, and then placed in various Telegram and Discord channels managed by Binance staff.
According to a recent Reuters article, Binance compensates its Angels with cryptocurrency discounts for their efforts.
CNBC investigated a conversation between an Angel and a user on Binance’s Angel platform from October 2022. The user was having problems accessing the Angel-only Binance webpages, which should be accessible from inside mainland China.
The Guardian suggested the client try connecting from a different VPN area.
In March 2022, one user asked another how to “create accounts for people in mainland China.”
A similar Angel advised the user to choose Taiwan as their country of residence and then register using an offshore email address.
The benefactor also helped other clients in a similar manner. Another person claiming to live in mainland China inquired, “What might I do if evidence of residency is required?” in April of 2022. Is it possible for me to relocate?
“Proof of registered residency is not necessary,” the Angel said.
Similarly, in March of 2022, a user who claimed to be a mainland resident expressed concern with posting their Chinese identification papers. The same Angel also informed the user that Binance would not prevent them from pretending to be from Taiwan while submitting a Chinese ID.
The Angel reassured the user, “[Binance] does not do business on the mainland, but it cannot prevent mainland users from circumventing the big firewall in order to play.”
Angels also educate customers on the features and best practices of the exchange, as well as the blockchain technology itself.
In an April 2022 Q&A session, two Binance Angels explained to Chinese customers how to invest in Binance’s IPO-like offering for new crypto tokens, Launchpad.
By Chinese legislation, citizens are barred from taking part in ICOs and other forms of initial exchange offerings.
The session’s Angel inquired rhetorically, “How can mainland people engage in Launchpad?”
Several people said that it couldn’t be done.
Several Q&A participants, including another Angel, argued that mainland users may evade Binance’s regulations by establishing a foreign corporation or using foreign KYC.
When asked who had the quickest response to “overseas company,” the session leader Angel congratulated the participant.
Binance emphasized to CNBC that the Angels are not employees in response to the article’s findings.
If you’re familiar with community ambassador programs on sites like Wikipedia or Reddit, you won’t find much difference between the Binance Angel Program and such programs. Angels are not allowed access to Binance infrastructure or systems, and they are not authorized to speak on Binance’s behalf. If a Binance Angel is discovered to be promoting anything that violates our standards or the law, they will be removed from the Binance Angel Program without warning.