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Ex-Trump Official at Binance.US Faces Uproar Over Firm’s Sibling

(Bloomberg) — The first challenge for the new chief executive officer of Binance.US: combat the perception that his company is simply a stand-in for a sister crypto firm that’s under investigation by U.S. authorities.Brian Brooks, a controversial former banking regulator under President Donald Trump, is embarking on a campaign to reassure regulators and others that his company is focused on complying with regulations and is independent from its namesake, Binance Holdings Ltd. The world’s largest cryptocurrency exchange, Binance Holdings is under investigation by the Justice Department and the Internal Revenue Service, among other U.S. enforcers, Bloomberg News has reported.U.S. officials have long been concerned that criminals are using crypto exchanges to conceal illicit transactions, and that customers on those platforms are evading taxes on their trading profits.San Francisco-based Binance.US, which is small but one of the country’s fastest-growing cryptocurrency exchanges, is under attack by rivals who are all too eager to link the U.S. company to its embattled namesake. A study by blockchain analysis company Chainalysis Inc. concluded that Binance Holdings handled more transactions tied to illicit finance than any other exchange.“The challenge ahead of me is to get in front of the regulators and explain to them that we have an approach. It’s a heavily compliance-focused approach,” Brooks said in an interview. He’s planning in coming months to meet with the Commodity Futures Trading Commission and Securities and Exchange Commission, among other regulators. “We are not an alter-ego of Binance,” said Brooks, who most recently served as acting head of the Office of the Comptroller of the Currency at the Treasury Department.He generated controversy during his tenure at the OCC over a rule that would have prohibited banks from withholding loans to industries like gun makers. He finalized the measure on his last day, a move that drew plaudits from Republicans and opposition from Democrats, consumer groups and banks. The Biden administration quickly stopped the new rule from taking effect.To continue its exponential growth, Binance.US will need to ensure that U.S. regulators don’t restrict it because of issues with Binance Holdings. A separate company, the U.S. firm is permitted to do business in 43 states, the largest exceptions being New York and Texas. In addition to securing those remaining licenses, Binance.US executives hope to one day persuade regulators to allow crypto-tied derivatives in the U.S., the business line that turned Binance Holdings into the behemoth it is today. All of those goals could become more difficult if regulators crack down.Though Brooks says Binance.US and Binance Holdings work at arm’s length, Binance.US’s majority shareholder is Changpeng Zhao, who founded Binance Holdings in China in 2017. The son of Chinese educators who emigrated to Canada, he got his start as an intern in Japan writing software for trading platforms.A spokeswoman for Binance Holdings said the company takes its legal obligations seriously but doesn’t comment on specific matters or inquiries.Zhao has said Binance Holdings is working with regulators around the world and continues to improve its compliance.Binance Holdings allows investors to trade cryptocurrencies that aren’t available on other exchanges. It also allows trading of derivatives, which investors can use to magnify their bets with leverage. Those features help explain why trading volume on Binance Holdings’ main exchange has quickly surpassed that of its rivals, like San Francisco-based Coinbase Global Inc.Binance Holdings processed more than $50 billion in crypto trading in the 24 hours ending at 2 p.m. ET on Friday, compared to more than $8.8 billion for Coinbase, according to Coinmarketcap.com, an industry website.Binance Holdings also processed more than $95 billion in derivatives, which investors outside the U.S. can use. Many exchanges, including Coinbase, don’t offer derivatives because they’re not approved to do so by U.S. regulators.By comparison, Binance.US handled about $1.9 billion in cryptocurrency transactions during that period, according to Coinmarketcap.com.Brooks said that Binance.US operates independently of Binance.com, which is Binance Holdings’ exchange, and that the U.S.-based exchange merely licenses the Binance name and some of its technology for a fee.Coinbase’s ProtestBinance.US’s attempts to keep its image intact in Washington, which precede Brooks, have already come under attack.Last year, its chief U.S. rival, Coinbase, quit industry trade group Blockchain Association in protest after Binance.US was allowed to join. A Coinbase executive wrote in a resignation letter that “recent weeks have demonstrated to us that the Blockchain Association is not interested in the membership criteria we had worked to establish to underpin the mission of this organization.”Before its $86 billion public stock listing, Coinbase said in a filing with the SEC that it competes with companies that “have varying degrees of regulatory adherence, such as Binance.”Brooks, who before becoming the acting head of the OCC was Coinbase’s chief legal officer, said he was concerned about rivals casting aspersions on Binance.US.“I wish that weren’t the way the world worked. It obviously is,” Brooks said. He said Binance.US plans to soon triple the number of employees in its regulatory, legal and compliance teams and that the company has joined several trade associations to help press the crypto industry’s interests with regulators.Other exchanges have faced their own regulatory issues. The CFTC fined Coinbase $6.5 million in March for giving investors misleading information about its exchange’s trading volume.Last month, Coinbase and three other companies started a new trade association, called the Crypto Council for Innovation. Many cryptocurrency executives see it as a rival to the Blockchain Association, which Coinbase viewed as being tainted by Binance’s membership. A CCI representative said the group’s formation was unrelated to the disagreement with the Blockchain Association.Questions about the relationship between Binance Holdings and Binance.US aren’t limited to lobbying circles. Lawmakers and some regulators ask about Binance in meetings and seem confused about Binance Holdings’ involvement in the U.S. business, which country’s regulators watch over it and even where Binance Holdings is headquartered, according to two lobbyists for cryptocurrency firms. A Binance.US spokeswoman said the company hasn’t run into such confusion itself.Nomadic ExistenceZhao has adopted a nomadic existence for himself and his company. When the Chinese government cracked down on cryptocurrency exchanges, Binance Holdings moved its operations and has claimed a presence in Japan, Malta and Singapore, among other locations.Last year, Zhao disavowed that the company had a home base at all, saying that the headquarters was wherever he happened to be. In legal filings, the company’s lawyers say that it’s incorporated in the Cayman Islands, which is well-known for being an offshore tax and regulatory haven.Initially, U.S.-based investors could have accounts on Binance.com even though some of the exchange’s practices were prohibited in the U.S. In 2019, Binance limited access for U.S. investors, and said it had entered into a partnership with BAM Trading Services Inc., a Delaware corporation, to launch Binance.US.BAM was incorporated in February 2019, according to public filings, and initially listed Zhao as its sole director. Now the filings show three directors: Zhao, Binance Holdings’ Chief Financial Officer Wei Zhou and former BAM CEO Catherine Coley. A spokeswoman for Binance.US said that’s no longer the current composition of the board but declined to say how it has changed.Brooks said Zhao recruited him to the job and gave him complete management control. He said he and Zhao have a good rapport and that BAM plans to bring in more investors and expand its board.“I wasn’t going to come here and lend a credential for a company that’s really managed somewhere else,” said Brooks.Zhao worked at Bloomberg LP, the parent company of Bloomberg News, from 2002 to 2005 in a division that develops trading technology and analytics.Despite their fast growth, neither Binance.US nor Binance Holdings has built a large Washington presence, in contrast to some of their competitors.Binance Holdings recently tapped former Senator Max Baucus, a Montana Democrat, for policy advice and to connect the company with regulators and lawmakers. Neither Binance Holdings nor its U.S. counterpart have any registered lobbyists. Coinbase, by comparison, had two firms with nine lobbyists representing it as of last quarter.Brooks said he hasn’t decided whether Binance.US will hire its own lobbyists but will handle much of the outreach to lawmakers and regulators himself with other Binance.US executives.More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.