Binance, the world’s largest cryptocurrency exchange in terms of daily trading volumes, has been hauled to court in South Africa, to thwart its attempt to force a business partner into arbitration which would keep its business conduct out of public attention.

Dimplx, a minority shareholder of Binance Digital Ltd, a subsidiary of Binance international which does business mainly in the UK and Souther Africa, alleges the holding company has misled authorities and customers about its operations. It claims the company has contravened the UK’s anti-money laundering and counter-terrorist financing laws and regulations; amended and backdated changes to its terms and conditions to obfuscate the true UK domicilium of the group entity, transacting with users of Binance.com; and channelled customers’ money into offshore bank accounts controlled by its founder, Changpeng Zhao.

Binance Digital Ltd has not as yet disputed these claims, but alledges that for the purposes of the current court case, they are irrelevant since the companies are bound by their agreement to enter arbitration if a dipsute arrises.

Binance’s website records indicate that more than £46-billion worth of transactions of crypto transactions were performed between June 2020 and December 2023, through Binance Digital Ltd, but it has not received any payment or dividend from the relationship.

It also contends that Binance has evaded regulatory scrutiny in the UK and avoided answering certain questions of the Financial Conduct Authority (FCA), which it was legally obliged to answer in terms of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 as well as section 165 of the Financial Services and Markets Act 2000.

As an alternate dispute resolution (ADR) mechanism, arbitration is ordinarily agreed to by parties, which involves the appointment of an arbitrator/s to preside over and make a final ruling on a dispute.

Instead of approaching a court of law to decide on a matter, which ventilates it in the public domain, arbitration is done under wraps and holds both parties to the outcome.

Relationship rift

Binance and Dimplx entered into a joint venture in South Africa and the UK in 2019, in which the latter is a 20% partner in Binance Digital Limited, with Zhao personally holding 80% shares of the company.

The 20% shareholding is Dimplx’s main asset. Dimplx has two South African directors — Simon Dingle and Joshin Raghubar.

In January 2020, the UK’s new money laundering regulations took effect, immediately bringing crypto service providers under the FCA’s supervision.

Between January and May of that year, Binance had received more than £100-million in deposits from UK customers. On 11 June 2020, the FCA sent Binance dozens of questions about its trading volumes.

Dimplx says its relationship soured with Binance and Zhao after the other directors of Binance Digital Ltd decided at a board meeting on 23 June 2020 not to answer the FCA’s questions and instead divert all of Binance Digital Ltd’s customer accounts and business activities to a company of which Zhao was the sole shareholder.

They say the business relationship between Dimplx and Binance Holdings deteriorated immediately after Dingle and Raghubar refused to consent to the course of action, which they regarded as being unlawful and designed to evade regulatory scrutiny. In answer to this claim, Binance subsequently argued that comments from former minority shareholders disappointed that their vision of the business plan for the entity did not come to fruition, should be viewed within that context. “We are aware that Dimplx and its directors, for their own commercial purposes, wanted BDL to register with the FCA to offer crypto services from the UK. They were upset that this course of action was not taken by BDL”.

Binance consumer alert and US charges

On 26 June 2021, the FCA published a consumer warning titled “Binance Markets Limited and the Binance Group” on its website, saying that the Binance group appeared to be offering UK customers a range of products and services via a website, Binance.com, but that Binance Markets Limited is not permitted to undertake any regulated activity in the UK, nor are any of its other entities entitled to do so.

The FCA updated that alert on 7 June 2023, saying Binance was no longer authorised to operate in the UK.

However, the FCA has taken no action against Binance, despite tough action by US authorities.

In November last year, Binance Holdings Limited, which operates Binance.com, entered a plea bargain with US authorities on charges linked to wilful money laundering, sanctions violations and illicit money transfers.

It has agreed to pay a $4.3-billion fine and Chinese-born Zhao — now a Canadian national — has been sentenced to four months in prison.

Zhao (47), who has a personal fortune of nearly $40-billion, has stepped down as CEO and has paid $200-million in fines.

Binance CEO Changpeng Zhao leaves the US District Court in Seattle, Washington. 21 November 2023. (Photo: David Ryder / Getty Images)

This comes just over a month after the sentencing of his former rival, Sam Bankman-Fried, who has been jailed for 25 years for his role in the multibillion-dollar FTX fraud. It was the world’s second-largest crypto exchange until its collapse in 2022.

Commenting on the plea and sentence, Attorney General Merrick Garland said: “Binance became the world’s largest cryptocurrency exchange in part because of the crimes it committed — now it is paying one of the largest corporate penalties in US history.

“In just the past month, the Justice Department has successfully prosecuted the CEOs of two of the world’s largest cryptocurrency exchanges in two separate criminal cases.  The message here should be clear: using new technology to break the law does not make you a disruptor, it makes you a criminal.”

Secretary of the Treasury Janet Yellen said that Binance had turned a blind eye to its legal obligations in the pursuit of profit.

“Its willful failures allowed money to flow to terrorists, cybercriminals and child abusers through its platform.

“Today’s historic penalties and monitorship to ensure compliance with US law and regulations mark a milestone for the virtual currency industry. Any institution, wherever located, that wants to reap the benefits of the US financial system must also play by the rules that keep us all safe from terrorists, foreign adversaries and crime or face the consequences.”

Biance has responded that the FCA supervisory notice dated 25 June 2021 was issued only against Binance Markets Limited and applied only to unused regulated permissions held by that entity. “No products or services related to these permissions were offered at any point by Binance Markets Limited or any other Binance entity. Binance Markets Limited complied with all aspects of the requirements imposed on it by the FCA under that supervisory notice, as confirmed publicly by the FCA in August 2021.”

“Binance Markets Limited later applied for the cancellation of these unused permissions, which was completed on 30 May 2023. Binance Markets Limited did not provide any crypto services and had no users in any country at any point. Binance has always endeavored to operate in the UK in compliance with local laws and regulations”. It added that Binance has reached resolutions with several U.S. regulatory bodies, acknowledging its responsibility for past compliance violations.

Binance has reached resolutions with several U.S. regulatory bodies, acknowledging its responsibility for past compliance violations. As far as Binance Markets Limited is concerned, the company said it is common for large corporate groups, such as Binance, to have group treasury management in place.  “BDL performed this role at the time had relationships with registered EMI and card processing companies and acted solely as an intra-group company service provider for Binance. BDL at no time offered or conducted any crypto asset exchange services as defined in the applicable regulations.”

Binance founder and former chief Changpeng Zhao, who pleaded guilty to violating US law by failing to implement a programme to prevent money laundering, arrives for his sentencing in federal district court in Seattle, Washington. 30 April 2024. (Photo: Reuters / Deborah Bloom)

SA litigation

On 17 May in the Western Cape High Court, advocate Arnold Subel SC, for Binance, argued that the allegations made against his client were not only slanderous but that they were irrelevant: Dimplx is bound to its contract with Binance, which holds it subject to international arbitration because the majority partner is an internationally domiciled company registered in the Cayman Islands.

However, advocate Richard Goodman SC, for Dimplx, contended that the Binance office at George Town, 23 Lime Tree Bay Avenue, in the Cayman Islands, is merely a registered office address and not Binance’s place of business.

Zhao himself has admitted that Binance, as a decentralised entity, does not need a traditional headquarters, nor does it have an operational base, and that it ultimately rests with his person.

The Cayman Islands Monetary Authority has said that Binance is not licenced by the regulator to operate a cryptocurrency exchange business within or from the Western Caribbean Islands.

Archived copies of Binance.com’s legal terms from 2020 show that Binance Digital Limited was the only named legal entity carrying out cryptocurrency transactions with visitors to Binance.com.

Dimplx’s allegations suggest that during the height of the 2020 crypto bull run, Binance’s global cryptocurrency transacting operations were, in fact, legally incorporated in the UK in the form of Binance Digital Limited.

Dimplx alleges that Zhao himself had signed an exclusive operations agreement with their UK entity.

Referring to the founding affidavit, Subel said the applicant had admitted in its affidavit that the first respondent is a peregrinus (a foreign litigant that is not domiciled within the jurisdiction of the court).

“There is an arbitration agreement, and the rules will apply to that arbitration, but there’s still an arbitration agreement.”

Without touching on the allegations of “impropriety”, Subel said the “real high threshold… is that the applicant doesn’t get close to satisfying the court that the arbitration provision must be overwritten here.”

Goodman, however, suggested that the reason Binance’s legal team wanted to avoid filing an affidavit challenging his client’s money laundering allegations and headquarters was that “there’s no desire on the part of Binance to reply.

“It simply does not want the affidavit to be admitted (to court), where that affidavit illustrates the wholesale conspiracy to evade whatever regulatory environment might otherwise be applicable.”

Binance now claims that Zhao’s “rather elusive” position on the matter has shifted and that he has recognised the importance of establishing a central headquarters, “signalling a shift in the company’s approach to corporate governance and regulatory compliance”.

“At the time of his appointment, (new CEO) Richard Teng initially reflected this non-disclosure policy regarding the company’s headquarters. However, his recent statements indicate a proactive approach towards defining the headquarters.”

Teng, according to Binance, has emphasised that the choice of location is not just a matter of preferences, but involves a “comprehensive evaluation of various factors”. Among these, the regulatory context of potential jurisdictions, the range of products offered by the exchange, and tax considerations. The discussion on these considerations reflects a deeper understanding of the complexities related to aligning business operations with regulatory expectations and market dynamics.”

Dimplx has brought an application to the Western Cape High Court in terms of Section 163 of the Companies Act for relief from a broad range of conduct engaged in by Binance that Dimplx says has had an unfairly prejudicial effect on its interests. It says arbitration on disputes in terms of its shareholders’ agreement with Binance would be “extremely inappropriate” in this matter because the decisions taken by an arbitrator would then be foisted upon a court which will ultimately have to determine the outcome of the Section 163 application. The court has reserved judgment.

Subsequently to the court action, Binance said in response to several recent allegations of tax evasion and money laundering , Binance said “Over the past two and a half years, Binance has worked hard to restructure our organisation and personnel and upgrade our systems. We have new leadership in place with deep compliance experience and impressive backgrounds ranging from top traditional financial institutions and leading tech companies, to law enforcement and major corporate entities.

The Binance leadership team report to a Board of Directors. The Board is responsible, as corporate steward, to safeguard the company’s interests as well as make key decisions to ensure the long-term sustainability and viability of the business. It is through this process that we have become a stronger, safer, and even more compliant and secure platform for our users. We have evolved dramatically as a business.  DM

• Article amended to accommodate the Right of Reply of Binance to several of the issues involved.