Binance Lawsuits: Is The Exchange Still Safe To Use?

Another year, another lawsuit for Binance. After the biggest crypto lawsuit in history against the exchange, it seemed like the storm had passed. However, the largest crypto exchange and its former CEO, Changpeng Zhao (CZ), is now facing another class action lawsuit from former customers. 

After the FTX debacle in 2022, users are increasingly nervous about trusting centralized exchanges. Whenever there’s notable news about lawsuits or potential misuse, the crypto community becomes largely concerned with the security of their funds.

So, what’s this new lawsuit about? And is Binance safe to use?

Key takeaways 

• Binance and its former CEO, Changpeng Zhao (CZ), are facing a class-action lawsuit for allegedly enabling the laundering of stolen cryptocurrency through their platform.
• The lawsuit is led by three crypto investors, Philip Martin, T.F. (Natalie) Tang, and Yatin Khanna, who claim their stolen assets were funneled through Binance.
• Despite the legal issues, Binance maintains a strong proof-of-reserves, showing it holds more assets than needed to cover all user deposits, and its SAFU fund, valued at $1billion, provides additional protection for users in case of emergencies.

Key details of the latest Binance lawsuit

In August 2024, Binance and its former CEO Changpeng Zhao (CZ) were hit with a new class-action lawsuit filed in the U.S. District Court for the Western District of Washington. The lawsuit alleges that Binance enabled the laundering of stolen cryptocurrency, making it impossible for the rightful owners to recover their assets.

The plaintiffs accuse Binance of intentionally neglecting anti-money laundering (AML) protocols, which allowed criminals to obscure their activities. Here are the core details of the lawsuit based on the filing at the District Court. 

• Nature of the action: The lawsuit accuses Binance of creating and operating a platform that allowed criminals to launder stolen cryptocurrency. It claims that Binance wilfully ignored U.S. laws and regulations, including Know Your Customer (KYC) and AML rules, to attract U.S. customers and profit from their activities without complying with legal obligations.
• Defendants: The defendants include Binance Holdings Ltd., Binance.US (operated by BAM Trading Services), and Changpeng Zhao (CZ). The complaint details how Binance, under Zhao's leadership, deliberately created Binance.US as a façade to distract U.S. regulators while continuing to operate Binance.com in violation of U.S. laws.
• Claims: The lawsuit makes several claims – Violations of the RICO Act, alleging that Binance was involved in a pattern of racketeering activity through its operations, including money laundering. Conversion, where the defendants are accused of converting the plaintiffs' stolen cryptocurrency for their own benefit. Aiding and abetting conversion, accusing the defendants of assisting others in committing the act of conversion.
• Background: The plaintiffs claim that their cryptocurrency was stolen and funneled through Binance, where it was laundered and made untraceable. The lawsuit outlines how Binance’s failure to implement effective KYC and AML policies made it a preferred platform for criminals.
• Trial date: As of the filing, a specific trial date has not been set. However, given the nature and complexity of the case, the legal proceedings could extend over a significant period, with a high likelihood of pre-trial motions and possible settlement discussions.

Who is suing Binance? 

The plaintiffs in the lawsuit against Binance are Philip Martin, T.F. (Natalie) Tang, and Yatin Khanna. These individuals have filed the class-action lawsuit on behalf of themselves and all others similarly situated. Here are brief details about each plaintiff:

• Philip Martin: A citizen of California residing in Los Angeles. He had tens of thousands of dollars worth of cryptocurrency stolen from his Coinbase account in December 2021. The stolen cryptocurrency was traced to at least one account on Binance.com.
• T.F. (Natalie) Tang: Also a citizen of California living in Los Angeles. In July 2022, she had tens of thousands of dollars worth of cryptocurrency stolen from her Coinbase account, which was similarly traced to an account on Binance.com.
• Yatin Khanna: A citizen of New York residing in New York City. He lost more than $1.5m worth of cryptocurrency in August 2022, which was also traced to a Binance.com account.

None of the plaintiffs ever held accounts with Binance or Binance.US, nor did they agree to any terms of use that Binance or BAM Trading impose upon their account holders.​

Previous lawsuits against Binance 

1. SEC Lawsuit (June 2023)

The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance, Binance.US, and CZ on 5 June 2023. The SEC accused them of operating unregistered exchanges, broker-dealers, and clearing agencies in violation of U.S. securities laws. The complaint alleged that Binance misled investors about the adequacy of its controls over investor assets and engaged in manipulative trading practices. Additionally, the SEC claimed that Binance and CZ commingled billions of dollars of user funds and transferred them to entities controlled by Zhao, raising significant concerns about the safety of customer assets. This lawsuit was part of a broader crackdown by the SEC on the cryptocurrency industry, focusing on ensuring that crypto platforms adhere to regulations designed to protect investors.

The lawsuit was significant because it represented one of the largest and most comprehensive actions taken by the SEC against a cryptocurrency exchange, emphasizing the agency’s stance that many digital assets fall under its jurisdiction​.

2. CFTC lawsuit (March 2023)

On 27 March 2023, the Commodity Futures Trading Commission (CFTC) filed a civil enforcement action against Binance, CZ, and Binance’s former chief compliance officer, Samuel Lim. The CFTC accused Binance of wilfully evading U.S. laws by offering unregistered commodity derivatives transactions to U.S. customers. The complaint highlighted that Binance’s compliance program was a 'sham' and that the company actively instructed U.S. customers on how to evade compliance controls to maximize profits.

The CFTC’s lawsuit was notable for its focus on derivatives trading and highlighted Binance’s alleged strategy of regulatory arbitrage. Binance allegedly operated a digital asset derivatives platform without registering as required under U.S. law. The CFTC sought significant penalties, including disgorgement of profits and permanent trading bans​.

3. DOJ investigation and guilty Plea (November 2023)

The Department of Justice (DOJ) launched a criminal investigation into Binance, which culminated in a guilty plea from the company and its CEO, CZ, on 21 November 2023. The DOJ charged Binance with violating the Bank Secrecy Act (BSA) and the International Emergency Economic Powers Act (IEEPA). Binance admitted to failing to implement effective AML controls, allowing its platform to be used for money laundering and facilitating transactions involving sanctioned jurisdictions such as Iran, Syria, and North Korea.

This case resulted in Binance agreeing to pay a record $4.3bn in penalties, one of the largest corporate resolutions in U.S. history. The plea agreement included significant compliance enhancements, including the appointment of an independent monitor to oversee Binance’s operations for three years. CZ also stepped down as CEO as part of the settlement. This case was pivotal as it marked the first time a major cryptocurrency exchange had pleaded guilty to such serious violations, setting a precedent for future enforcement actions​.

Is Binance safe to use in 2024? 

Despite these lawsuits, Binance remains safe because of the audited proof-of-reserves, its SAFU insurance fund, and its large transaction volume across the market. 

Still the largest crypto exchange 

It’s important to note that Binance is by far the largest crypto exchange in the entire market. As of August 2024, the exchange has an average monthly visit of nearly 54 million and nearly $11billion daily transaction volume. This means that the exchange has a steady flow of trading activities, which keeps it functional despite any operational or regulatory challenges. In terms of transaction volume, the closest competitor of Binance is Bybit, which has one-third of its daily transaction volume. 

A health proof-of-reserve 

Binance releases an update of its proof-of-reserve every month to assure customers that it has enough funds to support all withdrawal requirements. A ratio above 100% indicates that Binance holds more assets than the total customer liabilities, which means they have excess reserves for that particular asset. For example, for Bitcoin (BTC), the ratio is 106.34%, meaning Binance holds 106.34% of the Bitcoin necessary to cover all user deposits.
 

A $1billion insurance fund 

The SAFU (Secure Asset Fund for Users) is an emergency insurance fund established by Binance in July 2018. The fund is designed to protect users' assets in extreme cases, such as significant security breaches or unforeseen events that result in financial loss. Binance allocates 10% of all trading fees to the SAFU, which is stored in a separate cold wallet to ensure its security. The establishment of SAFU was a response to the increasing need for customer protection in the cryptocurrency industry, and it reflects Binance’s commitment to safeguarding user assets. The phrase 'Funds are SAFU' became popular following a brief security incident on the platform, reassuring users that their assets were safe.

As of early 2024, Binance's SAFU is valued at approximately $1billion. The fund is periodically adjusted to maintain this level, depending on market conditions, to ensure that it remains sufficient to protect users' assets in case of emergencies such as security breaches.​

Final thoughts 

Despite the continuous barrage of lawsuits, Binance is still the largest and one of the safest exchanges to use. Its large user base, commitment to regular proof-of-reserves, and continued security updates show that the exchange is trying hard to maintain high credibility. As Binacne dominates the daily crypto transaction volume by a large margin, the stability of the entire crypto market depends on the exchange's security. These lawsuits might prove a positive challenge in the long-term, as it will drive exchanges like Binance to strengthen their AML (anti-money laundering) practices and prioritize compliance.