Special Report-How crypto giant Binance built ties to a Russian FSB-linked agency -Breaking
© Reuters. FILE PHOTO SEE: Binance App on Smartphone in the Illustration taken July 13th, 2021. REUTERS/Dado Ruvic/Illustration/File Photo
By Tom Wilson and Angus Berwick
VILNIUS, Reuters – Russia’s financial intelligence team met with Binance’s regional chief in Moscow, April 2021. Binance is the largest cryptocurrency exchange worldwide. According to text messages sent by a company official to an associate, the Russians requested that Binance hand over their client data. This included names, addresses and other information to aid them in fighting crime.
According to a source familiar with the matter, Rosfinmonitoring, or Rosfin at the time was trying to track down millions of bitcoins raised by Alexei Navalny (a jailed Russian opposition leader), at the time. Rosfinmonitoring, Navalny’s network, added the month to a list that included terrorist organizations. He claimed that the money was used to fund efforts to expose corruption within President Vladimir Putin’s government.
Gleb Kstarev from Binance, Binance’s Eastern Europe & Russia Head, agreed to Rosfin asking him to allow the sharing of client data. The messages revealed. The business associate was informed by him that he had no choice in the matter.
Kostarev did not comment on this article. Binance said to Reuters that Russian authorities had not contacted it regarding Navalny. The company stated that it had been “actively seeking compliance with Russia” before the war, which would have obliged it to reply to any “appropriate requests by regulators or law enforcement agencies”.
According to Reuters, the encounter occurred as part of Binance’s behind-the scenes efforts to establish ties with Russian agencies in order to grow its country-based business. The following account is based upon interviews with 10 people with knowledge of Binance’s Russia operations. This includes former employees and ex-business partners as well as crypto industry executives. A review also included text messages Kostarev sent out to outsiders.
Binance continued its operations in Russia even after Putin placed troops in Ukraine on February 24th, despite being asked by the Kyiv government to Binance or other exchanges not to ban Russian customers. PayPal (NASDAQ) is another major fintech and payment company. American Express Services in Russia have been halted by (NYSE:) since Russia launched a special operation to “denazify and demilitarize” Ukraine. EXMO.com (one of Binance’s biggest competitors in Russia), announced on Monday that it was closing its Russian business and will not serve Russian and Belarusian clientele. There are smaller crypto exchanges.
Changpeng Zhao (known by his initials CZ) has declared that he opposed war and “politicians, dictators which start the wars” and that he does not support “people on both sides of Ukraine/Russia that are suffering.” Zhao declined to comment on the article. Binance referred Reuters at Zhao’s earlier statements about the subject.
Binance’s legal representatives told Reuters that the conflict has caused Binance to cease “active engagement” with Russia. Binance advised users on Thursday that due to recent European Union sanctions, it had stopped providing services to major Russian clients.
Binance has seen a surge in Russian trading volume since the start of war. This is according to data from an industry research company. The reason for this boom was that Russians have turned to cryptocurrency to safeguard their assets against Western sanctions and devaluation. Kostarev explained that Binance’s primary goal was to maintain the open market, and not “making a fuss.” He didn’t elaborate.
When Reuters asked Binance to clarify Kostarev’s message, Binance stated that the economic and war crisis would accelerate cryptocurrency’s adoption by working-class Russians looking for other payment methods. Binance stated that the country is applying Western sanctions aggressively, but it would not “freeze millions” of accounts.
GRAPHIC: Binance in Russia’s war – https://graphics.reuters.com/FINTECH-CRYPTO/mopanbbnava/chart.png
THE FREEDOM OF MONEY
Binance’s five-year anniversary in Shanghai has seen it dominate unregulated Russian crypto markets. According to market data, four fifths of all Russian trading volume is Binance. Binance stated that it does not comment on external data projections and doesn’t disclose such information to the public as a private firm.
In 2019, Zhao told Russians Binance’s mission was to “freedom money” and protect users. The platform was a popular alternative to an overtly controlled banking system that the Russians distrusted.
According to a draft law that would regulate crypto-companies, Binance consented to Rosfinmonitoring setting up a Russian local unit through which clients can be requested data. The Kostarev messages, reviewed by Reuters, show. Binance replied, “Should be we considering establishing a Russian local entity in the future? Binance will not share data without a valid law enforcement request.”
Leonid Vokov, Navalny’s chief of staff, said to Reuters that Russia’s proposed regulatory framework might allow Russia to identify opposition groups’ crypto donors. His anti-corruption foundation, Leonid Volkov, has encouraged supporters to give via Binance since Navalny was arrested in January 2021. This is because they would not be able to identify donors unlike bank transfers.
Volkov, who is the founder of the foundation in Lithuania, stated that these people would be “in danger.” Volkov stated that Binance must “never do any business” with the Russian government if Binance wishes to protect customers. The Kremlin refused to provide any comment about Navalny’s crypto-fundraising or Binance operations.
Binance responded to Reuters’ questions and said it had supported regulation that brought clarity to the area. However, the Ukraine conflict as well as Western sanctions against many Russian banks made it virtually impossible for any platform in the region to consider or initiate future plans.
Binance’s representatives said they supported the bill because it would require crypto exchanges to be partners with Russian banks once it is passed. This will allow customers to trade and deposit significantly more money.
In April, the finance ministry stated that it was done with drafting “the bill on regulation of digital currency.” According to people involved, the government is keen to quickly pass the bill. Last month, a lawmaker stated to parliament that crypto legislation could help reduce the impact of sanctions on the Russian economy.
Rosfinmonitoring was one of the agencies that assisted in the development of the law. This agency is responsible for countering money laundering as well as terrorist financing. Although it is nominally an independent agency, Rosfinmonitoring acts as an arm the Federal Security Service, the main successor of the Soviet-era KGB. Five people familiar with Rosfin’s work said. Rosfin’s director Yury Chukhanchin (according to his official biography) is a veteran of the security services.
Marshall Billingslea is a former chief of the Financial Action Task Force. It’s a watchdog that sets the standards for financial authorities in combating crime. He told a conference last January that Rosfin was now “firmly under control” of the FSB to make certain that Russia only allows state-approved transactions. Billingslea claimed that Rosfin declared Navalny’s network a terrorist organization after his arrest.
Rosfin replied to Reuters questions in writing. He stated that Rosfin fully complies international standards in operational independence. This includes regulating virtual asset service provider’s activities. Chikhanchin didn’t comment.
A source close to the talks said that at least one other cryptocurrency exchange didn’t agree to share client data with Rosfin over concerns about the use of the data and the FSB influence. Another representative of Russia’s crypto industry said that they are also skeptical about the draft law.
Mike Bystroff is a partner in the Moscow-based Digital Rights Center law company. He represented Binance during its successful challenge to a ban on their website in January 2021.
Binance’s openness to Rosfin engagement through 2021 was in contrast with the company’s approach elsewhere. Some regulators in other countries have accused the company withholding information. The regulator in Britain stated that a Binance UK Unit was “not capable” of effective supervision after the company refused to answer questions regarding Binance’s international business. In a 2020 report by Liechtenstein, the regulator said that Binance’s transactions with the body had been “nontransparent”, as it refused to give financial information upon request. Reuters wrote in January that Binance has cancelled plans for a 2019 license to Malta from Zhao, citing concerns over the amount of financial disclosure needed.
Binance lawyers claimed it was “false equivalent” to combine “distinct questions of our client’s responsiveness to Law Enforcement Disclosure Requests, with licensing applications for itself that would require wholly different types and disclosures.” Binance stated that it was the most active player in the sector, working with law enforcement on “best practices”, “thwart/mitigate new criminality” and “prevent illicit proceeds from entering into the marketplace.”
Binance claimed that there is no suggestion that it would refuse data sharing with law enforcement agencies who make legitimate requests. Binance stated that it follows strict procedures and policies to evaluate such requests, and has the option to decline those who do not meet legal requirements.
“DON’T BE AFRAID!”
Zhao was first to Russia in October 2019 as Binance CEO. A Moscow-based tech forum featured Zhao telling an audience that they should stop “slaving” to traditional financial services. He cited Jean-Jacques Rousseau, an 18th century philosopher: “A man can be born free but is always in chains.”
Binance targeted Russia as a target for growth, and noted in a 2018 blog that Russia has a “hyperactive crypto community.” To allow users to withdraw and deposit roubles with bank cards, the exchange partnered up with Advcash (a Belize-based payment company). Advcash confirmed that the partnership remains active.
Binance steadily gained control of the Russian crypto markets. Binance’s Russian trading volumes had made it second after China in terms of global market share. It was also the preferred choice for “VIP” clients, who are known to trade large quantities of cryptocurrency, according to a source with knowledge of company data. Based on data from CryptoCompare worth about 85 billion Russian roubles (1.1 billion), Binance was responsible for almost 80% rouble to crypto trades.
It was trusted by everyone. “It was always one step ahead of the competitors,” stated Maksim Sukhonosik (a Russian crypto trader who also cofounded blockchain consulting company Colibri Group).
Binance started to attract the attention of Russian authorities in 2020. They were then hostile towards cryptocurrencies. Russia’s Communications Watchdog has banned Binance from its website, claiming that it contained prohibited material regarding buying cryptocurrency. Binance tried to challenge the ruling in court. According to Binance’s statements posted on its Telegram group, the ban was removed in January 2021.
Binance stated to Reuters that the suit was dismissed because of procedural grounds. The firm hadn’t been properly notified. The regulator didn’t respond to inquiries for comment.
Navalny, who had been poisoned with Novichok nerve agent, was returned to Russia that month and was immediately arrested. Along with the U.S., British and Canadian governments, he blamed the FSB, which Russia denies. This article was not completed without the participation of the FSB.
Russian prosecutors argued that Navalny had been financing his foundation as a key part of their case. At the trial they charged him with stealing more than 350 million Russian roubles worth approximately $4.8million that the foundation had received in donations. Navalny refuted the accusation. Volkov claimed to Reuters security forces interrogated thousands supporting donors who had made payments through Russian banks. He said that none of the donors used digital currency.
After his arrest, Navalny saw his crypto fundraising rise. According to blockchain data, more than 670 bitcoins donated through Binance and other exchanges could now fetch almost $28 million. Volkov claimed that this is because bitcoins are sold at lower prices after they have been received.
In June 2021, a Russian court banned Navalny’s foundation and declared it “extremist”. Twitter users were advised by the network (NYSE:) that they should “learn how cryptocurrencies work” and to open Binance accounts. The foundation later advised that donors upload their identity cards to Binance in order to verify their accounts. It also noted that there are no cases yet where any cryptocurrency exchange has provided information to Russian authorities. Guide said that there is no need to feel afraid.
According to a person who is familiar with the subject, after the huge increase in Navalny’s donations to bitcoin, the FSB began looking for ways to identify his donors. Rosfin was instructed by the FSB to reach that goal, according to the source. Rosfin replied to Reuters’ questions that it was forbidden to reveal measures to fight terrorist financing. According to Rosfin, Navalny was involved with “terrorism activity.”
GRAPHIC: riches – https://graphics.reuters.com/FINTECH-CRYPTO/zjpqkddkdpx/chart.png
“OUT OF THE SHADEWS”
According to Reuters, Binance was invited by the Digital Economy Development Fund, a Russian non profit organization, to a private meeting in April 2021 with Rosfin. The invitation was seen by Reuters. German Klimenko (an ex-top advisor to Putin regarding internet policy) is the head of this organization, which was created in 2019 to help develop Russian technology. According to the site, Russian trade and industrial ministry is one of the partners. Kostarev is the Binance director and chairs the committee for digital currencies.
Klimenko and neither the Digital Economy Development Fund responded to email requests for comment.
According to a source familiar with the matter, OKX was invited as well. It is originally Chinese, but has its base in Seychelles. OKX spokespeople said that the company had declined to accept the invitation without providing any explanation.
Rosfin, as per Kostarev’s messages, stated at the meeting that it desired exchanges register with the agency to be able to respond to its client information requests. Kostarev wrote the associate to state that he did not see the request as a problem. He also told his associate that the FSB was also interested. He didn’t elaborate.
When Binance was asked about Kostarev meeting Rosfin’s, Binance replied, “We didn’t work with, collaborate with, or partner with that organisation.” Rosfin sent Binance a questionnaire about Kostarev’s meeting with Rosfin five months later. Reuters had reviewed the questionnaire to determine if Binance wanted more details on Rosfin’s background check on clients as well as its preferred channels of communication with authorities in order to request information regarding crypto transactions. The firm responded to questions about this communication by saying that they take compliance very seriously and are open to consulting with regulators.
Kostarev informed the business associate via a text message that Binance would be increasing its engagement with the government about crypto regulation. Rosfin is ready to assist Binance, Kostarev stated.
The Russian central bank opposed Moscow’s regulation of cryptocurrencies to allow the market to thrive out of fear that criminal activity might be encouraged. Most central banks worldwide, whose mandate is to control money supply, are concerned about crypto’s wild world. Russian Governor Elvira Nabullina said to Russia’s Parliament in November that “a responsible government should not encourage their distribution.” An official of the central bank refused to comment.
Binance had announced that in January it had made Olga Goncharova, a high-ranking central bank official, its director for Greater Russia. Binance claimed that Goncharova would create “systematic interaction” with Russia’s authorities.
Nabiullina had proposed that crypto-use on Russian territory be banned later in the month. Kostarev informed the business associate that Binance was fighting the central bank. Kostarev stated that all other Russian governments wanted legalisation of digital currencies. Moscow had begun to support crypto. Nabiullina called for a ban. The finance ministry’s top officials publicly supported the law to require cryptocurrency exchanges to give names to customers. They said that it was essential to guarantee “transparency.”
Putin intervened. Putin intervened during a Jan. 26 televised meeting between ministers. He asked for a consensus among the central bank and government on cryptocurrency regulation. Russia was noted to have “certain competitive benefits” in the area, including surplus electricity. This is crucial for power-hungry cryptocurrency creation.
Two weeks later the government approved a plan of regulation for crypto, which was drafted jointly by Rosfin (FSB) and agencies. This would allow the “industry to emerge from the shadows.”
Kostarev wrote in response to an announcement: “Finally, some good news.”
According to the government, without a proposed regulatory framework law enforcement would be “unable to respond effectively” to criminal and other offences. Rosfin would receive information from customers and create a database of all cryptocurrency wallets linked to terrorist financing. A draft of the law was submitted by Rosfin on February 18.
Six days later, Russian troops invaded Ukraine. Binance saw a boom in rouble trading as Western nations placed sanctions on Russia. Kremlin restrictions were applied to foreign currency withdrawals. CryptoCompare data has shown that Binance’s daily average volume of rouble transactions during the first three weeks of war was nearly four times greater than the previous month.
Binance Angels were some volunteers that endorsed the posts of traders thanking Binance and asking them not to block accounts. One message asked Binance not not to fall for “war crap.” Binance has engaged hundreds of Angels all over the world in order to spread the word about the exchange and local crypto traders.
Angel said that Binance is not involved in politics. Binance said to Reuters that Angels were not spokespersons for the company.
Putin’s United Russia party also expressed praise for Binance. Alexander Yakubovsky a lawmaker who spoke to the official parliament paper on March 14 called Binance “leading experts” in his country, advising politicians about crypto regulation. According to him, the firm is under intense pressure from Russia friendly countries. Binance stated that Yakubovsky had not been in touch with Binance and that their opinions are solely his.
($1 = 78.2830 roubles)