Concerns raised over New Zealand’s newest cryptoexchange, Binance

Inside a flashy Auckland hotel, rigged with neon lights and pumping dance music, a new kind of crypto business announced its arrival this week.

Binance, the world’s largest cryptocurrency exchange launched its New Zealand arm on Wednesday with much fanfare.

But some experts are warning the company’s recent behaviour should raise alarm bells.

In March, Reuters reported at least NZ$4.1 billion (US $2.3b) of illicit funds was laundered through Binance in the past four years. Binance disputed the report, but has not pointed to specific inaccuracies.

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The same report revealed a correlation, in 2018, between the arrival of Binance in Russia and a large spike in the purchase of drugs using cryptocurrency.

In September 2020, a North Korean hacking group used Binance accounts to launder stolen cryptocurrency.

Binance has been blocked from operating in the UK, and parts of the USA and Canada due to security concerns and failure to meet regulatory requirements.

University of Waikato finance professor Shaen Corbet​ said the entry of Binance into New Zealand should be a significant concern for regulators.

“I would certainly be concerned by the company’s recent behaviour, particularly the manner in which they have been reported to actively generate structural ambiguity, shroud information, and leverage upon regulatory weakness,” Corbet​ said.

Binance had a “significant track record of regulatory non-compliance”, he said.

It had been accused of minimising background checks and breaking promises to better regulate user behaviour, he said.

“Understanding the severity of the issues that have been observed elsewhere, it would be reasonable to question whether the benefits of the company’s potential presence outweigh the potential for directly associated financial, operational, regulatory, and reputational risks,” he said.

Binance head of New Zealand Ben Rose​ said the company was focused on being a compliant exchange.

“I can’t speak to overseas examples because I wasn’t involved, but what I will say is in New Zealand we are locally registered, locally compliant, and registered with the Department of Internal Affairs and MBIE.”

While Rose​ acknowledged some cryptocurrency was used for illicit purposes, he said this was a very small percentage of the overall asset.

Chainanalysis, a blockchain research company, estimated criminal cryptocurrency accounts received US$14 billion in 2021. Including the proceeds of scam, fraud, drugs, terrorism financing and child abuse material.

While this figure was only an estimated 0.15% of overall cryptocurrency transactions, the value of cryptocurrency finding its way into illicit accounts has grown over the past two years. Chainanalysis called it “a significant problem”.

“Cryptocurrency is a new technology and people are suspicious of new things. But the idea that crypto is only used by fraudsters is a myth. I would say the evidence points to that being less so than fiat money,” Rose​ said.

Rose​ said Binance planned to engage with local law enforcement to help better track criminal transactions, but the details of this were yet to be finalised.

As the world’s largest exchange, Binance had a higher security standard than any local exchanges, he said.

“In terms of storage solutions, security protocols, identity verification, transaction monitoring, we believe our systems are the best in the world,” he said.

Detective Inspector Christiaan Barnard​, director of the NZ Police’s Financial Crime Group, said it was better for international crypto companies to be registered locally, and so beholden to local laws

“The reality is the majority of New Zealanders that use cryptocurrency already do so through offshore companies. So those companies entering New Zealand is actually a good thing because it brings them into our regulatory framework, and increases their obligations,” Baarnard​ said.

Major cryptocurrency exchanges setting up in New Zealand was an opportunity for collaboration with law enforcement to increase, he said.

“Obviously we need to be alert to the risks it poses… but by bringing them into the AML regulatory framework we can get them to lift their game where it needs to be lifted.”

Financial adviser and cryptocurrency expert Darcy Ungaro​ said Binance could be trying to gain market share before regulation became too strong.

In the UK Binance was banned from bringing on new users. Those that had joined before the ban are allowed continued use.

Ungaro​ said Binance could be making a similar move in New Zealand, which was currently in relatively early stages of cryptocurrency regulation.

“Any business involved in helping people adopt crypto probably needs to expand operations and customer base as fast as they can, because they don’t know how long they will be free to attract new customers.

“It is never going to be as cheap, and as easy to attract new customers as it is now,” Ungaro​ said.

Regulation would eventually make it more expensive to bring on customers, so exchanges needed to establish a revenue model in anticipation of that, he said.

He called the current environment a “land grab”.

The Department of Internal Affairs said in general cryptocurrency exchanges had “more to do to meet the minimum compliance requirements”.

“As the sector matures, we would expect to see improvements that demonstrate commitment to best practise that exceeds minimum levels of compliance,” a spokesperson said.

The spokesperson said the DIA had met with Binance and the company would be “actively monitored on an ongoing basis”.