Binance, the world’s largest cryptocurrency exchange, is the target of a criminal complaint lodged in France this month by a group of 15 cryptocurrency investors who accuse it of marketing its services in the country before it received official approval to do so, of using misleading commercial practices and receiving the proceeds of fraud.
The plaintiffs, all clients of Binance, claim they were misled by the platform over their investments and that they incurred total losses of close to 2.4 million euros. Their complaint targets Binance France, the cryptocurrency exchange’s French arm, and its holding company Binance Holdings Limited, which is based in the Cayman Islands. They also cite “any other person” who was party to the alleged wrongdoing, which Binance firmly denies.
The joint complaint, which Mediapart has seen, was sent on December 14th to the Paris public prosecution services, who must now decide whether to pursue the matter. The complaint is the first of its kind in France involving the highly speculative and volatile sector of digital assets, and shines further light on the practices of the money-spinning cryptocurrency exchange platforms and the vast financial risks for investors.
The move comes at a time of turmoil in the business following the dramatic collapse of the Bahamas-based exchange FTX and the extradition from the tax haven to the US of its co-founder, Sam Bankman-Fried, who is accused of defrauding clients and money laundering. Meanwhile, Binance and its Chinese-Canadian co-founder and CEO Changpeng Zhao, aka “CZ”, are also the subject of investigations by US Department of Justice prosecutors into possible offences, including money laundering, although according to a report this month by Reuters news agency, the prosecution services are divided over the conclusions of the long-running probe.
On May 4th this year, Binance received official registration with France’s Financial Markets Authority, the AMF, to begin operating in the country as a cryptocurrency exchange. Importantly, registration allows crypto companies to operate without obtaining a regulator’s licence which would, if such a requirement was in place in France, entail closer supervision of their finances and offer a degree of consumer protection. The AMF was the first such body in Europe to give Binance regulatory approval to operate. But up until May 4th, Binance, which had applied for registration in December 2020, was not legally entitled to promote its services.
It was legislation introduced in France in December 2020 (la loi Pacte) which established that, to operate legally, cryptocurrency exchanges must be registered by the AMF as a digital financial service provider, or what is called a PSAN in French. In a joint statement issued in November 2020 with the Bank of France’s watchdog for the finance and insurance sectors, the ACPR, it was detailed that, as of December 19th 2020, cryptocurrency service providers “not registered by that date must cease all activity in France while waiting to be registered”, which included refraining from “acts of communication and promotion of their activities”.
The plaintiffs argue that from December 19th 2020, when Binance’s application for the PSAN recognition began to be processed, and up to May 4th 2022, when Binance France received its registration from the AMF, it continued to operate and recruit clients.
In the complaint, the plaintiffs’ Paris lawyers, Baptiste Bonhomme and Étienne de Dreuille, argue: “Binance, which only obtained a PSAN registration for its French entity ‘Binance France’ on May 4th 2022, therefore deliberately violated, from December 19th 2020 until May 4th 2022, the monopoly accorded to PSANs by continuing to promote its activities addressed to the French public.”
The lawyers write that, as of the end of 2021, Binance proposed to its users in France “the UST crypto currency, a crypto asset […] presented by Binance as a ‘stable’ cryptocurrency (or stablecoin), supposed to remain permanently pegged to the American dollar via an algorithmic mechanism”.
The platform proposed returns on investment of up to 20%. But on May 9th this year, the UST algorithmic stablecoin lost its dollar peg and crashed, as detailed by the complaint: “In May 2022, the UST brutally collapsed (losing 98% of its value), leading to the disappearance in a few days of close to 40 billion dollars of assets and colossal losses for numerous, non-professional investors, notably French.”
Thomas Blanc, a manager with French telecommunications group Orange, was one of the investors who lost a lot of money from the crash. On Discord, an online instant messaging platform which attracts video gamers and which is popular with young cryptocurrency investors, he created a dedicated discussion group. Very soon, around a hundred of the investors joined the discussions and counted their losses. In all, these amounted to around 10 million euros, of which more than half were from transactions on Binance. On Blanc’s initiative, they explored the idea of filing a legal complaint, which ultimately led to the joint action by the 15, who together recorded losses of close to 2.413 million euros.
In their complaint, the plaintiffs illustrated how Binance, before it was registered by the AMF, ran marketing campaigns on social media platforms such as Telegram and Instagram. They have joined to their complaint numerous screenshots of promotional campaigns targeting French investors, like the one shown below, which appeared on March 4th 2022 on the “Binance French” account on Instagram, with a heading, in French, reading: “What part of the pizza do you take?”. Visibly a promotion of the Binance trading platform, the pizza parts bear the commercial symbols of the different cryptocurrencies sold by Binance.
Enlargement : Illustration 1
Another screenshot attached to the complaint is that of the homepage of the platform for online visitors from France (see below), which appeared in 2021 (the comments in red on the screenshot were added by the plaintiffs).
Enlargement : Illustration 2
They also included screenshots of the “Binance French” group created by Binance on Telegram (comments in French and in red on the screenshot were explanations added by the plaintiffs). It dates from September 28th 2021, when the exchange was still legally bound to refrain from “acts of communication and promotion” of its activities:
Enlargement : Illustration 3
It shows that Binance was proposing to its French clients a “staking” service for the UST sister token “luna”, which appears to be described as a “high-yield safe earn”.
On April 6th 2022, when Binance had still not received registration allowing activities in France, the platform posted another promotional ad, as shown below (again, the comments in French and in red on the screenshot are explanations added by the plaintiffs). This was for a UST staking with a claimed annual percentage yield (APY) of up to 19.63%, described as a “high yield, safe and happy earn”.
Enlargement : Illustration 4
But around one month later, on May 9th 2022, five days after Binance France received its registration from the AMF, it proved far from being a “safe and happy earn”; the UST collapsed and the algorithmic stablecoin became virtually worthless, which also prompted the crash of the luna.
The regular posts on the “Binance French” account on Telegram is highlighted in the complaint because of the popularity of Telegram among those who are interested in crypto assets.
Contacted by email, Binance co-founder and CEO Changpeng Zhao provided a detailed reply in an exchange in French (see this in full here, or by clicking the “MORE” tab bottom of page), in which he contested the details of the complaint submitted to him by Mediapart. “Binance never comments on ongoing [legal] procedures,” the reply began (words in italics are editor’s notes added by Mediapart). “But in this case, we have received no notification related to criminal proceedings nor civil proceedings. In any case, Binance did not carry out any communications [campaign] of a promotional character in France during the period that you mention.”
“In our communications, it is staking that Binance presented as being “safe”, and not the tokens featured underneath,” the reply continued. “After withdrawing their assets from the staking product, a user would always have their principal investment in tokens, whatever their evaluation,” it continued. “While we always include warnings about the market risks relative to these types of product, following these problems Binance further reinforced the description of the products.”
“Binance has not carried out a promotion [of its services] in France before being authorised to do so,” the statement added. “The Telegram groups are worldwide community forums which any Telegram user can create or join voluntarily.”
However, that did not explain why Binance created a discussion group on Telegram called “Binance French”, precisely directed at a French audience and on which posts of a commercial nature appeared on an almost daily basis.
Rolling out the red carpet
While around the world there were increasing warnings over the secrecy and bubble-effects of cryptocurrency platforms, Binance was last year applauded by French officials, including the then digital transition minister, Cédric O. On November 3rd 2021, while Binance was waiting for its PSAN registration from the AMF, Changpeng Zhao took part in a filmed face-to-face Q and A discussion in English with Cédric O at the French finance ministry. The event, entitled “Crypto: what is at stake? New Challenges and opportunities”, was live-streamed on the Binance YouTube page (see below), which has 522,000 subscribers.
The fact that the French minister was taking part in what was effectively publicity for the founder of a platform criticised for its secrecy in numerous countries, and which was continuing with its activities in France despite not having received registration, raises questions. Particularly over his comments on the virtue of rule-breaking (which can be found at timecode 57’.39”).
“Look at what the history of innovation is,” he said. “At the beginning, innovation is disrupting the legacy regulation. And it’s normal. You cannot innovate if you abide [by] all the rules. So it’s always in the grey, or even the black zone. Then it’s getting pace, but if you want to scale, to some extent, then you have to regulate. Then you have to regulate because scaling is a question of trust.”
A little more than five months later, Binance France finally received registration from the AMF, a move that was greeted enthusiastically by Cédric O in a post on Twitter (see below).
Enlargement : Illustration 6
Two months after that, on July 11th this year, Changpeng Zhao was invited to a “Choose France” summit organised by the French government to attract foreign business investment. The event, held at the Château de Versailles, was hosted by President Emmanuel Macron, with whom Zhao took a selfie and proudly posted it on Twitter (see below).
Enlargement : Illustration 7
Among France’s efforts to lure cryptocurrency exchanges, the lack of requirement for an operating licence as opposed to the relatively simple process of registration, appears as a major attraction. The European Union is due to introduce stricter rules on the activities of the platforms in 2024, but the French government is hoping to be granted exemption from applying them until 2026. However, a legislative amendment adopted by the French Senate, and which will be submitted to the more powerful lower house, the National Assembly, early next year proposes to bring in tougher requirements before then.
“Players like Binance evidently use the [AMF procedure] as a marketing tool,” said Thierry Philipponnat, who resigned from the board of the AMF in October, in an interview with The Financial Times. Philipponnat, who is chief economist with Finance Watch, a Brussels-based NGO that studies and advises on financial regulation across the EU, resigned from his post as regulator with the AMF in protest over the appointment as its chair of a former banking lobbyist.
A little-reported incident among crypto companies led to the first ever decision by the AMF to withdraw the registration of a platform. This was a small crypto exchange called Bykep, which had obtained its PSAN registration in February 2021, before the assets of investors disappeared without trace. In September this year, the AMF withdrew the platform’s registration, citing the “non-respect of requirements of the registration”. In reality, the loss of the clients’ assets kept by Bykep, which in fact represented relatively small sums, was something that the AMF could only record after the event. In a statement issued in September, the AMF spoke of “operations carried out to debit clients’ portfolios without their consent”, and the “theft of digital assets”.
“The protection afforded to Bykep’s clients by the PSAN regime had been, in the facts of the case, inexistant,” said Thierry Philipponnat in an interview with Mediapart. “In passing, one of the absurdities of the PSAN regime is to allow the same actor to be [both] a platform operator and the keeper of assets treated by that platform, which is strictly prohibited in financial regulations that apply to traditional actors, for obvious reasons of protecting the clientele.”
Philipponnat said the details of what the PSAN process involves is only properly understood by a small number of specialists. “The only thing that the immense majority of users of crypto platforms note is that the service provider has received an “AFM visa”, which reassures them, whereas in reality the protection that this registration brings is the lightest possible, not to say non-existant, as the case of Bykep shows.”
“The French PSAN regime is de facto a regime of registration, which only carries out checks on procedures against money laundering and the financing of terrorism, and which concretely allows no possibility for the supervisor to intervene in the case of a problem. Why would a rational actor ask for [regulatory] approval when registration suffices for them to operate?”
The case of Binance is clearly different to that of Bykep, but the moral of the story is exactly the same, namely that the French regulations in place do not work, and the public powers are doing nothing to remedy the situation. It appears even to be quite the opposite.
-------------------------
- This is an abridged version of an original report in French, which can be found here.
English version by Graham Tearse
-------------------------
If you have information of public interest you would like to pass on to Mediapart for investigation you can contact us at this email address: enquete@mediapart.fr. If you wish to send us documents for our scrutiny via our highly secure platform SecureDrop please go to this page.
-------------------------