Week In Crypto: US Treasury Sanctions Binance Wallets With Ties To North Korea

May 26, 2023
Binance helps US authorities stop North Korean sanctions buster but faces new allegations of commingling of funds, Hong Kong pulls the plug on stablecoins for retail investors, and new crypto enforcements in Malaysia and the Philippines.

Binance helps US authorities stop North Korean sanctions buster but faces new allegations of commingling of funds, Hong Kong pulls the plug on stablecoins for retail investors, and new crypto enforcements in Malaysia and the Philippines.

The US Treasury’s Office of Foreign Assets Control (OFAC) has placed new sanctions on four entities and one individual believed to be linked to the North Korean government.

According to OFAC, the five suspects had engaged in transactions designed to conceal “revenue generation” and “malicious cyber activities” carried out by the North Korean state.

One of the suspects, 58-year-old Kim Sang Man, is believed to have used multiple crypto wallet addresses hosted by Binance.

As noted by OFAC, Kim had transacted from at least four separate crypto wallets using a mixture of bitcoin, ethereum, USDT and USDC. Blockchain data shows millions of dollars worth of transactions from the wallets in 2021 and 2022.

OFAC did not mention Binance by name in its sanctions announcement, but Binance followed up with its own statement describing how it had assisted OFAC in freezing the suspected wallet addresses and seizing $4.4m of crypto from them.

“Kudos to our law enforcement partners and the Binance Investigations team for their unwavering commitment to combating crime worldwide,” said Binance.

“We proactively took action against accounts connected to these individuals over a year ago, in compliance with lawfully served warrants and in collaboration with law enforcement.”

OFAC said that North Korean nationals such as Kim are known to pose as IT workers to “fraudulently obtain” employment overseas.

Once overseas, they are tasked with generating revenue to support the North Korean regime and its military priorities, including its “unlawful” weapons of mass destruction (WMD) and ballistic missile programmes.

In 2022, according to a confidential UN Panel of Experts report seen by OFAC, North Korean actors stole more virtual currency than in any previous year.

With estimates ranging from $630m to more than $1bn, North Korea’s estimated proceeds from cyber theft doubled in 2022 compared with 2021.

Chainalysis, a blockchain analytics firm, also said that 2022 was a record-breaking year for North Korean hackers, who stole an estimated $1.7bn of crypto.

Binance hit by new commingling allegations

On the same day that OFAC announced its new sanctions, Binance was also hit by new allegations of commingling customer and corporate funds in US bank accounts.

In 2020 and 2021, according to three former “insiders”, Binance commingled customer funds with company revenue, as described in a report from Reuters.

One of the insiders is said to have had “direct knowledge” of Binance’s group finances, and said that commingling happened almost daily and amounted to billions of dollars.

The source said that Binance had several accounts at Silvergate Bank, the New York-based lender that collapsed in March, which were used for this purpose.

Patrick Hillman, Binance’s chief communications officer, responded to the article by calling it a “desperate” attempt to publish a “negative story” about Binance.

“This story is so weak that they had to put up front, ‘Reuters found no evidence that Binance client monies were lost or taken’, in a transparent attempt to protect themselves from a libel suit,” he said.

“Underneath that, they then pinned 1,000 words of conspiracy theories (which we explained were false) with zero evidence other than a ‘former insider’.”

However, as noted by John Reed Stark, former head of internet enforcement at the Securities and Exchange Commission (SEC), commingling does not necessarily have to lead to lost or stolen funds.

“Per today’s scathing Reuters investigative report, Reuters has found even more suspicious activity at Binance,” he said, “in breach of US financial rules that require customer money to be kept separate.

“Commingling prohibitions ensure that investors’ securities are kept safe by financial firms” so that “no SEC-registered financial firm can use its customers’ securities to fund its own operations — ever.”

The allegations outlined in Reuters’ article are similar to those made against Binance by the Commodities Futures Trading Commission (CFTC) in a lawsuit filed in March.

As covered by VIXIO, the CFTC accused Binance of creating a corporate “maze” of more than 120 different holding companies that it uses to commingle funds and engage in other unlawful activity.

Hong Kong hits pause on stablecoins

In Hong Kong, this week the Securities and Futures Commission (SFC) published a conclusions consultation on its proposed regulatory requirements for virtual asset trading platforms.

Under the revised rules, which are set to come into force on June 1, 2023, Hong Kong will have some of the strongest oversight in the world for firms offering virtual assets trading services.

For example, firms will be banned from offering stablecoins to retail investors, at least until further regulation is issued specifically for stablecoins.

“Prior to stablecoins being subject to regulation in Hong Kong, it is our view that they should not be admitted for retail trading,” said the SFC.

The SFC’s new rules will also prohibit numerous services that are commonly offered by crypto exchanges, including borrowing and lending services and yield-bearing products.

Similar to New York’s latest proposed rules for crypto exchanges, firms in Hong Kong will be prohibited from acting as market-makers or from proprietary trading on their own platforms.

The SFC has advised firms that are “prepared to comply” with the new rules to apply for a licence as a regulated virtual asset trading platform.

Those that cannot comply have been advised to undergo an “orderly closure” of their business in Hong Kong.

Enforcement in Asia for Huobi, Gemini

Finally, two major crypto exchanges — Huobi and Gemini — have been hit by enforcement actions in Asia this week.

In Malaysia, the Securities Commission has sanctioned Huobi Global and CEO Leon Li for operating a digital asset exchange without registration.

Under the order, Huboi Global must cease all operations in Malaysia, and must disable its website, mobile apps and remove itself from the Apple App Store and Google Play Store. Users of Huobi Global have also been advised to withdraw their funds immediately.

Meanwhile, in the Philippines, the Securities and Exchange Commission (SEC) has issued an advisory warning investors not to use the Gemini Derivatives exchange.

Launched in the Philippines on May 1, the SEC said that Gemini Derivatives lacked the necessary licensing and authority to operate in the country.

The agency added that brokers, dealers or agents that sell or promote unregistered securities face a fine of up to 5m pesos ($89,826) or 21 years’ imprisonment.

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