Inside a flashy Auckland hotel, outfitted with neon lights and dance music, a new breed of crypto business announced its arrival this week.
Binance, the world’s largest cryptocurrency exchange, launched its New Zealand arm on Wednesday to much fanfare.
But some experts warn that the company’s recent behavior should set off alarm bells.
In March, Reuters reported that at least NZ$4.1 billion (US$2.3 billion) of illicit funds were laundered through Binance in the past four years. Binance disputed the report but has not pointed out any specific inaccuracies.
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The same report revealed a correlation, in 2018, between the arrival of Binance in Russia and a large increase in the purchase of drugs with cryptocurrencies.
In September 2020, a group of North Korean hackers used Binance accounts to launder stolen cryptocurrencies.
Binance has been blocked from operating in the UK and parts of the US and Canada due to security concerns and non-compliance with regulatory requirements.
University of Waikato finance professor Shaen Corbet said Binance’s entry into New Zealand should be a major concern for regulators.
“I would certainly be concerned about the company’s recent behavior, particularly the way it has been reported to actively build structural ambiguity, cover information and leverage over regulatory weakness,” Corbet said.
Binance had a “significant history of regulatory noncompliance,” he said.
He had been accused of downplaying background checks and breaking promises to better regulate user behavior, he said.
“Understanding the severity of the problems 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 New Zealand boss Ben Rose said the company was focused on being a compliant exchange.
“I can’t talk about overseas examples because I wasn’t involved, but what I will say is that in New Zealand we are locally registered, locally compliant and registered with the Department of Home Affairs and MBIE.”
While Rose acknowledged that some cryptocurrencies were used for illicit purposes, he said that this was a very small percentage of the total assets.
Chainanalysis, a blockchain research firm, estimated that criminal cryptocurrency accounts received US$14 billion in 2021, including proceeds from scams, fraud, drugs, terrorist financing, and child abuse material.
While this figure was only an estimated 0.15% of total cryptocurrency transactions, the value of cryptocurrencies finding their way into illicit accounts has risen in the last two years. Chainanalysis called it “a significant problem”.
“Cryptocurrency is a new technology and people are suspicious of new things. But the idea that only scammers use cryptocurrencies is a myth. I would say the evidence points to that being less than fiat money,” Rose said.
Rose said that Binance planned to collaborate with local law enforcement to help better track criminal transactions, but details of this had yet to be finalized.
As the world’s largest exchange, Binance had a higher security standard than any local exchange, he said.
“In terms of storage solutions, security protocols, identity verification, transaction monitoring, we believe that our systems are the best in the world,” he said.
Detective Inspector Christiaan Barnard, director of the New Zealand Police Financial Crimes Group, said it was best for international crypto businesses to register locally and thus be subject to local laws.
“The reality is that the majority of New Zealanders who use cryptocurrency already do so through offshore companies. So those companies coming into New Zealand are actually a good thing because it brings them into our regulatory framework and increases their obligations,” Baarnard said.
The establishment of major cryptocurrency exchanges in New Zealand was an opportunity to increase collaboration with law enforcement, he said.
“Obviously we need to be alert to the risks that it poses…but by including them in the AML regulatory framework, we can make them up their game where it’s needed.”
Financial advisor and cryptocurrency expert Darcy Ungaro said that Binance could be trying to gain market share before regulation becomes too strong.
In the UK, Binance was banned from attracting new users. Those who had joined before the ban can continue to use them.
Ungaro said that Binance may be making a similar move in New Zealand, which was currently in the relatively early stages of crypto regulation.
“Any business involved in helping people adopt crypto probably needs to expand operations and customer base as quickly as possible, because they don’t know how much free time they will have to attract new customers.
“It’s 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 attract customers, so exchanges needed to set up a revenue model in anticipation of that, he said.
He called the current environment a “land grab.”
The Department of Home Affairs said that, in general, cryptocurrency exchanges had “more to do to meet minimum compliance requirements.”
“As the sector matures, we would expect to see improvements that demonstrate a commitment to best practice that exceeds minimum levels of compliance,” a spokesperson said.
The spokesperson said that DIA had met with Binance and that the company would be “actively monitored on an ongoing basis.”