In the latest legal blow to the world’s largest cryptocurrency exchange, Binance and its former Chief Executive Officer, Changpeng “CZ” Zhao, are facing a class action lawsuit over claims that it facilitated money laundering activities within its platform.

The lawsuit, filed on August 16th in the US District Court for the Western District of Washington in Seattle, alleges that Binance allowed criminals to launder stolen crypto funds and harmed American users due to its lax anti-money laundering policies.

The lawsuit piles up on top of the recent legal issues faced by both the crypto exchange and its founder. In November last year, the two were hit with a $4.3 billion settlement with US authorities over similar allegations of anti-money laundering compliance failures and sanctions violations.

Lawsuit Claims that Binance Makes it Easier for Criminals to Launder Stolen Funds

The class action lawsuit was brought by three crypto investors – Philip Martin, Natalie Tang, and Yatin Khanna – who claim that they were unable to recover their stolen digital assets due to Binance’s alleged AML weaknesses.

According to the complaint, the plaintiffs had their crypto holdings stolen by unknown bad actors. Their funds were transferred to Binance in order to “remove the connection between the ledger and their digital assets” and make them untraceable.

The lawsuit claims that a main feature of blockchain technology is the “permanent record of transactions” it provides, which usually helps authorities follow the flow of illegal money. However, the plaintiffs argue that Binance acted as a crucial “platform to launder crypto” for these criminals, allowing them to hide where the stolen funds came from.

“Without a place to launder crypto, such as Binance.com, if a bad actor steals someone else’s crypto, there is a risk the authorities would eventually track them down by retracing their steps on the blockchain,” the lawsuit states.

By allegedly failing to implement robust anti-money laundering (AML) and Know Your Customer (KYC) controls, the plaintiffs claim that the exchange violated the Racketeer Influenced and Corrupt Organizations (RICO) Act through its role in facilitating these money laundering activities.

The Case Could Have Huge Implications for Blockchain Technology

Legal experts say that this latest lawsuit could have significant ramifications for Binance and the broader crypto industry, especially if it progresses into the discovery phase and trial.

Bill Hughes, senior counsel and director of global regulatory matters at the Ethereum development firm ConsenSys, said that the case puts Binance in a “tough position”.

“If this case goes far into discovery and even to dispositive pre-trial motions, then the efficacy of blockchain analytics itself and on-chain asset recovery will be on trial,” Hughes said in a social media post on X.

He explained that Binance would likely be pressured to make arguments about the traceability and recovery of crypto assets on the blockchain in order to defend itself. However, this could undermine broader industry narratives about the ability to combat financial crimes in the crypto space.

Binance Will Face No Ordinary Plaintiffs

While Hughes expressed some skepticism about the plaintiffs’ ability to conclusively prove their allegations, he acknowledged the formidable legal team behind the lawsuit.

The class action is being led by prominent class action law firms Keller Rohrback L.L.P. and Milberg Coleman Bryson Phillips Grossman PLLC.

These firms have previously represented groups of plaintiffs in other high-profile cases against tech giants like Facebook over consumer privacy breaches as well as pharmaceutical companies over the opioid crisis and Wells Fargo over fraudulent accounts.

“Their pockets are deep and they smell the blood in the water,” Hughes said of the plaintiffs’ attorneys.

This legal expertise, combined with the recent regulatory and criminal actions taken against Binance could pose a serious legal threat for both the exchange and CZ.

binance changpeng zhao sentenced to four months in prison in November 2023

The class action lawsuit comes on the heels of Binance’s $4.3 billion settlement with US authorities in November 2023, which saw the company and CZ plead guilty to various financial crimes.

As part of that deal, CZ admitted to violating US money laundering laws and was sentenced to four months in prison, which he is currently serving. He is expected to be released in September 2024.

The November 2023 settlement resolved an investigation from the Department of Justice (DOJ) into Binance’s willful violations of the Bank Secrecy Act, failure to register as a money-transmitting business, and evasion of US sanctions.

According to court documents, Binance prioritized growth and profits over compliance with American anti-money laundering and sanctions laws. The exchange failed to implement effective KYC protocols, did not monitor transactions to identify suspicious activity, and allowed US customers to engage in trades with users in sanctioned jurisdictions like Iran.

“Binance turned a blind eye to its legal obligations in the pursuit of profit. Its willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform,” the lawsuit alleges.

The DOJ said Binance’s actions had enabled criminal groups to use the platform to launder funds from ransomware attacks, darknet markets, and other cybercrime.

In addition to the criminal penalties, Binance also faced civil enforcement actions from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and the Commodity Futures Trading Commission (CFTC).

Binance Faces Another Lawsuit from the SEC and Could Be Targeted by Others

The new class action lawsuit adds to Binance’s legal woes, which have persisted even after the high-profile 2023 settlement.

In June 2023, the U.S. Securities and Exchange Commission (SEC) filed a separate lawsuit against Binance and CZ, accusing them of misleading regulators about the exchange’s market surveillance controls and artificially inflating its trading volumes.

A federal judge recently granted the SEC’s request to allow most of that case to move forward and dealt another legal blow to the exchange.

Despite these challenges, Binance has continued to tout its efforts to enhance compliance and prevent illicit activity on its platform. In a recent press release, the exchange claimed to have stopped over $2.4 billion in potential losses for its users in 2024 through its AI-powered fraud detection and risk management systems.

However, the new class action lawsuit alleges that these efforts have been insufficient and inadequate. It states that Binance has become a hub for money laundering while its inaction to comply with AML laws has directly harmed crypto investors.

As these legal battles continue, the outcome of this latest lawsuit could have significant implications for the company, its founder, and the broader cryptocurrency industry’s efforts to establish trust and credibility with regulators and the public.