Special Report: How crypto giant Binance built ties to a Russian FSB-linked agency

VILNIUS, April 22 (Reuters) – In April 2021, Russia’s financial intelligence unit met in Moscow with the regional head of Binance, the world’s largest crypto exchange. The Russians wanted Binance to agree to hand over client data, including names and addresses, to help them fight crime, according to text messages the company official sent to a business associate.

At the time, the agency, known as Rosfinmonitoring or Rosfin, was seeking to trace millions of dollars in bitcoin raised by jailed Russian opposition leader Alexei Navalny, a person familiar with the matter said. Navalny, whose network Rosfinmonitoring added that month to a list of terrorist organisations, said the donations were used to finance efforts to expose corruption inside President Vladimir Putin’s government.

Binance’s head of Eastern Europe and Russia, Gleb Kostarev, consented to Rosfin’s request to agree to share client data, the messages showed. He told the business associate that he didn’t have “much of a choice” in the matter.

Kostarev didn’t comment for this article. Binance told Reuters it had never been contacted by Russian authorities regarding Navalny. It said that before the war it was “actively seeking compliance in Russia,” which would have required it to respond to “appropriate requests from regulators and law enforcement agencies.”

The encounter, which has not been previously reported, was part of behind-the-scenes efforts by Binance to build ties with Russian government agencies as it sought to boost its growing business in the country, Reuters reporting shows. This account of those efforts is based on interviews with over 10 people familiar with Binance’s operations in Russia, including former employees, ex-business partners and crypto industry executives, and a review of text messages that Kostarev sent to people outside the company.

Binance has continued to operate in Russia since Putin ordered his troops into Ukraine on Feb. 24, despite requests from the government in Kyiv to Binance and other exchanges to ban Russian users. Other major payment and fintech companies, such as PayPal and American Express, have halted services in Russia since the Kremlin launched what it calls a “special operation” to demilitarise and “denazify” Ukraine. One of Binance’s main rivals in Russia, EXMO.com, said on Monday it would no longer serve Russian and Belarusian clients and was selling its Russia business. Some smaller crypto exchanges remain.

CEO Changpeng Zhao, widely known by his initials CZ, has said he is against the war and “politicians, dictators that start the wars” but not against “the people on both sides of Ukraine and Russia that are suffering.” Zhao didn’t comment for this article. Binance referred Reuters to Zhao’s previous statements on the matter.

Legal representatives for Binance told Reuters that “active engagement with the Russian government has now stopped due to the conflict.” On Thursday Binance told users it was limiting services for major clients in Russia because of the latest European Union sanctions on Moscow.

Binance’s trading volumes in Russia have boomed since the war began, data from a top industry research firm shows, as Russians turned to crypto to protect their assets from Western sanctions and a devaluing rouble. In one recent message to an industry contact, Kostarev said Binance’s priority was to ensure the market stayed open, so the exchange wasn’t “making a fuss.” He didn’t elaborate.

Asked by Reuters to clarify Kostarev’s message, Binance said the war and economic crisis could accelerate crypto’s adoption among working-class Russian citizens looking for alternative payment means. Binance added that it is aggressively applying sanctions imposed by Western governments, but would not unilaterally “freeze millions of innocent users’ accounts.”

THE FREEDOM OF MONEY

Since its launch five years ago in Shanghai, Binance has grown to dominate the unregulated Russian crypto sector with an estimated four-fifths of all trading volumes, market data shows. Binance said it doesn’t comment on “external data projections” and, as a private company, doesn’t share such information publicly.

Zhao, in 2019, told Russians that Binance’s mission there was to increase the “freedom of money” and “protect users.” Russians flocked to the platform, seeing it as an alternative to a banking system closely monitored by a state they distrusted.

In line with a draft law to regulate crypto companies, Binance agreed with Rosfinmonitoring to set up a local unit in Russia through which authorities can request client data, the Kostarev messages reviewed by Reuters show. Asked whether it had proceeded to set up this local unit, Binance responded, “Should we consider establishing a local entity in Russia in the future, Binance will never share data without a legitimate law enforcement request.”

Navalny’s chief of staff, Leonid Volkov, told Reuters that Russia’s proposed regulatory framework could let the Kremlin identify the opposition group’s crypto donors. Since Navalny’s arrest in January 2021, his anti-corruption foundation has publicly encouraged backers to donate via Binance, telling them this was the safest way to do so because, unlike with bank transfers, authorities would not know donors’ identities.

“These people will be in danger,” said Volkov, who runs the foundation from Lithuania. If Binance wants to protect its customers, Volkov went on, it should “never do anything with the Russian government.” The Kremlin declined to comment on Navalny’s crypto fundraising or Binance’s operations.

In response to Reuters’ questions, Binance said that before the war it was supportive of legislation that would bring clarity to regulation. But the Ukraine conflict and Western sanctions on many Russian banks had made it “virtually impossible for any platform to initiate or consider future plans in the region.”

People close to Binance said it supported the draft law because, once passed, crypto exchanges would be required to partner with Russian banks, allowing customers to deposit and trade significantly more funds.

The finance ministry said in early April it had finished drafting its “bill on the regulation of digital currencies.” People involved in the discussions say the government wants to move quickly to write the bill into law. One lawmaker told parliament’s official newspaper last month the crypto legislation would help mitigate damage to the Russian economy from sanctions.

Among the agencies helping develop the law is Rosfinmonitoring, responsible for combating money laundering and terrorist financing. Though nominally independent, it acts as an arm of the Federal Security Service (FSB), the main successor to the Soviet-era KGB, five people who have interacted with Rosfin said. Rosfin’s director, Yury Chikhanchin, is a security services veteran, according to his official biography.

Marshall Billingslea, a former head of the Financial Action Task Force, a global watchdog which sets standards for authorities combating financial crime, told a conference last year that Rosfin was “firmly under control of the FSB” to ensure that only state-sanctioned transactions were made into and out of Russia. Billingslea said it was “no surprise” to see Rosfin declare Navalny’s network a terrorist organisation after his arrest.

Rosfin, in a written response to Reuters’ questions, said it fully complies with international standards of operational independence in areas including regulating the activities of virtual asset service providers. Chikhanchin didn’t comment.

At least one other crypto exchange did not agree to provide client data to Rosfin due to concerns about how the information could be used and the FSB’s influence on the unit, according to a person familiar with the discussions. Others in Russia’s crypto sector said they were also sceptical about the draft law.

“No one knows if the proposed local office system will be used for good or bad,” said Mike Bystroff, a partner at the Moscow-based Digital Rights Center law firm, who represented Binance when it successfully challenged a ban on its website in January 2021.

Binance’s willingness to engage with Rosfin through 2021 contrasted with its approach elsewhere. Some national regulators have accused the company of withholding information. Britain’s regulator said in August last year a Binance UK unit was “not capable of being effectively supervised” after it refused to answer questions about Binance’s global business. Liechtenstein’s regulator, in a 2020 report, said Binance’s dealings with the body were “non-transparent” as it declined to provide financial information on request. In an article published in January, Reuters reported that Binance cancelled plans to seek a licence in Malta in 2019 due to Zhao’s concerns about the level of financial disclosure required.

Lawyers for Binance said it was “false equivalency” to conflate “distinct issues of our client’s responsiveness to law enforcement disclosure requests, with licensing applications for its own business that would involve wholly different types of disclosures.” Binance said it was “the most active participant in the industry” working with law enforcement to “develop best practices, mitigate/thwart new methods of criminality and prevent illicit proceeds from entering the marketplace.”

Binance said any suggestion that it refuses to share data with authorities making legitimate requests is “absolutely false.” It said it has strict policies and procedures to assess such requests and reserves the right to decline “when there is no legal purpose.”

“DON’T BE AFRAID”

Zhao first travelled to Russia as Binance CEO in October 2019. At a tech forum in Moscow, he told an audience to…