On Binance, Iran and Why We Need to Do Better as an Industry

Update: For more details, please refer to this blog on the incident from industry leading chain analysis firm, Elliptic. 

It has been a while since I’ve been able to sit down and put pen to paper. The last time was to go in-depth into our sanctions process and give you a broader understanding of how Binance, as the world’s largest cryptocurrency exchange, continues to innovate to ensure that it meets global sanctions law.

I think the time is right for me to continue that conversation in light of recent developments regarding Iran. 

Earlier in the week, we discovered that Binance interacted with certain Iran-based nexuses. 

“Nexus” is a fancy term used in the sanctions world to say that users of these Iran-based crypto exchanges attempted to move crypto through Binance’s exchange.

As soon as we discovered this, we moved to freeze transfers, block accounts and follow the protocol set up by our compliance team.

Dealing with these kinds of bad actors is something that we, as well as every major player in global finance, have to contend with everyday. 

I felt compelled to write this piece to shed some light on the issues we are facing as an industry in dealing with sanctioned parties, and to put out a rallying cry for our industry peers to do more to take a stand against this sort of illicit behavior. 

The Issue

It is no secret that as crypto matures, we face many of the same issues that have plagued traditional financial institutions for decades.

In particular, the big question for centralized exchanges like Binance is, “how do we keep sanctioned individuals from accessing our platform while simultaneously extolling the values of decentralization.”  

I believe that no exchange out there, not even Binance, has cracked this issue.

This is not to say that we do nothing, far from it. We employ extremely robust KYC protocols and invest in the best technology and people to ensure that the people who should not be using our platform are unable to access our ecosystem.

However, as is often the case, we are playing catchup, especially when you consider the sheer speed and anonymity offered by the blockchain.

This is an industry-wide issue and one I feel my peers at other exchanges should be talking more about. There's an interesting  quote from a peer over at Chanalysis that I always keep in mind, “You cannot control the touches to the exchange, but you can control what you do with it once it touches your platform.”  If we are to better control what touches our exchange we must work together.  

Iran

Take Iran, for example. Even though we’re not a US company required to follow American law, as the industry leader, we work hard to keep sanctioned individuals off our platform. 

When the US reimposed previously suspended sanctions on Iran in 2018, Binance acted by telling traders in Iran they could no longer use our services, and would have to liquidate their accounts. 

This only impacted users based in Iran and had no impact on the larger global Iranian diaspora. Iranians outside of Iran, who have no income coming from Iran, are able to access our services.

We invest heavily in KYC (Know Your Customer) and transaction monitoring technology with some of the strictest protocols in the industry. Unlike many other exchanges out there, we do not allow users to trade on our platform without passing KYC checks that include country of residence and personal ID information. 

One area in particular that we have ramped up is transaction monitoring. This is a dynamic process that utilizes the latest technology to keep an eye on every transaction to ensure that we can, in real-time, discover and halt any illicit transactions and transfers.

To achieve this, we work with partners such as Chainalysis, TRM Labs, CipherTrace by Mastercard and Elliptic, as well as a robust suite of internal tools. Quite simply, we fully recognise and embrace our responsibility as leaders in this space to be an example of best practice for others. 

While, the nature of the blockchain and its underlying transparency is a critical asset in implementing and enforcing sanctions, the very nature of this technology can present novel compliance challenges when it comes to analyzing the flow of funds and the transactions underpinning them. This is something that is truly unique to the crypto space and one that for the most part, does not exist in the realm of traditional fiat finance. 

These features could perhaps lead an observer of the blockchain to conclusions that may be incorrect and make assumptions about the sanctions-related flow of funds.

For example, just looking at the blockchain, one might see that a Virtual Asset Service Provider’s (VASP) such as Binance could receive a transfer of funds from another wallet based in a sanctioned country such as Iran. This could then lead one to the assumption that the VASP receiving the funds are not acting with the best intentions  and utilizing all available technical tools to and processes to avoid sanctions violations. . 

The truth is that the blockchain data alone does not tell the whole story.

It could be likely that the VASP that received the transfer from the Iranian wallet had no intention of interacting with them and it is also likely that the VASP had measures and protocols in place to deal with inbound transfers from these sanctioned markets.

Similarly, a VASP could be acting on behalf of a customer and send funds to an address that, at the time of transaction, was deemed to be legitimate. At a later date, blockchain analytics may in fact have come to the conclusion that the sending wallet was in fact, part of a nexus belonging to a sanctioned entity. 

The bottom line is that one cannot ever clearly determine intent from the blockchain data alone.

Binance has some of the strictest safeguards in place around these sorts of transactions and if our analytics determine that such an incident has taken place, we immediately set up a task force to resolve the issue. Any failure of the system is unacceptable to us. 

We recently discovered that a lapse in vendor safeguards caused a potential nexus with entities in Iran. This is why we have our focused team and tools dedicated to working on these problems.

We are collaborating closely with the vendor to develop solutions that will strengthen systems and processes for this industry-wide issue. There’s not a single exchange out there that has completely figured this out. But since I have arrived at Binance I have been determined to find solutions whenever and wherever necessary, and ensure our commitment to regulation and compliance leads the industry — as it should. This is fixable, and together, as an industry, we will fix it.

What Next?

Working in the blockchain industry, and dealing with the creation and implementation of important global financial regulations, all while the ecosystem and technology continues to   develop at break-neck speed, is the greatest challenge compliance and sanctions professionals have confronted.  Under these daunting circumstances, we will make some mistakes.  

But, I promise this - every single time we do, we will work tirelessly to learn the necessary lessons and put processes and technology in place to diminish the chances of a repeat error.  As I have mentioned before, it took banks and other financial institutions over a century to build out the global system of regulations in use today. Binance has, in the space of just five years in existence, managed to put in place robust systems within an ever-changing landscape, and has hired over 500 industry leading experts dedicated to working on global compliance and investigations.

We’re here to build, and keep building, for the next century plus, and that includes constantly strengthening our compliance and regulatory systems, too.  The reality is perfect systems, in what is essentially an entirely new environment, can’t be built overnight. What I am committed to here at Binance, however, is to put in place the absolute best practices possible, and continued improvement. Given the industry-wide nature of this problem, however, I call upon my compliance colleagues in sister exchanges and block chain analytics firms around the world to work with me to develop a process and plan to rectify this shortcoming that we all face.  If we work together, we can mitigate this risk. We can overcome this problem. 

This is me stretching out my hand to my peers in the rest of the ecosystem: work with us, help build better tools, better methodologies and guide newcomers so that we can uplift the blockchain industry, together. I will be in touch with you to set up a working group to begin this dialogue.