Binance Requires Source of Wealth Declaration for Money and Cryptocurrencies
The crypto exchange Binance will from now on oblige both new and existing users by conducting a so-called intermediate verification. This was announced by the exchange in an information on the update of Binance services. The background here is ostensibly also the fight against money laundering and terrorist financing. Primarily, it is supposed to be about the identity verification of the users. However, it should only be a matter of time that Binance also demands a source of wealth declaration for money and the cryptocurrencies.
Why Even Binance Requires Proof of Source of Wealth Very Soon!
The topic of proof of source of wealth is currently on everyone’s lips in Germany. With the latest amendments to the Money Laundering Act (“Geldwäschegesetz“, GwG) and BaFin‘s application notes, Germany implemented stricter European regulations for combating money laundering and terrorist financing into German law. On this website, we provide comprehensive information on these obligations around the proof of source of wealth, which have recently come into force.
The sensitive intrusion into the privacy of citizens, which the proof of source of wealth represents, does not only refer to cash. Crypto exchanges, as so-called obligated parties in the sense of the GwG, must now also demand proof of the source of the financial resources and cryptocurrencies from their users for certain transactions. These certain transactions present themselves on a crypto exchange in particular through the trading of cryptocurrencies and the deposit and withdrawal of fiat money.
The recent tightening of EU anti-money laundering law is also the reason why, for example, the Austrian-based crypto exchange Bitpanda has recently started requiring proof of wealth (more precisely: proof of source of funds) from its users. This involves questioning both the source of the money and the source of the cryptocurrencies (which were not purchased from Bitpanda). There are numerous reports of blocked user accounts.
Binance Announces First Step Towards Proof of Source of Wealth!
So it comes as little surprise that the now (allegedly) Malta-based crypto exchange Binance now also seems to bow to the pressure of the regulators in the field of cryptocurrencies and informs its users about innovations with the following tweet:
Binance constantly reviews its products and services to enhance user protection, provide a safe crypto environment and to align with the evolving global compliance standards. As an important step forward, we’re updating our global KYC requirements for all users.
— Binance (@binance) 20. August 2021
In the tweet, Binance points out innovations in the KYC (Know Your Customer) area. This refers to the interim verification mentioned at the beginning and now introduced. Both new and existing Binance users have to undergo an identity check and verification as part of this intermediate verification. In other words: Binance wants to know who is behind the user accounts.
What sounds banal at first glance means a paradigm shift in Binance’s own compliance policy, especially for Binance as one of the largest crypto exchanges in the world.
Not Very Praiseworthy: Binance’s Past in Terms of Source of Funds.
After all, the cryptocurrency sector is generally still a very weakly regulated asset and service field. However, Binance in particular, as a platform on which Bitcoin and other cryptocurrencies are tradable, has already attracted negative attention in the past with regard to regulatory requirements.
Only recently, the British financial regulator FCA publicly warned against Binance Markets Limited and Binance Group. This warning message did not cause any reaction in the cryptocurrency market, even though Binance is one of the largest crypto exchanges in the world. Another sign of the low risk awareness of most investors in Bitcoin and other cryptocurrencies.
The actions of Binance already seemed strange for years. This is because people were able to sign up for trading there without any verification. Anonymous trading in this form is prohibited in the vast majority of countries around the world for good reason. Binance has not yet requested a proof of source of wealth for the financial means and assets of the customers.
In the meantime, however, Dutch banks have started to refuse euro transactions to and from Binance due to this illegal practice of Binance. It can be assumed that other well-known banks will follow this decision.
So Far, Binance Has Cleverly Avoided Requiring a Source of Wealth Declaration From Users. This Will Soon Be Over!
The proof of source of wealth has not played a role at Binance so far. This is partly because Binance itself generally did not think much of regulatory measures in the cryptocurrency sector until recently.
It is not without reason that Binance changed its registered office internationally several times, kept it secret in some cases, and engaged in “jurisdiction hopping“. This means changing jurisdictions through quick local moves of the company’s structures.
Such jurisdiction hopping, among other things to keep the question of proof of origin of funds away from users, is something a company like Binance can only do for a limited time.
This is because the more Binance grows, the higher the probability that influential tax authorities such as the US IRS and international anti-money laundering institutions will “pin down” Binance.
Why No One Has Yet Forced Binance to Require a Source of Wealth Declaration
One thing must be clear at this point: Even those who reach into the “bag of tricks” of jurisdiction hopping are usually not behaving in a legally compliant manner. As a rule, providers of goods and services have to follow the regulations of the country in which they offer the goods or services. This is made clear by a simple
Example: An online store whose headquarters are outside the EU wants to sell goods to German customers. The translation effort of the website requires little (financial) effort compared to the additional sales potential. However, the online store now has to comply with German law because it is targeting German customers. It must therefore grant the two-week right of withdrawal when purchasing the goods. This applies regardless of where in the EU the company is based and what the legal situation is there.
The example can also be projected to crypto exchanges. In whichever country the exchange offers Bitcoin and other cryptocurrencies like Bitcoin to users, the national law of the users must be observed. When using services, these users should be able to rely on the fact that the laws applicable in their country apply. And so, foreign cryptocurrencies also have to comply with European anti-money laundering regulations. The requirements in Germany or Austria, for example, are now quite stringent.
This is challenging for companies operating internationally. However, it is part of the entrepreneurial risk and due diligence if you want to enter international markets. After all, an internationally active company also benefits from a normen increase in the number of potential customers.
Enforceability Is Key. Also For the Proof of Source of Funds!
As nice and clear as the legal situation now seems due to the above example. In the end, it is the enforceability of the law that is at least as important. However, it is precisely the hurdles of legal enforcement that can cause difficulties for foreign companies. This is exactly where Binance and other foreign crypto exchanges benefited in the past.
Due to the constant changes in company headquarters and structure described above, it has always been difficult for investigative and law enforcement agencies to punish violations of national law. It has been mostly about the concerns of small users who have had problems enforcing the law against powerful crypto exchanges with corporate headquarters around the world for the last decade or so.
That never seemed important enough. But those times are now changing.
What to Expect From Binance on Proof of Source of Wealth?
After all, the pressure on providers in the field of cryptocurrencies and crypto exchanges is currently increasing massively internationally.
As you can see, even a heavyweight like Binance cannot withstand this increasing regulatory pressure. The company’s history shows that Binance is not tightening its own KYC policy due to its own drive. Regulatory issues did not interest the crypto exchange in the past.
But when the FCA, IRS and other international regulators swing regulatory clubs, caution is advised. Because then, for crypto exchanges caught in the spotlight, it’s a matter of losing and continuing business models worth millions!
(Potential) users of Binance must therefore be prepared not only to go through the KYC process, but also to provide detailed information and relevant evidence. We explain what these might look like on our “First Steps” page. Binance will not be able to avoid having to disclose the source of assets.
Presumably, Binance will initially take a “rather lax” approach to proof of source of wealth and allow a “rough” proof of funds of source of wealth to suffice, possibly depending on a certain limit that must be exceeded in terms of value. However, this is likely to change soon.
It must be assumed that Binance will demand a detailed proof of source of wealth under increasing pressure from regulators. This question about the source of funds will come as a complete surprise to Binance users. This is because they currently assume that they will not be confronted with a proof of source of wealth, especially with Binance.
It cannot be ruled out that Binance will freeze the credit balances and assets of the persons concerned if proof of the origin of funds is not provided. If the source of the wealth cannot be fully clarified at Binance, the credit balances and assets are exposed to a high risk.
Efficient KYC Policy Wanted: This Is Why Binance Will Soon Simply Require a Source of Wealth Declaration Everywhere
Because which jurisdiction will Binance ultimately submit to? The American? The European? An Asian one? A mixture of all?
As a commercial enterprise, Binance and every other crypto exchange are also revenue-driven. You want to make money. And spend as little money as possible on complying with a wide variety of national anti-money laundering regulations. The most efficient way is required.
If crypto exchanges were to only want to provide the minimum level of the respective national KYC requirements in each case, this would require an elaborate and cost-intensive monitoring process. The legal situation is constantly changing, and so are the requirements for money laundering prevention and combating. Consulting companies and law firms would have to be hired for a lot of money and on a recurring basis. This is because a company cannot do this itself.
Crypto exchanges will therefore want to meet as many international requirements as possible in terms of KYC policy with as little financial outlay as possible. This could mean that often more evidence will be required than may be required by law in individual countries. The aim is to achieve an internationally uniform and thus cost-saving practice.
It can probably be assumed that Binance will therefore require proof of source of wealth for money and cryptocurrencies from all users as part of its international service offering. Exactly in the same way, by the way, as it is now also being handled uniformly with the interim audit to be carried out first.
Questions and Answers on the Source of Wealth Declaration
Does it help that I have been registered with Binance for a long time?
No. For the proof of source of funds, it does not matter how long you have been servicing an account at Binance. The proof of source of financial funds is done regardless of the length of the previous customer relationship.
What to do if Binance does not respond?
If Binance does not respond to you, or does not accept the proof of source of funds altogether, your assets could be at risk. We recommend the involvement of a specialized law firm.
How often do I need to provide proof of source of funds to Binance?
Presumably for any transaction that initiates new Euro balances or new Bitcoins and cryptocurrencies to or from Binance. Other exchanges where Bitcoin and cryptocurrencies can be traded regularly require proof of source of funds.