Federal prosecutors are examining the relationship between Binance and U.S.-based hedge funds as part of a broader investigation into the cryptocurrency exchange’s possible skirting of money-laundering guardrails.
Hedge Funds
Hedge funds are pooled funds that trade in relatively liquid assets and that can use sophisticated tools to try to improve their performance on a risk adjusted basis. Generally only sophisticated investors such as high net worth individuals and institutions can invest in hedge funds.
Different hedge funds have different strategies of investing. Some hedge funds are activists and try to get companies to change their strategy to unlock value. Other hedge funds are more value oriented and buy deep value stocks. Yet other hedge funds will try to use an algorithmic approach to investing and try to create very sophisticated computer models that tell them when to buy certain stocks and when to sell certain stocks. Because many hedge funds hedge their investments, they may not outperform the market at times because they take theoretically less risk.
The subpoenas do not automatically mean authorities will bring charges against Binance or its founder and CEO Changpeng “CZ” Zhao, the Post noted as federal authorities are still discussing a potential settlement with Binance and are assessing whether the evidence they have is sufficient to bring charges.
In past years, Binance acquired a reputation for circumventing regulations and finding legal loopholes to sustain its business’ operations in jurisdictions all over the world, according to legal experts who spoke to the Post. The company’s previous lack of identification requirements raised concerns from lawmakers over the platform’s role in money laundering, according to a former DOJ prosecutor quoted by the Post. Last year, Binance had been used as a “hub for hackers, fraudsters and drug traffickers” with connections to the Russia-based dark web marketplace Hydra.
The company’s financials have also been deemed opaque by some. Last month, a representative from Nansen, a blockchain data analytics company said that there isn’t much on-chain [data] or any kind of financial access or transparency into [Binance’s] entities.”
Crypto company failures are becoming more common and interconnected. Celsius, a crypto platform that collapsed in July, lent heavily to FTX affiliate Alameda Research, which went bankrupt five months later. Binance’s founder and chief executive, Changpeng Zhao, was an early FTX backer, and his decision to sell off a large chunk of the company’s digital tokens helped spark a customer panic and run on bank deposits that FTX could not meet.
