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

Source: 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 February 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."

In April 2021, a Russian non-profit organisation called the Digital Economy Development Fund invited Binance to a private meeting with Rosfin at a government building in Moscow, according to the invitation seen by Reuters. The organisation is headed by a former top advisor to Putin on internet policy, German Klimenko, and was set up in 2019 to develop Russian technologies. The fund's website says one of its partners is the Russian trade and industry ministry. Kostarev, the Binance director, chairs the fund's committee on digital currencies.

Neither the Digital Economy Development Fund nor Klimenko responded to emails seeking comment.

Another exchange, OKX, originally Chinese but now based in the Seychelles, was also invited, a person familiar with the meeting said. An OKX spokesperson said the company declined the invitation, without giving a reason.

At the meeting, according to Kostarev's messages, Rosfin said it wanted exchanges to register with the agency so they could receive its requests for client information. Kostarev wrote to the business associate to say he didn't view the demand as a problem. He told the associate the FSB was interested in crypto, too. He didn't elaborate.

Asked about Kostarev's meeting with Rosfin, Binance said, "We did not work with, collaborate, nor partner with that organization." Five months later, Rosfin sent Binance a questionnaire, reviewed by Reuters, seeking more information on the exchange's background checks on clients and its "preferred channel of communication" with authorities for requests on crypto transactions. Asked about this communication, the firm said, "Binance takes its compliance obligations seriously and welcomes opportunities to consult with regulators."

Kostarev told the business associate in a message around the time of the questionnaire that Binance was stepping up efforts to engage with the government on crypto regulation. Rosfin was prepared to support Binance in this, Kostarev wrote.

But the Russian central bank was opposed to Moscow regulating cryptocurrencies and allowing the market to flourish out of concern that it would encourage criminal activity. Many of the world's central banks, whose mission includes controlling money supply, have similar qualms about the wild world of crypto. Governor Elvira Nabiullina told Russia's parliament in November "a responsible state should not stimulate their distribution." A spokeswoman for the central bank declined to comment.

In January of this year, Binance announced it had hired a senior central bank official, Olga Goncharova, as a director for the Greater Russia region. Goncharova would build "systematic interaction" with authorities in Russia, Binance said.

After Nabiullina proposed a ban on crypto use on Russian territory later that month, Kostarev told the business associate in a message that Binance was "in a war" with the central bank. All other Russian government agencies wanted to legalise digital currencies, Kostarev said. Support for crypto was indeed building in Moscow. Following Nabiullina's call for a ban, a top official at the finance ministry publicly backed the law that would require crypto exchanges to turn over names of their customers, saying it was necessary to ensure "transparency."

Putin then intervened. In a televised meeting with ministers on Jan. 26, he asked the government and central bank to reach a "unanimous opinion" on crypto regulation. He noted Russia had "certain competitive advantages" in the sector, such as surplus electricity, the most crucial input for the power-hungry creation of cryptocurrency.

Two weeks later, the government approved a plan for crypto regulation, drawn up by agencies including Rosfin and the FSB, that would bring the "industry out of the shadows."

Kostarev tweeted in response to an article on the announcement, "Finally some good news."

In a document describing the proposed regulatory framework, the government said that without such a system law enforcement "will not be able to respond effectively to offences and crimes." The government would create a database of cryptocurrency wallets related to terrorism financing, the government said, and exchanges would have to disclose information about their customers to Rosfin. The finance ministry submitted an early version of the draft law on Feb. 18.

Six days later, Russian forces invaded Ukraine. Binance's rouble trading exploded as Western nations imposed sanctions on Russia and the Kremlin limited foreign currency withdrawals. CryptoCompare's data shows Binance's average daily volume for rouble transactions for the initial three weeks of the war was almost four times higher than during the month before.

On Binance's Russian Telegram group, some volunteer customer representatives, known as Binance Angels, endorsed traders' posts thanking Binance for not blocking accounts, including one message asking Binance not to "fall for this war crap." Binance has enlisted hundreds of Angels around the world to promote the exchange to local crypto traders.

"Binance does not interfere in politics," one Angel wrote. Binance told Reuters that Angels are not spokespeople for the company.

Binance also drew praise from Putin's United Russia party. One lawmaker, Alexander Yakubovsky, speaking to the official parliament newspaper on March 14, called Binance the "leading experts in our country" advising politicians on crypto regulation. The company "is under strong pressure from countries unfriendly to Russia," he said. Binance said they had never met or communicated with Yakubovsky and his opinions were his own.

($1 = 78.2830 roubles)