Hacked Japanese Exchange Files Lawsuit, Claiming Binance Allowed $9.4M to be Laundered

Japanese crypto exchange, Fisco, files a lawsuit against the largest crypto exchange, Binance, for allegedly helping hackers launder over $9 million in stolen funds from the former exchange in 2018. The lawsuit, filed in the Northern California District Court, claims the exchange “intentionally or negligently” refused to stop the money laundering process even after Fisco (named Zaif at the time) informed them.

The filed lawsuit further claims Binance should cover the costs and damages caused by their negligence. The case is filed in California due to Binance using Amazon Web Service (AWS) servers and part of its digital assets being held by California-based custodians such as Coinbase and BitGo.

The Fisco-Binance Fiasco

In September 2018, Zaif crypto exchange, rebranded to Fisco after Fisco Cryptocurrency Exchange (FCCE) purchased it for $44 million, announced a hack on its hot wallets that saw the attackers make away with over $60 million in users funds. The exchange reported 5,966 BTC alongside a substantial amount of Monacoin (MONA), and Bitcoin Cash (BCH) was stolen during the hack.

While the exchange has restructured, repaying users who lost their funds, and reported the matter to authorities, the hack has opened up once again. This time Fisco has filed a lawsuit against Binance claiming a fraction of the funds stolen from the hack, about $9.4 million, were traced to the largest crypto exchange.

The lawsuit claims that Binance’s “lax KYC/AML regulations did not measure up to industry standards.” The exchange allowed new unverified accounts to transact and withdraw up to 2 BTC with no KYC compliance, which Fisco claims helped the hackers launder the 1,451 BTC sent to the exchange. The lawsuit reads,

“The thieves laundered the stolen funds through Binance by taking advantage of Binance’s policy that allowed new users to open accounts and transact on the exchange in amounts below 2 Bitcoin without providing any meaningful identification or KYC information.”

Fisco further claims it told the Binance management team on the ongoing heist highlighting the Binance addresses that had received the stolen cryptocurrency. Despite the warning, Binance did not take any action to stop the hackers.

“Binance, either intentionally or negligently, failed to interrupt the money laundering process when it could have done so.”

The Japan-based exchange is heading to court to seek compensation from Binance on the losses suffered and costs incurred to recover the amount. This will provide a clear case on the KYC compliance regulations set forward by the global regulator, FATF, known as the Travel Rule.

Japan-Malta companies court fight in California?

Zaif decided to file the case in Northern California due to several factors. First, over $40 million of the stolen funds from the exchange users’ wallets belonged to U.S and California residents. However, the exchange did not only select California due to the users residing in the area but also due to some of Binance’s “key business components” being located in the West coast state. The lawsuit states that Binance relies on Amazon Web Services (AWS) for hosting purposes – AWS is registered in California:

“Upon information and belief, a significant portion if not all of the AWS servers Binance relies on for its operations are located in the State of California.”

Moreover, Fisco claims a significant portion of Binance’s offline hardware wallets custodial services are offered by crypto firms located in California. Focusing on Swipe, a payments firm recently acquired by Binance, Fisco lawsuit stated:

“Binance admits that Swipe uses Coinbase and Bitgo, both of which are located in the San Francisco Bay Area, to custody the cryptocurrency used in Swipe’s business.”

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