Three crypto investors are suing Binance and its former CEO, Changpeng Zhao, alleging the crypto exchange failed to stop their stolen funds from being laundered.

Allegations and Legal Context

In an Aug. 16 class action complaint filed in the U.S. District Court for the Western District of Washington, Seattle, the plaintiffs allege their crypto was stolen, and the thieves sent those funds to Binance to "remove the connection between the ledger and their digital assets," making them untraceable.

The plaintiffs argued a key attribute of crypto transactions is "a permanent record of those transactions" on the blockchain, which makes them "permanently and accurately traceable."

The class action suit alleges, **"Therefore, without a place to launder crypto, such as Binance.com, if a bad actor steals someone else's crypto, there is a risk the authorities would eventually track them down by retracing their steps on the blockchain."

** Plaintiffs say Binance was an essential part of the money laundering process, which violates the Racketeer Influenced and Corrupt Organizations (RICO) Act.

Expert Opinions and Industry Implications

Bill Hughes, senior counsel and director of global regulatory matters at Ethereum development firm Consensys said he's "dubious" about whether the suit will be able to prove these allegations.

In an Aug. 20 post to X, Hughes said the new class action suit was a "natural, predictable follow-on civil action" that seeks to capitalize on government prosecutions.

However, Hughes also said the lawsuit puts Binance in a "tough position" and could have significant ramifications for the crypto industry if it ever goes to trial.

"If this case goes far into discovery and even to dispositive pre-trial motions, then the efficacy of blockchain analytics itself and on-chain asset recovery will be on trial," he said.

"The things that Binance would be incentivized to say about tracing and recovery - [kind of] a tough position to be in, honestly, if you care anything about the industry," Hughes added.

Previous Legal Troubles

In November 2023, CZ pleaded guilty to violating U.S. money laundering laws and resigned as Binance CEO as part of a settlement with authorities.

Binance agreed to pay $4.3 billion in fines for "civil regulatory enforcement actions." In April, a federal judge sentenced CZ to four months in prison, shorter than the three years federal prosecutors requested. He started serving his sentence in June and will be released in September.

Ongoing SEC Scrutiny

The U.S. Securities and Exchange Commission (SEC) also filed a suit against Binance in June 2023, accusing the exchange and CZ of misleading the agency about its market surveillance controls and artificially inflating its trading volumes.