Binance, a leading cryptocurrency exchange, is the industry leader weathering regulatory challenges worldwide. Its experience may provide insights into what awaits other players in the crypto market in the coming years. Cryptocurrencies are no longer the Wild West — a sheriff has arrived in town.
The exchange recently had to exit Russia and several European countries. Yesterday marked the end of the standoff between Binance and the U.S. government. Following court hearings, the founder of the exchange, Changpeng Zhao, better known as CZ, pleaded guilty to money laundering and agreed to step down as the CEO of his own company. As part of the agreement with the U.S. Department of Justice, the exchange will pay a fine of $4.3 billion. Let's delve into the background of this conflict.
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Binance US vs. U.S. Government
Binance US was launched on September 24, 2019, as a solution to local regulatory issues. In early June, the exchange announced its expansion into the United States. However, by the 14th of the same month, an update in the terms of use stated that "Binance does not provide services to U.S. citizens."
By September, Binance had entered into a deal with a company named "BAM Trading Services," located in California, San Francisco, and registered as a financial services enterprise.
“Binance US will be headed by our local partner BAM Trading Services and will serve the U.S. market in full compliance with regulatory requirements.”
However, it remained unclear who this partner was and where they came from. There are reasons to believe it was a similar story to what later happened in Russia, where the entire business of the exchange was sold to a company registered just a day before the deal.
Despite the California company being registered with FinCEN — the U.S. Department of the Treasury's bureau for combating financial crimes — the registration document notes that "FinCEN does not verify the information provided by BAN," and the document "only reflects what was directly provided to the regulator."
Nevertheless, the crypto exchange failed to outsmart Uncle Sam. In 2020, as part of an investigation initiated even before the appearance of Binance's local branch, the U.S. Department of Justice (DOJ) sent a written request to the exchange demanding internal records for money laundering scrutiny. It is unknown how the exchange reacted to this demand. Binance's PR Director, Patrick Hillman, responded evasively:
“Regulators reach out to all major cryptocurrency exchanges to better understand our industry. This is a standard process. We work with agencies to answer any questions they may have. Binance has a leading industry security team with over 500 employees, including former regulators and law enforcement officers.”
In addition to the Department of Justice's request, the Securities and Exchange Commission (SEC) in the same month issued a subpoena to the U.S.-based partner — BAM Trading Services. In the document, the Commission demanded documents about whether any BAM employees worked on the main Binance exchange and what services it provides to the American company.
Binance vs SEC: Asset Freeze
The investigation, which began from the Department of Justice's side five years ago, took an unexpected turn in the summer of 2023. On June 5, the Securities and Exchange Commission filed a lawsuit against Binance and CZ personally, bringing 13 charges against the exchange.
The SEC claimed that Binance artificially inflated trade volumes, misappropriated client funds, failed to restrict platform access for U.S. customers, and misled investors. Additionally, the regulator stated that Zhao, the founder and one of the most influential figures in the crypto industry, secretly controlled customer assets, using them "at his discretion."
According to the Commission's investigation, Binance created a separate U.S. company "as part of a carefully planned scheme to circumvent U.S. federal securities law." This refers to the aforementioned "BAM Trading Services," which failed to provide evidence of its independence from the main exchange — Binance Ltd.
Following these allegations, the exchange faced a mass withdrawal of user funds, and Bitcoin dropped by 5%. The SEC insisted on a temporary freeze of all Binance US assets, causing panic in the market. However, a federal judge overseeing the case refused to issue such a court order.
This allowed the U.S. branch of the company to continue its business while simultaneously resolving the situation with the regulator.
We need $4 billion
The drama that unfolded yesterday can be considered the conclusion of the investigation. On Tuesday evening, CZ appeared before a federal court in Seattle, where he and Binance Ltd. faced charges of conspiracy, conducting unlicensed money transmission business, and violating the "IEEPA" law—International Emergency Economic Powers Act.
The main allegations from the Department of Justice were that Binance allowed transactions on its platform involving ISIS, Al-Qaeda, and HAMAS, facilitated darknet trading, and assisted in circumventing sanctions for Russian citizens, residents of Donetsk, and Luhansk.
As part of the agreement, CZ stepped down as the CEO of the company, and his position was taken by Richard Teng, Binance's regional director. The court prohibited Zhao from participating in Binance's activities, while retaining the ownership of the exchange's shares. The former CEO is required to serve 18 months in prison.
Binance commits to completely exit the U.S. market and appoint an observer who will monitor the sanctions compliance program for five years.
Additionally, the exchange will pay a $3.3 billion fine within 15 months, and another $1 billion will be confiscated immediately. CZ personally will pay $50 million to the U.S. government.
Reactions
User MinisterOfNFTs: "Breaking: the new CEO of Binance will be Sam Bankman-Fried*. 'He will steer Binance in the right direction' — source."
*Sam Bankman-Fried — founder of the fraudulent FTX exchange, which stole billions of dollars of user funds.
Throughout his career, Zhao has crafted an image of a noble, visionary, and professional player in the crypto market. Binance, under his leadership, became the world's number one exchange. The industry will not forget him, as evidenced by numerous social media posts in his support.
User Ryan Sean Adams: "Say what you want about CZ, but he brought millions of people into crypto and didn't steal our money. I trust him more than the regulators of the United States."
User Quinten: "Thanks for everything, legend! Think what you want, but CZ moved mountains in the crypto industry. He's one of us."
User Ashley: "CZ sacrifices himself for the entire crypto sphere."
User Cold: "CZ died for the bull run."
He himself reacted calmly and thoughtfully — summarizing, introducing the new CEO of Binance, and outlining his future plans.
"...I made mistakes and must take responsibility. It's better for our community, for Binance, and for me. Richard Teng, the new head of the exchange, will ensure that Binance provides security, transparency, and compliance with regulatory requirements. For now, I will take a break. I haven't had a real vacation in the last 6.5 years. I will engage in passive investing... Binance has never misappropriated user funds or engaged in market manipulation, as confirmed by the SEC investigation. I will stay in touch with the exchange team for consultations within the framework established in the agreement..."
The BNB token, the exchange's native token, reacted with a 5.5% drop.
UPD: CZ was released on bail of $175 million in the courtroom. The next hearing is scheduled for February 24, 2024. The maximum punishment he faces is 18 months in prison.
