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Binance: A Breakdown of What's Really Happening

Binance: A Breakdown of What’s Really Happening

Discover what's happening with Binance and how it might impact the crypto markets over the coming years.

Binance made headlines for paying one of the largest fines in corporate history – a $4.3 billion settlement with the CFTC, Department of Justice, and other government agencies over money laundering and additional charges. But what’s behind these numbers, and how will these charges impact the future of the U.S. crypto industry?

In this article, we’ll dive into the specifics of the settlement and how it might impact the markets over the coming year and beyond.

What Did Binance Do?

Binance was accused of and admitted to two major crimes.

First, the company conspired to conduct an unlicensed money-transmitting business without “know your customer” (KYC) or “anti-money laundering” (AML) measures in place. Without these safeguards, the platform became a conduit for “terrorists, cybercriminals, and child abusers” to launder funds, according to the DOJ’s press release.

Second, the company operated an unlicensed crypto exchange in the U.S. and intentionally hid it from U.S. regulators. In particular, it set up Binance.US as a compliant exchange to appease U.S. regulators but still let more prominent investors (“whales”) secretly transfer funds to, enabling them to skirt U.S. rules and regulations.

Why Did Binance Settle?

Binance had been knowingly evading U.S. laws for years. In fact, Samuel Lim – the company’s former compliance lead – admitted in a damning internal chat that “we are operating as a fking [sic] unlicensed securities exchange in the USA bro”. So, what prompted the company to settle for such a large fine and even potential prison time?

Why Did Binance Settle?
Samuel Lim’s incriminating chat logs. Source: Twitter / X

While the SEC and CFTC had their targets set on the exchange for years, the Department of Justice and Treasury Department brought the leverage needed to secure a settlement. The Treasury has the power to sanction the exchange and cut it off from large swaths of the international banking system – almost certainly forcing it out of business.

The settlement came as an alternative to an indictment and sanctions. While it involves a massive fine and potential prison time, Binance will live to fight another day.

What’s in Binance’s Settlement?

Binance and the Department of Justice settled charges that the exchange conspired to conduct an unlicensed money-transmitting business without anti-money laundering protections. Under the settlement, the firm agreed to pay a $1.8 billion fine and $2.5 billion in forfeitures and appoint a monitor for three years to ensure its future compliance.

The company also settled with the Commodity Futures Trading Commission (CFTC) after operating an unlicensed crypto derivative trading platform in the U.S. and intentionally hiding it from U.S. regulators. Under that settlement, it will pay $1.35 billion in civil penalties and another $1.35 billion in disgorgement.

In addition to these two settlements, the exchange settled charges that it violated anti-money laundering and sanctions laws with the Financial Crimes Enforcement Network (FinCEN) for $3.4 billion in penalties (and a five-year monitor). And finally, it reached a $968 million settlement with the Office of Foreign Asset Control (OFAC) for similar charges.

Not surprisingly, the actual payment of these fines is contingent on many factors. While the sum of these figures is over $10 billion, officials say that only $4.3 billion will initially move from Binance to the U.S. government. The balance involves exchanges between agencies and depends on whether the exchange complies with future rules and regulations.

What About Binance’s Officers?

Changpeng “CZ” Zhao stepped down as CEO of Binance and reached a $150 million settlement with the Department of Justice and CFTC. Under the settlement, he pled guilty to violating the Bank Secrecy Act, and sentencing will occur on February 23, 2024. Recently, he secured release from custody on a $175 million personal recognizance bond with a $15 million trust.

In addition to CZ’s criminal charges, former Chief Compliance Officer Samuel Lim settled charges with the CFTC for $1.5 million.

Will Binance Face Any Other Fines?

The notable exception from the government’s settlement with Binance was the Securities and Exchange Commission, which would have pushed the exchange to close most of its U.S. crypto trading business and accept a claim that its affiliates engaged in manipulating trading. The SEC’s settlement would have also made trading BNB in the U.S. impossible and hurt its global value.

Ultimately, the SEC’s ongoing case relies on the agency’s claim that cryptocurrencies are securities. And after Ripple’s success in court, Binance lawyers may be more confident in their ability to fight the SEC’s claims and protect their Binance.US assets. The exchange may also want to do its part in fighting the SEC’s allegations and safeguard its reputation.

However, the SEC’s lawsuit has already taken a toll. According to court documents, Binance.US has lost almost half of its monthly users following the SEC’s lawsuit, while the average monthly value of its assets is down nearly 90%. So, even if Binance wins in court, it could suffer tremendous damage in the U.S. from the lawsuit.

What’s the Impact on the Industry?

The crackdown on Binance is the latest in a series of regulatory actions that have transformed market-leading firms and sent high-profile individuals to prison. The feds have brought charges against Do Kwan, creator of Terra-Luna, Alex Mashinsky of Celsius, and Sam Bankman-Fried of FTX – and CZ is likely to become the latest casualty.

In addition to taking down free-wheeling figureheads, the government has weeded out unregulated off-shore exchanges and clarified that anyone doing business in the United States must follow the rules.

But the million-dollar question is: How far will regulators go in their crackdown on the crypto industry?

Many are happy to see the SEC reigning in the less savory companies, but in some cases, regulators aren’t going after just the “bad guys” but the well-meaning companies. For instance, the SEC has gone after Coinbase for operating as an unregistered exchange, broker, and clearing agency despite the company’s efforts to secure the registrations it would need to operate legally.

According to Coinbase, the SEC permitted Coinbase to go public in April 2021 and said at the time that it didn’t think it had statutory authority to regulate businesses like Coinbase. But in recent months, the agency abruptly changed its position and contends that Coinbase has been operating illegally since 2018 and must register as a national security exchange.

Moreover, Coinbase has repeatedly requested clarification and rulemaking. For instance, the exchange repeatedly sought guidance on activating its Commission-registered alternative trading system (ATS) subsidiary – a system multiple broker-dealers use when they provide trading, brokerage, and custody services to retail investors.

The Bottom Line

Binance’s historic $4.3 billion settlement with various government agencies is another example of regulators reining in the industry. But while the CFTC and other agencies seem satisfied with the settlement, the SEC continues to pursue its claim that all cryptocurrencies and securities – a claim that extends beyond Binance to other exchanges like Coinbase.

Ultimately, the government’s actions against Binance, FTX, Terra-Luna, and other unsavory projects are well-deserved and could help usher in a more mature industry. Still, how far the government’s reach into crypto will extend remains to be seen.

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This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.

Justin Kuepper