Is the settlement further indication that the crypto industry’s Wild West era is winding down, with a new epoch marked by regulation and taxation beginning?
Many predicted that Binance would never embrace regulation — it would only pretend to comply in jurisdictions like the United States.
No more.
Binance pleading guilty to money laundering and other federal charges on Nov. 21 means it’s giving up its free-booting ways. It will also pay a $4.3 billion fine, the largest in the history of the U.S. Treasury Department.
Moreover, Binance’s founder, CEO and principal owner Changpeng “CZ” Zhao — deemed by many the most powerful individual in crypto — will be sidelined from the firm for at least three years after the naming of a court-appointed monitor.
Today, I stepped down as CEO of Binance. Admittedly, it was not easy to let go emotionally. But I know it is the right thing to do. I made mistakes, and I must take responsibility. This is best for our community, for Binance, and for myself.
— CZ BNB (@cz_binance) November 21, 2023
Binance is no longer a baby. It is…
But those may not even be the most important effects.
“The settlement is a lot bigger than that,” Yesha Yadav, Milton R. Underwood chair, professor of law and associate dean at Vanderbilt University Law School, told Cointelegraph, adding:
“It will bring some systematic oversight to Binance by virtue of a monitorship agreement, signaling the end of an era where the exchange has been able to operate in a relatively borderless way, without headquarters and seemingly without a major domestic regulator.”
It will subject Binance to more “scrutiny over its products, risk management, governance, trading partnerships and compliance rigor” than it’s ever experienced before, Yadav continued, and the exchange will probably undergo significant structural reform to put it on a more compliant footing.
The agreement, which Binance reached with the U.S. Department of Justice (DOJ), the Treasury Department and the Commodity Futures Trading Commission (CFTC), should have industry-wide consequences — and not necessarily negative, either.
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Indeed, the deal is a “long-term positive” for the cryptocurrency and blockchain industry, according to Austin Campbell, founder and managing partner at Zero Knowledge Consulting and adjunct professor at Columbia University’s School of Business. He told Cointelegraph:
“This is an acknowledgment that crypto is here to stay, and people should have access to it.”
It is arguably a monumental event for the industry, in part, because stateless Binance is the world’s largest cryptocurrency exchange that at times has processed two-thirds of all digital trades, while Zhao, who reached a separate plea deal, is viewed by many as the face of the industry, particularly since the downfall of FTX’s Sam Bankman-Fried.
“We will get you”
“Only the U.S., with its proven and rather unique extraterritorial application of its law, can do this,” Switzerland-based attorney Markus Hammer, principal of consulting firm HammerExecution, told Cointelegraph. “The signal to the crypto world could not have been clearer,” he said, adding:
“If you are addressing U.S. users and actively involved in money laundering and circumventing U.S. sanctions in the crypto business, we will get you. We will get you, including your CEO, and even if you have no registered headquarters.’”
However, Binance may not be totally out of the woods yet with regard to federal U.S. charges. Separately, the SEC brought 13 charges against Binance in June, and those cases have yet to be heard. Moreover, these charges “are much broader than the ones brought collectively by the DOJ, CFTC and Treasury,” Carol Alexander, professor of finance at the University of Sussex, told Cointelegraph.
Binance has evolved into a multifunction organization, observed Alexander, going well beyond its exchange activities. It has a nonfungible token marketplace, for instance, and conducts market-making activities through two firms controlled by Zhao: Merit Peak and Sigma Chain.
The SEC has charged that Binance and Zhao commingled client assets in these market-making firms and used those customer assets as their own, which sounds a lot like what FTX did before its collapse. It will take some time before these latest cases are brought, however, Alexander noted.
Paving the way for crypto exchange-traded funds (ETFs)?
Still, the DOJ plea deal seems to offer some relief for the crypto sector. Some feared the government might try to put Binance out of business and feared global consequences given the firm’s ubiquity. So the settlement eliminated a big “overhang” in the market by this view.
Binance was the biggest idiosyncratic overhang on this market for the entire last year. Looks like we may finally be getting some resolution on it.
— Will (@WClementeIII) November 20, 2023
Markets hate uncertainty and they love clarity and resolution.
Similar vibes to the Bitmex resolution in 2020.
“I see the clarity now provided by the authorities in connection with the deal as very positive for the crypto industry, in general,” said Hammer. “It should also pave the way for a [U.S.] BTC spot-market ETF, which is likely to be launched in January 2024, and perhaps an ETH Spot ETF later in the year.”
Others saw the settlement as another sign the industry is maturing and moving beyond its buccaneering origins.
The Binance of 2018 is very different from the Binance of today, according to Campbell. It’s evolved from what he called “an evasive pirate enterprise” to one that is “well-established in some jurisdictions with actual KYC/AML programs and risk professionals in place.”
“Binance has been committed to getting it right for a while,” Campbell told Cointelegraph, referencing people like Richard Teng — named Zhao’s successor as CEO — and Noah Perlman, chief compliance officer, as examples of its growing seriousness vis-a-vis compliance and regulation. The DOJ settlement “is just one more step on that road.”
Just as the internet’s early pioneers eventually became integrated into the main market and economic system, “so too is crypto coming into the fold,” Truflation founder and CEO Stefan Rust said last week in a statement. “Full regulation and taxation are now here.”
Zhao himself seemed to see the shape of things to come back in 2021, when he stated in a public letter that regulation often trails innovation, particularly with revolutionary technologies like crypto. “The adoption and development of crypto has many parallels with that of the car. When the car was first invented, there weren’t any traffic laws, traffic lights or even safety belts.” Those came later.
Allowing Binance to survive?
Some also read in the DOJ settlement a conscious decision by the U.S. government not to drive Binance out of business. Campbell said:
“One of the biggest negatives for the [crypto] space and for the United States would have been regulators embracing the goal of a crypto ban. This is very much the reverse: the settlement is explicitly about Binance continuing to exist.”
According to Yadav, “a reformed Binance might benefit the crypto industry as a whole by offering a source of private standard-setting and representing a more maturing, careful organization to the world.”
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Maybe that’s going too far. Binance was already growing less dominant in the industry before the plea deal, and that trend could still continue, especially as the SEC case with its broader charges remains outstanding.
Binance could also lose market share over time as risk-seeking consumers gravitate to smaller, offshore exchanges, acknowledged Yadav, while adding:
“But this settlement offers a possible way back for Binance to shed its image as a risk-tolerant firm that has acquired market share by aggressively pursuing customer acquisition at all costs.”
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