Why Did Binance and CZ Settle With US Authorities for $4.3 Billion?

Introduction

A feared potential black swan event has come and gone in crypto with little fanfare. Binance, the world’s largest cryptocurrency exchange, and its popular founder/CEO Changpeng Zhao, better known as CZ, have reached a massive settlement with U.S. authorities, marking a significant turning point in the crypto industry’s relationship with regulators as the next bull run looms large thanks to incoming catalysts like the BlackRock Bitcoin spot ETF and Bitcoin Halving. This comes on the back of the SEC also again going “back for seconds” against Kraken and publishing a list of what it considers crypto securities.

The U.S. Securities and Exchange Commission (SEC) had previously filed 13 charges against Binance and its CEO for: operating unregistered exchanges, broker-dealers, and clearing agencies, and misrepresenting trading controls and oversight. The CFTC, on the other hand, charged Binance and CZ with willful evasion of federal law and operating an illegal digital asset derivatives exchange.

The settlement, announced on Nov 21 and 22, 2023, sees Binance paying a whopping $4.3 billion. This settlement is the largest in Treasury history according to Janet Yellen, with CZ personally paying $50 million to the CFTC and posting bail for $175 million in order to return to his home in the UAE on bail.

The charges against CZ are very serious and included failure to maintain an effective anti-money laundering program at the crypto exchange in violation of the Bank Secrecy Act which birthed regulations such as the so-called Travel Rule requirement.

As part of the settlement, CZ pleaded guilty to breaking U.S. anti-money laundering laws and agreed to step down from his role as CEO of Binance. It was announced on Nov 22 2022 that he has been replaced by the experienced ex-Abu Dhabi regulator Richard Teng in order to provide some much-needed stability at the world’s biggest crypto exchange. Zhao could see jail time if convicted.

What’s next for Binance?

CZ will retain his stake in Binance, which could allow him to continue exerting some influence on the company. This is highly unlikely in the short term, as the criminal cases against him are ongoing and his behavior will be heavily scrutinized. Zhao’s demise at Binance draws comparisons with other axed exchange heads like FTX founder Sam Bankman-Fried (due for sentencing in 2024) and Arthur Hayes, previously the head of controversial exchange BitMEX, who faced similar charges in 2020.

Both FTX and BitMEX embraced full compliance with anti-money laundering legislation after the departure of their founders; and the same is likely in store for Binance under the guidance of Teng. He stated that his focus would be on “reassuring users that they can remain confident in the financial strength, security, and safety of the company” and is a strong advocate for regulatory compliance.

The settlement also includes the appointment of independent compliance monitors for three- and five-year terms. These monitors will have sweeping powers to oversee Binance’s business practices, including how it adds new customers and how it interacts with jurisdictions subject to U.S. sanctions or surveillance.

The Binance result is a highly significant development in the ongoing scrutiny of cryptocurrency exchanges by U.S. authorities. It sends a clear message to the industry about the importance of compliance with U.S. laws and regulations. Despite the hefty penalties, the settlement allows Binance to continue operating and potentially marks the start of a new chapter for the world’s largest exchange as well as the crypto industry.

Why did the SEC charge Binance and CZ?

The SEC previously filed 13 charges against Binance entities and CZ, alleging that since at least July 2017, Binance.com and Binance.US, while controlled by Zhao, operated as exchanges, brokers, dealers, and clearing agencies, earning at least $11.6 billion in revenue from transaction fees from U.S. customers.

The SEC charged Binance for the unregistered offers and sales of BNB, BUSD, and crypto-lending products known as ‘Simple Earn’ and ‘BNB Vault’.

In addition to the SEC’s charges, Binance and CZ faced accusations from the U.S. Department of Justice and the U.S. Commodity Futures Trading Commission (CFTC). The CFTC sued Binance for offering unregistered crypto derivatives in the U.S., alleging that Binance had a “maze of corporate entities” demonstrating the exchange’s “willful evasion of U.S. law”.

Binance settles, CZ pleads guilty to AML violations

In response to these charges, Binance and CZ have agreed to a series of settlements. CZ pleaded guilty to failing to maintain an effective anti-money laundering (AML) program, in violation of the Bank Secrecy Act (BSA), and has resigned as CEO of Binance.

As part of the plea agreement, Binance has agreed to forfeit over $2.5 billion and to pay a criminal fine of over $1.8 billion, for a total financial penalty of over $4.3 billion. CZ will also pay a $50 million fine to the CFTC and may face potential prison time when he gets sentenced in 2024, ironically before Sam Bankman-Fried.

In addition, Binance will make a “complete exit” from the U.S. (Binance.US, a different entity, will remain) and agree to strict oversight from monitors over the next several years.

These legal actions and settlements mark a significant moment in the regulation of the cryptocurrency industry. The SEC and other federal agencies have been increasing their scrutiny of cryptocurrency exchanges and other entities in what is known as Operation Chokepoint 2.0, seeking to enforce compliance with securities laws and other regulations.

The actions against Binance and CZ are part of this broader trend, and the dominant exchange’s meek surrender could have significant implications for the future of the cryptocurrency industry which is gradually being reined in by regulators around the world.

The settlements and CZ’s resignation may serve as a fresh start for Binance, which had been hamstrung by widespread market fears that U.S. authorities will shut it down globally. The settlement was seen as the only way for Binance to continue its business, giving them a fresh start in 2024 if all goes to plan.

With powerful new TradFi entrants like BlackRock and Fidelity knocking on its door, Binance’s actions are also bullish for the entire crypto industry, helping it to clear its collective closet of skeletons that regulators like Gary Gensler can point to when they argue that the whole market is manipulated.

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