Last updated on April 30th, 2024 at 01:42 pm
In 2022 and 2023, FTX dominated crypto regulation headlines, this year the cannons of government-enforced regulation, undeterred in their mission to seek and destroy, are focused on another “big bird” and are hell-bent on clipping its wings.
Binance, for several months now, has faced a series of challenges with regulators worldwide, and the crypto giant is enduring more setbacks than successes. In another development in its ongoing battle with regulators, attorneys from the US Department of Justice filed a sentencing memo on Tuesday April 23rd, arguing that former Binance CEO Changpeng Zhao (CZ) should serve no less than 36 months in prison and pay a $50 million fine after he pleaded guilty to violating the Bank Secrecy Act last November.
The DOJ argued in its memo that CZ and Binance amassed a significant fortune through a deliberate decision to disregard financial compliance regulations in the US. Therefore, the upgraded punishment proposed is a “more appropriate” consequence of CZ’s “Wild West model,” which allowed criminals to exploit Binance to violate US federal sanctions and money laundering laws. It should be considered and approved to effectively punish Zhao for breaking US laws and serve as a deterrent to others contemplating doing the same.
FTX, Binance and CZ; Stars of a Bizarre Horror Show
Binance has been under the radar of US regulators since roughly 2018, but the FTX crash in 2022, in which CZ played a particularly interesting role, put the crosswinds in the regulators’ favour. FTX has been dealt with, and now Binance is the prime target. Before we get into the details, let’s replay CZ’s scene in the FTX horror show.
Concerns about FTX started when CoinDesk published an article in early November 2022, reporting that a significant portion of FTX’s sister company Alameda Research’s assets consisted of FTT, a token created by FTX that allowed the exchange’s users access to discounted trading fees.
According to the report, FTT’s liquidity had been compromised, and the token couldn’t be easily exchanged for cash, stoking fears about the capital reserves at Alameda Research and, consequently, FTX. Reacting swiftly, CZ, then the CEO of rival exchange Binance, announced the immediate sale of all the company’s FTT holdings, which amounted to $580 million (Binance, at the time, was a backing FTX).
This major exit from a crypto heavyweight and one of FTX’s most prominent investors triggered a massive selloff (similar to the Silvergate bank run). A wicked flurry of user panic withdrawals ensued, which worsened after withdrawals on the exchange were temporarily halted and resumed haphazardly across different countries as FTX battled under immense pressure to meet the sudden cash demand for customer withdrawals. FTX’s founder and CEO at the time, Sam Bankman-Fried, made concerted public efforts to raise funds to shore up FTX’s reserves to save the firm.
Surprisingly, FTX reached a deal to sell itself to Binance, its biggest rival, and the crypto exchange whose executive had helped trigger the selloff that put it in shark-infested waters. Binance came very close to finalizing and had signed a non-binding letter of intent to acquire FTX, only to walk away from the deal 24 hours later, citing “results of corporate due diligence, as well as news reports regarding mishandled customer funds and alleged US agency investigations” as its reasons for pulling out. FTX had reportedly been lending customer deposits to Alameda Research to help it meet its liabilities, and top executives at Alameda Research were aware of it, raising more questions about the relationship between Alameda Research and FTX.
This damning discovery coming to light was the proverbial final nail in the coffin for FTX as it, on November 11, filed for Chapter 11 bankruptcy. SBF’s crypto empire all but melted away within nine days. The result…blinding chaos, probably the worst to ever hit crypto. The domino effect; bankruptcies of exposed firms, failures of crypto friendly-banks, a bitter crypto winter, and a rather barefaced tightening of the regulatory noose around the crypto industry.
SBF eventually resigned as FTX CEO, was charged by the US DoJ and on March 25, 2024, sentenced to 25 years in prison, three years of supervised release, and ordered to pay $11 billion in forfeiture for his orchestration of multiple fraudulent schemes. A morbid end to the saga of a man once famed as the “poster boy of crypto” because of his philanthropy and his vocal advocacy for crypto regulation. A new scene has since unfolded, and CZ, the star of this chapter, is now the one wading for survival in the same murky waters SBF waded and sank in.
Just How Bad is the Binance Situation in the US?
Binance is in trouble with a host of US regulators, including the SEC, CFTC, and the DoJ.
In March 2023, the CFTC accused Binance of breaking US financial laws by providing derivative trading to US customers without proper registration with regulators.
The regulator also claimed Binance’s former CEO, Zhao, and former chief compliance officer, Samuel Lim, allegedly directed US “VIP customers” to create Binance accounts through shell companies, citing chat messages as evidence that Zhao and Lim were aware of criminal groups using the exchange.
The US SEC’s case against Binance includes 13 alleged securities law violations, some resembling issues seen with FTX. Among other claims, the SEC alleges that Binance and Zhao could transfer customer assets to other businesses owned by Zhao, like Sigma Chain and Merit Peak Limited. The SEC further accused Sigma Chain of engaging in manipulative trading that artificially inflated Binance’s trading volume and alleged that the exchange provided false information to investors about safeguards meant to prevent manipulative actions like “wash trading.”
Binance, after its launch in 2017, grew fast and quickly became widely used in the US by millions. Per standard regulations, Binance, due to the sheer volume of transactions it handled daily, was supposed to register with the US Treasury’s Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing, and other financial crimes as a money services business, and to also implement an effective Anti-Money Laundering (AML) program to prevent from being used to facilitate money laundering.
Binance didn’t comply with these regulations and bullishly reiterated its commitment to retaining its status as an unregulated, uncensored, and largely user-anonymous exchange. Instead, it announced in 2019 that it would “block US users from accessing the platform and create a new platform, “Binance.US, to serve US users.
Despite this announcement, internal reports, based on investigations released by the SEC, attributed 16% of Binance’s total registered user base to the US, notably surpassing any other country. Apparently, Binance didn’t block “all US users” as it had earlier said it would but secretly allowed some 2.5 million US-based users to keep transacting with other customers on the main Binance platform, including those from sanctioned regions.
The DOJ alleged that Binance, through deliberate actions, ignored and evaded regulations that enabled illicit trade, money laundering, and trading activities between US residents and residents of regions under specific sanctions by the US government.
After prolonged investigations and extensive fact-finding by the DOJ, Binance and CZ pleaded guilty and agreed to an unprecedented $4.3 billion settlement with the DOJ, CFTC, and the US Treasury, marking one of the largest penalties ever in cryptocurrency legal cases.
Under the terms of the plea settlement reached between Binance and the DOJ, Binance was mandated to make a “complete exit” from the US market, pay $1.81 billion within 15 months, and forfeit an additional $2.51 billion in assets. Aside from the financial penalties, Binance was required to institute significant internal reforms. To ensure adherence and compliance with regulatory standards, Binance was also required to appoint an independent compliance monitor for three years.
Shortly before the settlement announcement, CZ officially resigned and stepped down from his position. He pleaded guilty to felony charges related to violating the Bank Secrecy Act (BSA) and committed to personally paying $50 million in fines from his personal assets. Richard Teng was subsequently appointed as the interim CEO.
Under the terms of his plea agreement, CZ initially faced up to 18 months in prison, but the DOJ argued in Tuesday’s filing that “the scope and ramifications of Zhao’s misconduct were massive” and so “an upward variance is appropriate here.”
“In part because Zhao failed to implement an effective AML program at Binance, illicit actors used Binance’s exchange in various ways, including operating mixing services that hid the source and ownership of cryptocurrency; transacting in illicit proceeds from ransomware attacks; and moving proceeds of darknet market transactions, exchange hacks, and various internet-related scams,” the filing said, pointing to fund movements from darknet markets and crypto mixers.
Hours later, CZ’s defense team filed its own sentencing memo, saying, “No defendant in a remotely similar BSA case has ever been sentenced to incarceration.” Instead, they suggested he be sentenced to probation, which could include home confinement at his home in Abu Dhabi.
Whether this request is approved now hangs in the balance, but public opinion is swaying towards certain hypotheses as the biggest motive for Binance’s regulatory woes in the US, such as:
- US regulators are anti-crypto and are trying to portray crypto in a bad light.
- SBF was a known sponsor for certain politicians and political institutions, and his connections in the corridors of power want their pound of flesh for CZ’s supposed betrayal of FTX.
Only time can tell whether these rumblings have any substance or not…
Binance’s Nigeria Situation
It’s concerning that Binance is facing similar allegations regarding violations of federal sanctions and money laundering laws in Nigeria.
The Nigerian government has accused Binance of aiding money laundering and enabling currency speculation, which resulted in the crash of its currency, the naira. Two officials, Tigran Gambaryan and Najeem Anjarwalla, were arrested and detained on February 26 after flying to Nigeria’s capital city of Abuja to consult with the government at its request.
Gambaryan, an American citizen and former Internal Revenue Service (IRS) special agent, heads Binance’s financial crime compliance unit while Anjarwalla, a dual U.K.-Kenyan national, is Binance’s African regional manager.
Nadeem Anjarwalla reportedly escaped custody in Nigeria and fled to Kenya. Reports making the rounds say he has been arrested in Kenya, and the process of extraditing him to Nigeria to face trial is underway.
Gambaryan and Anjarwalla have since filed a suit against Nigeria’s National Security Advisor, Nuhu Ribadu, and the Economic Financial Crimes Commission for violating their human rights.
The money laundering trial against Gambaryan and Binance will begin on May 2. The tax evasion charges will be tried separately beginning on May 17.
Prior to this, the Nigerian government had barred access to Binance’s website and mobile application, forcing Nigerian users to resort to Virtual Private Networks (VPNs) to access the platform.
Bruised But Unbroken; Binance’s Transition to Maturity
Despite the barrage of criticism the exchange and its leadership have faced and continue to face, it remains the largest crypto exchange by volume, with no other exchange seemingly capable of challenging Binance’s dominance anytime soon.
From a functional standpoint, the exchange appears to be adapting well to the rapid changes in its leadership and operational style that it has had to implement in recent months.
Richard Teng, the new CEO, asserts that the company has “moved beyond cultural issues” to achieve “regulatory maturity,” stating in an April 2024 interview that all the allegations levelled against the exchange were related to events in its “early stages” of development.
Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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