CZ’s Resignation as CEO of Binance and the $4.3billion Settlement; Implications for the Future of Cryptocurrency & Decentralized Finance (DeFi) in the Global Fintech Ecosystem
BACKGROUND
When Binance launched in 2017, it grew rapidly and quickly became the largest cryptocurrency exchange in the world, albeit with a very significant amount of its customers coming from the United States of America (USA)[1]. As a result, the exchange was advised to register with the US Treasury’s Financial Crimes Enforcement Network (Fin CEN)[2], a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order 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 Binance from being used to facilitate money laundering.
Instead of complying with the regulations and legal limitations, Binance bullishly reiterated its commitment to retaining its status as an unregulated, uncensored and largely user-anonymous exchange, and instead announced in 2019 that it would “block US users from accessing the platform”[3]. Despite this announcement, internal reports via investigations released by the US SEC attributed 16% of Binance’s total registered user base to the US, a figure notably surpassing any other country on the platform[4].
On November 21st, 2023, after prolonged investigations and extensive fact-finding by the US Department of Justice (DOJ) as well as engagement with Binance’s erstwhile CEO Changpeng Zhao (“CZ”), Binance and CZ pleaded guilty and reached a settlement with the US DOJ[5] after what seemed to be a prolonged legal battle spanning most of 2023, but this came with attendant significant consequences. The implication of the successful plea bargain is that Binance has now been forced to “completely exit” the US market, endure a substantial financial hit and also undergo a significant leadership change culminating in CZ ultimately stepping aside from his role as CEO of Binance.
DOJ’S CASE AGAINST BINANCE
In 2018, the U.S. DOJ commenced its investigation into Binance and its commercial activities. The investigation focused on dire allegations of the crypto exchange’s non-compliance with U.S. AML laws and sanctions and included grave charges including unlicensed money transmission, money laundering conspiracy and criminal sanctions violations.
The DOJ’s Attorney General (AG), Merrick B. Garland, explained that it believed Binance wilfully violated US federal laws to pursue profit and growth. The allegations also included facilitating or simply turning a blind eye to transactions involving terrorist organizations such as the Hamas Brigades, Palestinian Islamic Jihad and others.
It was further claimed that Binance, including its then CEO “CZ” directed employees to instruct high-volume traders and users of the Binance exchange from the US to conceal their U.S. connections. To prove this allegation, DOJ stated that despite Binance publicly claiming that it blocked U.S. users, DOJ’s internal reports revealed a significant user-base attributed to the U.S. under the label “UNKWN” – short for “unknown.” According to the DOJ, this was actually a cunning pseudonymization of US Binance users[6]. As of October 2020, “UNKWN” users represented approximately 17% of Binance’s registered user base.[7] The DOJ Attorney-General also famously asserted that “using new technology to break U.S. laws does not make one a disruptor but a criminal”[8].
Initially, Binance challenged the allegations, regarding the figures claimed to be illicit funds as “inaccurate” while describing the DOJ’s poor verdict of its internal compliance standards as “outdated.”[9]
BINANCE’S /DOJ SETTLEMENT AND CZ’S RESIGNATION
However, against its publicly perceived confrontational stance, on 21st November 2023, Binance Holdings Limited (Binance) pleaded guilty and agreed to an unprecedented $4.3 billion settlement with the USDOJ, Commodities Futures Trading Commission (CFTC), and the U.S. Treasury. The resolution marks one of the largest penalties ever in the history of cryptocurrency legal cases.
Under the terms of the plea settlement reached between Binance and the DOJ, Binance is mandated to make a “complete exit’ from the US market, as well as make a payment of $1.81 billion within 15 months, and an additional $2.51 billion in asset forfeiture. Aside from the financial penalties, Binance is required to institute significant internal reforms. To ensure adherence and compliance with regulatory standards, Binance is also required to make the appointment of an independent compliance monitor for a duration of three years.
Shortly before the settlement announcement, Binance CEO, CZ officially resigned and stepped down from his position and pleaded guilty to felony charges related to violating the Bank Secrecy Act (BSA). He also committed to personally paying $50 million in fines from his personal assets. Additionally, Richard Teng was appointed as the interim CEO.
It is instructive to note that the settlement only involves both the US DOJ and Commodities Futures Trading Commission. However, the US Securities and Exchange Commission (SEC), opted not to participate in the settlement despite having its own separate 13 charges against Binance of operating an unlicensed exchange[10]. Impliedly, the SEC may still separately choose to prosecute Binance.
CURRENT STRUCTURE OF DEFI & CRYPTOS VS IMPLICATIONS OF THIS FOR DEFI
The legal tussle and the settlement are a landmark moment in the history of cryptocurrency regulation as it signals increased regulatory scrutiny and stricter compliance measures on cryptocurrency exchange and DeFi platforms. Typically, DeFi and Crypto platforms thrive on running exchanges and trading platforms that are not tightly regulated or limited by regulatory constraints as well as allowing anonymity of users.
However, it is expected that Governments and regulatory bodies may now be forced to tighten regulatory oversight to ensure DeFi and Crypto platforms are in compliance with existing financial regulations, thereby impacting the overall regulatory landscape for the crypto and DeFi industry.
This also underscores the need for a more globally aligned policy approach to cryptocurrency regulation. As the cryptocurrency industry matures, regulators can no longer afford to underrate and undermine the crypto players in the economic scheme of things, and collaboration between industry stakeholders and regulators may become more crucial to establish standardized frameworks that foster innovation while also addressing legal concerns.
In the same vein, as the crypto and DeFi sector matures, the industry will expectedly adapt to the demands posed by regulatory challenges and governance oversight and will likely become bullish for it. This will consequently bolster investor confidence through compliance with legal frameworks and the promotion of regulatory-compliant practices in the crypto and Defi sector.
CONCLUSION & RECOMMENDATIONS
In our view, the crackdown on Binance by the US DOJ casts a larger spotlight on the global spectrum of decentralized finance (DeFi) and the cryptocurrency industry at large. The ripple effects of this range from- increased regulatory scrutiny, potential shifts in market structure, volatility of trade, imposed compliance measures and the need for innovative adaptation.
Given the reactive nature of the cryptocurrency space, it is expected that the market may bow to volatility pressures and suffer temporary decline to crypto investments in the short-term. However, in the long run, the current compliance systems being adopted across board may culminate into a fully mature and more resilient cryptocurrency ecosystem.
Lastly, it is recommended that in light of the Binance legal saga and its attendant implications for the cryptocurrency space, all cryptocurrency exchanges, trading platforms and DeFi projects generally must proactively improve their regulatory compliance measures, tighten data protection measures including Know Your Customer (KYC) processes, maintain strict anti-money laundering (AML) measures and compliance with legal standards and thereby mitigate the risk of illegal activities which can undermine their autonomy. Self-regulatory activities within the cryptocurrency industry including regular audits of internal processes and financial operations should also be routinely embraced to ensure transparency and adoption of risk management protocols while keeping an open line of communication with relevant regulators.
[1] Sourced from https://www.businesstoday.in/crypto/story/how-binance-became-the-worlds-biggest-crypto-exchange-without-headquarter-or-licenses-312039-2021-11-12 on 07/12/2023 ; 1;01PM
[2] Ibid
[3] Sourced from https://www.justice.gov/opa/speech/attorney-general-merrick-b-garland-delivers-remarks-announcing-binance-and-ceo guilty#:~:text=In%20June%202019%2C%20Binance%20publicly,them%20to%20the%20U.S.%20exchange.
[4] Ibid
[5] Sourced from https://www.justice.gov/opa/pr/binance-and-ceo-plead-guilty-federal-charges-4b-resolution#:~:text=Binance%20Holdings%20Limited%20(Binance)%2C,to%20register%20as%20a%20money on 07/12/2023 ; 1;01PM
[6] Sourced from https://www.justice.gov/opa/pr/binance-and-ceo-plead-guilty-federal-charges-4b-resolution#:~:text=Binance%20Holdings%20Limited%20(Binance)%2C,to%20register%20as%20a%20money 07/12/2023 ; 1;03PM
[7] Ibid
[8]Sourced from https://www.justice.gov/opa/pr/binance-and-ceo-plead-guilty-federal-charges-4b-resolution#:~:text=Binance%20Holdings%20Limited%20(Binance)%2C,to%20register%20as%20a%20money on 07/12/2023 ; 1;20PM
[9] Sourced from https://www.reuters.com/markets/us/us-justice-dept-is-split-over-charging-binance-crypto-world-falters-sources-2022-12-12/ on 7/12/2023; 1;36pm
[10] Sourced from https://dailycoin.com/heres-what-binances-4b-settlement-and-czs-resignation-means/ on 7/12/2023; 1;39pm
