What’s next for Binance after DOJ settlement, departure of Changpeng Zhao

What's next for Binance after DOJ settlement, departure of Changpeng Zhao

Binance co-founder and CEO Changpeng Zhao speaks during Web Summit 2022 in Lisbon, Portugal, November 1, 2022.

Ben Mcshane | Sports file | Getty Images

drains Binance have totaled more than $1 billion in the last 24 hours, not including Bitcoin, according to data from blockchain analytics firm Nansen, after founder and CEO Changpeng Zhao resigned on Tuesday and pleaded guilty in a deal with the Justice Department.

According to data provider Kaiko, liquidity fell by 25% over the same period as market makers withdrew their positions.

The outflows are significant and are similar to what happened previously when the exchange and its founder were charged by the SEC with 13 securities violations.

The exchange’s native token, BNB, has fallen by more than 8% in the last 24 hours. According to Nansen, Binance holds around $2.8 billion worth of BNB tokens. And after Binance phased out fee-free trading of crypto asset pairs including Bitcoin, a key incentive for customers, in March, the exchange’s share of overall spot trading began to decline.

Binance remains the world’s largest crypto exchange, processing billions of dollars in trading volume every year.

Binance agreed to pay $4.3 billion in penalties to the US government. The plea deals end a years-long investigation into the crypto exchange.

According to Nansen, more than $65 billion in assets remain on the platform, meaning Binance likely has enough capital to withstand a sudden rush of investors from the platform. And although withdrawals are increasing, there has not yet been a “mass outflow” of funds from the exchange.

“After the temporary shock of the agreement with the announcement, there is no significant impact on most assets,” said Grzegorz Drozdz, market analyst at investment firm Conotoxia Ltd.

“The cryptocurrency that appears to have suffered the most, losing more than 9%, is Binance’s BNB token. Of the top 100 cryptocurrencies, a whopping 98 experienced a noticeable upswing in the last 24 hours. Bitcoin, on the other hand, fell 4% before recovering and remaining at a loss of 1.3%,” he said.

Drozdz added that it could be positive for the industry as a whole, as the dispute with regulators is now behind Binance and the company has pledged to increase security measures.

“Combined with the likely imminent approval of an ETF based on Bitcoin prices, this could have a long-term positive impact on the crypto market,” Drozdz said.

Can Binance survive in this phase?

That’s the multi-billion dollar question facing the cryptocurrency giant after Zhao agreed to a plea deal and resigned from the company.

Founded in 2017 by the Chinese-born entrepreneur, Binance has gone from a relatively unknown name to a major force in the crypto space in a matter of weeks.

Experts CNBC spoke to said Binance is likely to survive the ordeal despite the turbulent situation. They pointed to the company’s decision to comply with the DOJ process and implement a three-year strategy to bring its operations into compliance, as well as the amount of assets held in the company’s reserves.

“The $4 billion figure is clearly very large and will really put a strain on Binance’s balance sheet,” Yesha Yadav, Milton R. Underwood Professor of Law and associate dean at Vanderbilt University, told CNBC by email.

“However, this penalty does not appear to be aimed at dealing a fatal blow to the stock market. Based on Binance’s dominant position within the crypto ecosystem over several years, CZ’s personal wealth… and sustained trading volume despite declines in overall crypto trading.” Based on Binance’s volume as well as market share compared to other trading venues, I doubt that Binance will face risks to its solvency if it pays this fine.”

$4.3 billion plea deal

Zhao and others were accused of violating the Bank Secrecy Act for failing to implement an effective anti-money laundering program and for willfully violating U.S. economic sanctions “in a deliberate and calculated attempt to gain from U.S. to profit from the market without implementing the controls required by US law.” “, said the Justice Department.

Binance has agreed to withhold $2.5 billion to the government and pay a fine of $1.8 billion, for a total of $4.3 billion.

US Attorney General Merrick Garland said in a press conference on Tuesday that it was “one of the largest sentences we have ever imposed.”

“Using new technology to break the law does not make you a troublemaker. It makes you a criminal,” Garland said. “Binance has put its profits above the safety of the American people.”

Zhao said in a post on X, formerly Twitter, on Tuesday that he had “made mistakes” and “needs to take responsibility.”

Richard Teng, a former financial services professional from Abu Dhabi, was named as Zhao’s successor. Teng was most recently global head of regional markets at Binance.

He was also previously Director of Corporate Finance at the Monetary Authority of Singapore.

The lawsuit against Binance and its founder was a joint effort by the Department of Justice, the Commodity Futures Trading Commission and the Treasury Department.

Notably, the Securities and Exchange Commission was absent.

Treasury Secretary Janet Yellen said in a news release Tuesday that the exchange enabled illicit actors to conduct more than 100,000 transactions that supported activities such as terrorism and illegal drugs, and that it facilitated more than 1.5 million virtual currency trades that violated U.S. Sanctions violated.

It also allowed transactions related to terrorist groups such as Hamas’ Al-Qassam Brigades, Palestinian Islamic Jihad, Al-Qaeda and ISIS, Yellen said in the press release, noting that Binance “never filed a single report of suspicious activity.” have.

Zhao was released on a $175 million personal recognizance bond secured by $15 million in cash. A court hearing is scheduled for February 23rd.

Binance continues

Binance will continue to function, but with new basic rules. The Company is committed to maintaining and improving its compliance program to ensure that its business meets U.S. anti-money laundering standards. The company is obliged to appoint an independent compliance monitor.

The case against Binance, which was unsealed on Tuesday, shows that the exchange faced three criminal charges, including conducting an unlicensed money transfer business, violating the International Emergency Economic Powers Act and conspiracy.

In particular, some of its competitors may try to take advantage of the situation CoinbaseKraken and OKX.

Coinbase and Kraken are each currently engaged in their own legal battles with the SEC. In June, the agency filed a similar lawsuit against Coinbase as it did against Binance, alleging that the company was operating as an unauthorized securities exchange, broker and clearing house. And on Monday, the SEC sued Kraken, saying the exchange commingled $33 billion in customers’ crypto assets with its own company’s assets, creating a potentially significant risk of loss for its users.

Vanderbilt’s Yadav said Binance’s reserves would likely come under scrutiny as investors weigh where to go after the company’s CEO leaves. Binance’s attempts to provide strategic transparency since FTX’s collapse have “failed,” she added.

Binance has released its Proof of Reserves, a system for representing the number of its assets and liabilities. However, this proof is based on limited information that can be revealed from public blockchains and is not comparable to a comprehensive audit.

“There is no doubt that Binance’s reserves will come under scrutiny in the coming months and years,” explained Yadav. “A big question that concerns Binance is how it is run, what the state of its internal governance and risk management is.”

“This is a venue that has long been known for its opacity as well as an impenetrable capital and organizational structure, the complexity of which has led regulators such as the CFTC to investigate these organizational connections as possible opportunities for Binance to engage in activities that violating existing regulations,” Yadav said.