Binance’s position at the top of the cryptocurrency market is under threat as it reels from the US’s landmark punishment of the exchange, which exacted a $4.3bn settlement, tougher scrutiny and the loss of its talismanic founder.
Under the leadership of Changpeng Zhao, Binance grew from nothing in 2017 to almost 60 per cent of the global market less than a year ago.
But on Tuesday, US authorities laid out how it got there: putting profit ahead of compliance and turning a blind eye to some of the darkest corners of the online world.
That included acting as a conduit for the flow of money linked with child abuse, drugs, financing to designated terrorist groups such as Hamas and al-Qaeda, and violating US sanctions on countries like Iran and Russia.
As part of the settlement Zhao, known in the industry as CZ, agreed to step down, pay a $50mn fine and pleaded guilty to failure to protect against money laundering.
His replacement Richard Teng, who was promoted to chief executive, will be responsible for implementing the tough list of conditions US authorities extracted along with the plea, and a threat of another $150mn fine for failure to comply.
He must also handle the threat to the business from a lawsuit by the Securities and Exchange Commission while also keeping customers — who CZ prioritised — happy.
“When you’re in the DoJ’s crosshairs, the impact on the company and trying to salvage a future for the business becomes a real issue,” said Mark Kornfeld, shareholder at law firm Buchanan Ingersoll & Rooney.
After the initial verdict crypto supporters claimed the decision by authorities not to shut down Binance represented a victory for the sector.
The exchange had just over $650mn worth of net outflows in the immediate aftermath of the deal, according to data provider Nansen. By comparison, there were $6bn of outflows when rival exchange FTX collapsed a year ago. Binance’s own in-house currency, BNB, fell roughly 15 per cent on the news but has since partly recovered.
“I’m not really worried about Binance,” said the head of one crypto market maker who uses the exchange. “Everybody saw it coming [the DoJ penalty and CZ stepping down]. I was expecting worse than that, they could have added one zero to the deal, they could really have gone after all the executives and tried to push everybody to jail.”
“CZ is going to take some nice vacation and they are off the hook,” he added.
Missing from the settlements Binance struck on Tuesday with the US Treasury, Department of Justice, and the Commodity Futures Trading Commission, was an outstanding case from the Securities and Exchange Commission.
Observers say the SEC charges, which allege that Binance ran an unregistered securities exchange and mixed billions of dollars of customer cash with a separate trading firm owned by Zhao, is pivotal to Binance’s business.
If the SEC wins its case, Binance will have to concede that cryptocurrencies traded on its platform are securities, which would sharply increase regulatory costs.
Moreover, the accords Binance struck with US authorities also laid out tough compliance requirements over the coming years. These include Binance’s complete exit from the US and a toughening of anti-money laundering and sanctions compliance programmes. It would also require the company to have an independent compliance monitor for three and five years under the DoJ and Treasury deals, respectively.
The SEC case could strengthen the independent monitors’ hand, said Charles Whitehead, professor at Cornell Law School. While they typically focus on ensuring compliance with agreements met rather than “rat out the company to other regulators”, the fact that “they could call the SEC . . . gives them a lot of weight”, he said.
Teng, previously Binance’s global head of regional markets, will have to step into a position entirely shaped by the personality of its founder.
Zhao had kept the day-to-day running of Binance in the hands of a few close associates. “When we say Binance, we think of Zhao,” said Aidan Larkin, chief executive of Asset Reality, a company that manages seized assets for law enforcement agencies. Internally at Binance, several members of staff told the Financial Times they were caught unaware by the way Zhao’s departure came to pass.
Yesha Yadav, law professor at Vanderbilt University, doubted that “a much more ‘boring’ Binance 2.0 would be able to attract the kinds of dominant volumes it has done historically”.
The US Department of Justice said that Binance had generated “significant” fees from illicit activities passing through the exchange since its foundation. Binance enabled nearly $900mn in transactions between US users and “users ordinarily resident in Iran” between January 2018 and May last year, according to the DoJ. As one compliance employee wrote, “we need a banner: ‘is washing drug money too hard these days — come to Binance we got cake for you’.”
Teng, a former head of Abu Dhabi’s financial regulator who has also served as a regulator and exchange executive in Singapore, joined the company in 2021.
He was “brought in to help get the house in order”, said one person who has worked with him. “All the things Binance needs to do, he has first-hand experience of it all.”
In recent months Teng’s public profile has risen as Zhao stepped back, appearing at industry events as the main management representative. And while he may satisfy regulators, he will have to convince customers of his commercial nous.
“Even if he wants to reassure the market on the ‘compliance’ of Binance with his profile, in fact he will have to demonstrate that he is able to generate revenue,” said another person who has worked with Teng.
The head of one crypto market maker who trades on Binance said without Zhao it “can be the best thing for the company itself” as it “forces them to grow and bring new ideas, and try without daddy’s supervision”.
Achieving respectability in the eyes of US authorities may have another cost as it will mean that legally-compliant rivals can be more competitive.
“Institutions are going to trade at highly regulated entities that they know, and there’s the opportunity to trade there whether it’s CME Group or others,” said Andrew Bond, senior research analyst at Rosenblatt Securities. “[Binance becomes] kind of irrelevant at this point. And if you are doing illicit activity, why would you want to trade on Binance when all your activity’s being monitored?”
