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Breaking down Binance: What you must know about the guilty verdict

Binance, the largest cryptocurrency exchange in the world, is now facing an existential crisis. Federal prosecutors had issued charges to Binance and founder and CEO Changpeng Zhao for their failure to report 100,000 suspicious transactions involving ransomware attacks, hacks, and even terrorist financing.

Charges of anti-money laundering and breaching sanctions

On November 21, 2023, Binance pleaded guilty to charges related to anti-money laundering, operating an unlicensed money-transmitting business, and breaching international financial sanctions, given that it had allowed sanctioned entities, like Hamas, to transact through its platform. The company, under Zhao’s leadership, effectively turned a blind eye to laundering, including from sanctioned entities, as these users were whales, bringing significant volume to the platform. As part of its settlement with the Justice Department, the Treasury Department, and the Commodity Futures Trading Commission, Binance will pay US$4.3 billion in fines

Zhao has also pleaded guilty to a charge of failure to protect against money laundering. He will resign as CEO of Binance, but keep his majority ownership of the company, a stake that has made him a billionaire

Zhao will also pay a hefty US$50 million fine and face sentencing in February 2024. He can face up to 18 months in prison, but federal prosecutors may ask for a stiffer penalty. He remains free until his sentencing on account of a US$175 million personal recognizance bond, which allowed for his temporary release from custody. 

Binance post-Zhao 

Zhao named Richard Teng as the new CEO of Binance, where he had been serving as global head of regional markets. Prior to Binance, Richard Teng had worked in the financial regulatory space, first as the director of corporate finance at the Monetary Authority of Singapore and later as the CEO of Abu Dhabi Global Market. 

Teng will steward Binance through what many analysts consider an existential crisis, due to the hefty fines now on Binance’s books as well as the increased regulatory scrutiny it will continue to face. 

The appointment of Teng, who has leadership experience in two hotbeds for crypto regulation, may signal Binance’s greater willingness to cooperate with authorities. Teng will also have to contend with a nervous user base of 128 million, some of whom may withdraw their funds in the manner of a bank run, fearing the exchange’s collapse. He will also have to implement new KYC controls and ban any users that violate them.  

CFTC Commissioner Christy Goldsmith Romero believes that this verdict is a watershed moment for not only Binance but all exchanges in the sector that might seek workarounds. 

“Binance is the first defendant charged under the CFTC’s anti-evasion law implemented by the Dodd-Frank Act.  Its maze of corporate entities designed to obscure the ownership, control, and location of the Binance platform did not work. This case should also send a message that the CFTC will not tolerate the use of VPNs, ‘I am not a U.S. customer pop-up buttons, or any other actions to circumvent KYC obligations,” she said in a statement. 

The culmination of regulatory scrutiny 

While Binance and Zhao’s guilty plea may come as a surprise to some, the exchange and its leader have been under intense regulatory scrutiny since its founding, which has come to a head over the last year. 

March 2023 - The CFTC filed a case against Binance, accusing it of operating illegally in the United States by soliciting American customers. The lawsuit sought an injunction against Binance. The agreement with the CFTC and other regulators reached on November 21, 2023 also settles this lawsuit. 

April 2023 - After announcing that Binance.US would be acquiring the remaining assets of the defunct brokerage Voyager Digital for US$1.02 billion in December 2022, the company reneged on the deal, citing a “hostile and uncertain regulatory climate.” 

June 2023 - The SEC sued Binance, accusing the company of allowing customer funds to be mixed in with Merit Peak Limited, another firm owned by Zhao incorporated in the British Virgin Islands. The charges were similar in nature to those brought against FTX founder Sam Bankman-Fried. The SEC also alleged that Binance misrepresented corporate controls and operated unregistered clearing agencies, broker-dealers, and exchanges. 

October 2023 - In the wake of Palestine’s surprise attack on Israel on October 7, 2023, 

Republican Senator Cynthia Lummis and Democratic Senator Kirsten Gillibrand (D-NY), the two authors of the Responsible Financial Innovation Act, publicly called on the government to crack down on Binance, which they argued was supporting terrorist financing

November 2023 - Binance and Zhao plead guilty to federal charges, leaving the fate of the once-dominant exchange hanging precariously in the balance. 

How Merkle can help with AML and sanctions compliance 

In light of escalating regulatory scrutiny, it is crucial for businesses in the cryptocurrency sector to adhere to regulations, ensuring robust AML/CFT and sanction compliance practices, now more than ever. 

Merkle Science prioritizes a compliance-centric strategy, striving to assist businesses in effortlessly adhering to regulatory requirements and sanctions through our comprehensive suite of products and services.  Reach out to us here to learn more.