What Does the Binance-DOJ Agreement Mean? What Will CZ Do Now?

Binance, once the world’s largest crypto exchange, announced that it is leaving the US market, creating a major change in the cryptocurrency world. The decision is accompanied by a significant financial settlement and significant regulatory implications. Now we will examine the details of the situation.

Binance was pretty big in the US

According to the US Department of Justice (DOJ), Binance’s prominence was due to American customers, who contributed a large portion of its revenue and determined its status as a crypto exchange giant. Unsealed charging documents against Binance and its founder Changpeng Zhao (CZ) reveal years of compliance failures and strategic moves to protect US customers despite not having a registered US business. The exchange has actively sought growth in the US market, particularly among high-value “VIP” users, who play a significant role in Binance’s trading volume and revenue.

In early 2018, 30% of Binance’s web traffic and revenue originated in the United States, according to government filings. Attempts to fix this, such as blocking IP addresses and enforcing know-your-customer (KYC) requirements, were claimed to be inadequate. Instead, Binance executives, including CZ, allegedly resorted to obscuring and obfuscating their most valuable US users through an API, even as a separate US exchange, Binance.US, launched with stricter KYC requirements. In September 2020, around 16% of Binance’s customer base was from the US, making it a very important market despite regulatory bans.

There were AML and sanctions violations

Binance’s compliance failures went beyond its focus on the US market. The exchange allegedly processed hundreds of millions of dollars in transactions from darknet markets and crypto mixing services such as Hydra and BestMixer. Surprisingly, it was alleged that Binance’s staff was aware of criminal activities but in some cases allowed these activities to continue, especially if the perpetrators were VIP users. This approach had serious consequences for Binance’s compliance with US sanctions, as the matching engine facilitated illicit transactions involving at least 1.1 million transactions between US and Iranian users worth approximately $900 million.

Despite internal knowledge of the risks, including the need to remediate sanctions violations, Binance reportedly did not dedicate significant resources to address the issues until May 2022, when full KYC enforcement finally occurred.

What do financial settlements and regulatory actions mean for Binance?

Binance agreed to pay $3.4 billion to FinCEN and $968 million to OFAC, settling charges of violating the Bank Secrecy Act and enforcement programs. Additionally, a separate settlement with the US Department of Justice involves Binance paying $4.3 billion in fines and penalties. CZ’s resignation as founder and CEO is also part of this agreement. As part of the settlement, Binance will also be monitored for five years by a designated monitor to ensure compliance with sanctions programs. The US Treasury Department will have access to Binance’s records and systems during this period.

Treasury Secretary Janet Yellen emphasized the historic nature of these actions, calling the watchdog unprecedented. Binance’s complete exit from the US market is part of this agreement. However, Binance.US, a separate US exchange, remains unaffected due to its status as a registered money services business.

What is the legal status of former Binance CEO CZ?

Changpeng Zhao’s legal situation changed when he pleaded guilty to violating US anti-money laundering laws. In a tweet by BitMEX Research, details of the court proceedings were revealed, shedding light on CZ’s temporary residence in the United Arab Emirates while awaiting sentencing scheduled for next year. CZ expressed his desire to close this chapter in his life and emphasized his clean record. Zhao agreed to return to the United States by paying $175 million bail 14 days before the trial, which was scheduled to be held on February 23, 2024. CZ is likely to return to Dubai.

Because Zhao will be allowed to stay in the United Arab Emirates while awaiting his sentence, which is scheduled for next year. The concession came after Zhao was found guilty of violating US anti-money laundering laws. The repercussions of CZ’s resignation were felt not only within Binance but also in the broader market. Following the news, the price of Binance Coin (BNB) dropped by 9.1%, according to CoinGecko data.

What were the reactions of the industry?

Amid these developments, Coinbase CEO Brian Armstrong weighed in on the situation via a social media post. Armstrong confirmed that Coinbase’s decision to comply with U.S. money transmitter licensing laws was the right decision, even if it meant facing a competitive disadvantage. He emphasized the importance of embracing compliance for the company’s long-term success. While Armstrong acknowledged that compliance slowed the company’s growth, he maintained that it was the right approach, consistent with their belief in the rule of law.

Industry analysts and prominent names shared their views on Binance’s deal and exit from the US market. Markus Thielen, an analyst at Matrixport, viewed the deal as a positive outcome for CZ and Binance. He suggested that with CZ resigning and the fine being lower than initially feared, Binance is likely to remain one of the top three exchanges for the next 2-3 years. Thielen predicted that more exchanges will strengthen their compliance, making it easier to approve spot Bitcoin ETFs in the United States.

Support messages to former Binance CEO

Justin Sun, one of the leading names in the industry, expressed his gratitude to CZ for his leadership role and contributions to the cryptocurrency community. Sun acknowledged CZ’s pivotal role in taking the industry to unprecedented levels over the past six years. CryptoQuant’s Kim Young Ju highlighted the global regulatory pressure on Binance and its ripple effects on market dynamics.