Binance CEO admits to criminal AML violations: What does it mean for the future of crypto?

On 21 November 2023, the Wall Street Journal broke the news that Binance CEO Changpeng Zhao, popularly referred to as CZ, plans to step down from his role and “plead guilty to violating criminal US anti-money-laundering requirements”.

Learn Crypto examines the potential impact of the withdrawal of one of the most influential personalities in the crypto industry.

Contextual points to CZ’s resignation and guilty plea:

• US government authorities have been investigating Binance for various financial and tax allegations since at least 2018. The CFTC, SEC, DOJ, and IRS have made formal charges.
• Binance has won in court before – but now come up against the US government
• The guilty plea, along with the alleged $4.3 billion settlement is related to the US Department of Justice (DOJ) charge of money laundering, bank fraud, and sanctions violations.
• Binance exchange does not appear to be in danger of closure

The king of crypto admits to breaking the law

The co-founder and CEO of the world’s largest cryptocurrency exchange, Binance, is reportedly stepping down from his role to enter a guilty plea in court this week as part of a rumoured settlement with the US Department of Justice.

CZ confirmed on X (formerly Twitter) that former Binance Head of Regional Markets Richard Teng would assume the role of Binance CEO.

While there has been no confirmation of the legal part of the report from Binance or CZ, the information appears to be in line with recent reported developments, particularly with settlement negotiations ongoing between the DOJ and Binance.

In addition to CZ’s plea, Binance itself will be the subject of the court settlement, reported to be some $4.3 billion in fines, including amounts for civil allegations made by regulators.

Although it is not an unusual manner of ending investigations against financial institutions, the news will still surprise many in the crypto industry who see Binance as a critical piece of the crypto market, especially after the 2022 demise of FTX.

Binance fallout, crypto winter?

When stablecoin platform Terra collapsed in May 2022, it sent a deadly ripple throughout crypto, taking down many old names in the industry, including the seemingly infallible Sam Bankman-Fried and FTX.

CZ’s stepping down isn’t quite the same thing, however. For one thing, FTX was found out after it couldn’t hide any longer, battling insolvency and gross financial mismanagement.

Binance, on the other hand, doesn’t appear to have a funding problem. Business is as usual on its exchange and other financial instruments. More importantly, customer withdrawals have not paused, despite an increasingly apparent bank run on its exchange that started in October when Binance announced that the Binance USD (BUSD) stablecoin would no longer be supported.

On the other hand, Binance, like FTX, has many interests and investments throughout the blockchain industry.

As an entity owns many other businesses other than an exchange. Binance Labs funds startups and invests in other companies. Binance Earn supports decentralised finance or DeFi ventures. Binance Charity Foundation raises funds for charities worldwide.

Having spent most of 2023 winding down operations and cutting staff globally, the settlement could be viewed as yet another indicator of a further shrinking of Binance’s sphere of influence.

Whether that will affect partners and investments financially, like FTX-linked companies were, remains to be seen.

For now, it seems, little can dampen the sentiment in a crypto market that has seen Bitcoin rise 25% in the month leading up to CZ’s guilty plea.

After a small, brief crash when the news broke, Bitcoin only surged back to pre-news levels on 21 November.

Binance fallout: wake-up call or snooze alarm?

The expectation from most quarters might be that this event serves as a warning to crypto industry players. 

Again, it’s not fair to make comparisons to FTX, whose case mainly dealt with financial fraud.

The Binance settlement would ring alarm bells for businesses dealing with user compliance, particularly those who must comply with anti-money laundering (AML) and anti-terrorism financing regulations.

In the years following its exodus from China, where Binance was founded, the exchange made successful forays into the European Union, the United Kingdom, and even Africa. 

Only, once stricter regulations such as the EU’s Anti Money Laundering Directive (AMLD5) came into force, Binance, unable to suitably comply, found itself edged out, with exits from the UK and Netherlands happening just months before the news of this settlement.

Binance’s supposed settlement isn’t the first either. In 2021, crypto derivatives platform BitMEX also settled with the US government on similar AML violations – though the $100 million fine pales in comparison.

The message to the industry here is: get compliant or cease. Crypto companies who don’t yet have measures in place for regulatory compliance for financial dealings with a global user base will likely be sitting up to take note. They simply can’t be hitting that snooze button forever.

And the winner is… the crypto industry

Ironically, licensing and compliance could work out to be beneficial for new crypto exchanges or “virtual currency asset providers (VASPs). Simply put, convince the regulators that your business complies with regulations and you will have a license to operate outside the grey area that pioneers like Binance did.

In many parts of the world, even in developed economies, there is still a lot of uncertainty on how to use crypto legally, which exchanges to use, and which companies to trust.

In the Learn Crypto Academy course on Buying Crypto, when choosing an exchange, we recommend users to seek exchanges that are licensed in their countries. It’s still relevant in this situation.

And despite the cries of FUD (fear, uncertainty, despair) that will ensue all over crypto X (formerly, Twitter) – CZ himself is often vocal about “ignoring FUD” – regular people who use crypto should see this development as good news.

Regulations ensure the proper running of enterprise, responsible fund management, stamping out criminal activity, and ultimately, consumer protection. Just as regulations ensure that banks take good care of customer funds and that funds are not used for crime, exchanges, as custodians of consumer crypto, must be made to do the same.

As the brief history of crypto shows, those who survive and emerge from tribulations – regulatory or otherwise – often come out stronger.