Binance, Changpeng Zhao’s US chastening is just the beginning

The world’s largest digital asset exchange, Binance, suffered the most punishing day in its relatively short history on Tuesday as it agreed to settle a U.S. Department of Justice (DOJ) case against it to the tune of over $4 billion in payments and an image damaging admission of guilt. Meanwhile, the company’s founder, Changpeng “CZ” Zhao, stepped down as CEO after pleading guilty to breaking U.S. anti-money laundering laws.

This was the culmination of a multi-year DOJ investigation into the trading platform and its embattled billionaire founder, resulting in charges of conspiracy to conduct an unlicensed money transmitting business, failing to maintain an effective anti-money laundering program, conducting an unlicensed money transmitting business, and violating the International Emergency Economic Powers Act (IEEPA).

As part of its settlement, Binance agreed to pay a $1.8 billion fine and forfeit $2.5 billion in gains, including $1.6 billion in fees generated from trades by Binance’s U.S.-based customers and $900 million representing the value of transactions between U.S. customers and customers based in Iran.

But the DOJ deal was just one of several announced on Tuesday, as the U.S. Treasury Department also reached a nearly $4.4 billion settlement with the company for violations of the Bank Secrecy Act (BSA) and various sanctions programs—$3.4 billion for the Financial Crimes Enforcement Network (FinCEN) and another $968 million for the Office of Foreign Assets Control (OFAC).

On top of this, the U.S. Commodity Futures Trading Commission (CFTC) reached an agreement with Binance and CZ over civil charges filed by the regulator in March, accusing the pair of operating an illegal digital assets derivative exchange. That deal amounts to another $1.35 billion in civil monetary penalty and $1.35 billion disgorgement in gains, as well as a $150 million penalty CZ will pay to the CFTC.

In total, Tuesday cost Binance around $4.3 billion in penalties, forfeitures, and fines, and its embattled billionaire founder and now former-CEO, CZ, has agreed to be barred from any involvement in the business. He is set to be sentenced for his role in the DOJ charges next year.

“I made mistakes, and I must take responsibility,” CZ wrote in an X (formerly Twitter) post on Tuesday. “This is best for our community, for Binance, and for myself.”

Once the dust has settled on these dramatic events, Binance will have to take stock and, in doing so, may have to entertain the possibility that this humbling string of defeats could be just the opening salvo of a global fightback against its shady practices.

The resounding result for the U.S. DOJ, which included an admission of guilt from Binance and CZ, will surely embolden regulators and authorities around the globe who have made no secret of their distaste for the company’s operating practices.

Binance’s unwelcome global footprint

For years, Binance has faced regulatory challenges and critiques of its practices worldwide, including allegations of insider trading, market manipulation, money laundering, and tax evasion. A whistle-stop tour of jurisdictions that have raised concerns about Binance’s operations will earn you a lifetime’s worth of airmiles.

In June 2021, Japan’s Financial Services Agency (FSA) warned the company for operating without permission. This was not the company’s first run-in with Japanese authorities, as it had previously been cautioned by the FSA in March 2018 for the same reason.

The exchange was forced to retreat from the Japanese market for two years until it re-entered in August 2023 after acquiring the regulated digital asset exchange Sakura Exchange BitCoin (SEBC) in November 2022. Existing services on SEBC were terminated on May 31, and a new service under the provisional name “Binance Japan” was launched.

In the end, Binance reached an amicable détente with the Japanese authorities, but examples abound of where the exchange failed to agree with local regulators.

The government of China banned digital currency transactions and initial coin offering (ICO) activities in 2017, forcing digital asset exchanges in the country to cease operations. However, a 2020 CCTV investigation revealed that a Beijing-based reporter was able to sign up on the Binance platform via its Chinese website, Binancezh.com, and was also able to purchase digital assets. Binance claimed Binancezh.com was a ‘test site,’ an excuse that did not play well in China.

On May 12, 2023, Binance announced it would be exiting Canada, citing increased regulatory requirements introduced by the Canadian Securities Administrators (CSA), the umbrella organization for the country’s securities regulators, that make operating in the country “no longer tenable for Binance at this time.”

Canada is not the only jurisdiction the company has had to pull out of due to regulation. Over in Europe, the embattled exchange was forced to flee the Netherlands in June after failing to win a license. Likely, its reputation in the country had been irreparably damaged a year earlier when it was fined €3.3 million ($3.6 million) by Dutch central bankers for offering services to local residents without registering with the De Nederlandsche Bank (DNB).

In an unfortunate coincidence, at the same time the exchange was running from the Netherlands, tail between its legs, the French daily Le Monde was reporting that the Paris Public Prosecutor’s Office had opened an investigation into Binance’s activities in the country as early as February 2022.

The French authorities said the claim “relates on the one hand to acts of illegal exercise of the function of digital asset service providers (PSAN), and on the other hand, acts of aggravated money laundering, through participation in investment operations, concealment, conversion, the latter being carried out by perpetrators of offenses having generated profits.”

These are just some of the more recent problems the company has faced in Europe, but going back further reveals a history of dodging the rules. A couple of years before French prosecutors launched their probe, neighboring Germany had already floated accusations of violating securities law against Binance.

In April 2021, the German Federal Financial Supervisory Authority said it had reasonable grounds to suspect Binance of violating securities laws over its tokenized stock trading service. The regulator said the tokens would violate European Union securities laws, and in July of that year, Binance was forced to no longer offer the tokens.

The contagious suspicion of Binance seemed to spread across the channel, and in June 2021, the U.K.’s Financial Conduct Authority (FCA) banned Binance from conducting any regulated activity. It imposed several requirements on the exchange’s U.K.-based entity, Binance Markets Limited, including a ban on engaging in regulated activities, providing notice to customers about the FCA’s restrictions, and securing and preserving customer assets.

In a supervisory notice issued at the time, the U.K. regulator said, “based upon the firm’s engagement to date, the FCA considers that the firm is not capable of being effectively supervised.”

It went on to state that “this is of particular concern in the context of the firm’s membership of a global group which offers complex and high-risk financial products, which pose a significant risk to consumers.”

The company’s FCA issues precipitated a string of U.K. payment providers suspending their services to Binance, including Paysafe (NASDAQ: PSFE) and Checkout.com, meaning U.K. customers were no longer able, as of March 2023, to deposit or withdraw in their national currency, GBP.

But logistical problems are only part of the company’s U.K. woes, as in 2022, the exchange became one of the defendants in a multi-billion-pound class action.

UK anti-competition case

In July 2022, a £9.9 billion ($12.4 billion) class action lawsuit was filed against Binance, Bittylicious, Kraken, and Shapeshift on behalf of BSV investors over the exchanges’ collective delisting of the digital asset.

The four digital asset exchanges are accused of colluding to damage the prospects of BSV by delisting the asset without good reason, in breach of the U.K. Competition Act 1998. Binance and Kraken are also accused of causing further losses to BSV investors by “forcibly converting BSV to other digital assets without investors’ consent.”

The case is ongoing and still in its early stages, but one important development to come from it was the ability to actually serve the claim to the hard-to-pin-down company.

While it may open local ‘separate’ entities such as Binance.US, Binance Japan, and Binance Markets Limited (in the UK), the international parent company Binance.com is supposedly non-domiciled, which means it does not have a specific legal residence or headquarters in a particular jurisdiction.

This non-domiciled status can make it challenging for authorities to serve court papers and summons, as there may not be a clear legal entity with a fixed location.

In May 2023, the U.K. Competition Appeal Tribunal granted the BSV Class Action claimants permission to serve the claim on defendants outside England and Wales, the last of which was Binance, who were served “through official channels”—the exact details are not public, but it appears the claimants did manage to pin the elusive company down.

To be continued…

Tuesday’s settlement in the U.S. against both CZ and Binance.com provide further proof that the company and its founder cannot hide behind their non-domiciled status, cannot evade justice, and cannot continue running roughshod over local rules and regulations without consequence.

That is to say, Binance and CZ’s very public and very expensive chastening this week is almost certainly not the end of the exchange’s regulatory and legal problems—in fact, it doesn’t even spell an end to the company’s U.S.-based legal travails.

Binance is still the subject of an ongoing lawsuit filed by the U.S. Securities and Exchange Commission (SEC) in June. The regulator sued Binance.US, the U.S.-based subsidiary of Binance, and CZ on accusations of violating securities laws—charges that could result in more fines and bans for the pair.

It’s also worth remembering that Tuesday’s settlement doesn’t preclude the DOJ from bringing further criminal charges against Binance and CZ in the future.

So rather than drawing a line under Binance’s legal troubles, the company’s diem horribilis may just serve to remind its various global critics that they should be taking another good hard look at the operating practices of the habitually rule-flouting exchange and its disgraced founder.

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