Binance sees $956 million in outflows after Zhao steps down to settle US probe
November 23, 20237:58 AM GMT+8Updated 9 hours ago
Nov 22 (Reuters) – Investors pulled about $956 million from crypto exchange Binance over the past 24 hours, market data showed, after its chief, Changpeng Zhao, stepped down and faced prison time after pleading guilty on Tuesday to settle a years-long U.S. illicit finance probe.
The deal, in which Binance will pay $4.3 billion to U.S. authorities, raises questions over the future of the world’s largest crypto exchange and marks another blow for an industry beset by scandals. Zhao has been replaced by Richard Teng, a senior Binance executive who joined in 2021, the company said.
It remained unclear on Wednesday how much jail time, if any, Zhao would ultimately serve, and how much influence he – as Binance’s founder and major shareholder – could continue to exert on Binance under the terms of the settlement.
Some analysts also noted that the deal was unlikely to end the exchange’s U.S. legal woes, with Securities and Exchange Commission charges alleging Binance broke U.S. securities laws still unresolved.
“Binance is not entirely out of the woods. The ongoing civil lawsuit with the SEC remains a concern for the exchange, which (is) likely to result in further fines,” wrote Robert Le, a crypto analyst at data firm PitchBook.
Data from crypto analytics platform Nansen, which does not include bitcoin flows, signaled some investors had been rattled by the news, pulling $956 million from the exchange. Still, the outflows were small relative to the more than $65 billion of assets that remain on Binance, Nansen said.
As it strived for market dominance, Binance shunned key checks Zhao believed would turn customers off, authorities said.
It failed to report more than 100,000 suspicious transactions, including with organizations the U.S. described as terrorist groups such as Palestinian militant group Hamas, and never reported transactions with websites dedicated to selling child sexual abuse materials.
Binance did not immediately respond to a request for comment, but said on Tuesday it had worked hard to make Binance “safer and even more secure.” Lawyers for Zhao did not respond to requests for comment on Wednesday. On Tuesday, he conceded “I made mistakes, and I must take responsibility.”
PRISON TIME
While authorities have probed Zhao and Binance since at least 2018, Zhao’s exit marks a dramatic development for one of the most powerful figures in the crypto industry. Zhao, who resides in the United Arab Emirates (UAE), entered his plea in a Seattle court on Tuesday.
He faces a maximum prison sentence of 18 months under federal guidelines and has agreed not to appeal any sentence up to that length. Prosecutors will take a position on how much jail time to seek closer to Zhao’s Feb. 23 sentencing hearing in Seattle, a Justice Department spokesperson said on Wednesday.
“But we do reserve the right to seek a sentence above the guidelines.”
Zhao paid a $175 million bail bond, with another $15 million held in a trust account, a court filing showed. He has agreed to return to the United States 14 days before sentencing.
Reuters could not immediately ascertain his whereabouts on Wednesday. At Tuesday’s hearing, Zhao’s lawyers said he would remain in the Seattle area through Monday evening, and would be able to then return to the UAE, provided the district judge did not object to his agreement with the government, another DOJ spokesperson said.
Later on Wednesday, federal prosecutors urged a federal judge to block Zhao from leaving the continental United States prior to his February sentencing, saying in a court filing that Zhao posed a serious flight risk despite his bail conditions.
“There is no combination of conditions sufficient to protect against the risk of flight and ensure Zhao’s return” for sentencing, the prosecutors said.
Some legal experts said they did not expect Zhao to spend more than a year in prison, maybe less, citing Arthur Hayes, former chief of crypto exchange BitMEX, who likewise pleaded guilty to anti-money laundering violations.
Hayes was ultimately sentenced
However, FTX founder Sam Bankman-Fried could spend decades in prison
Based on the alleged facts, prosecutors likely could have charged Zhao with more serious crimes carrying heavier sentences, but had to weigh that against the probability that he would have stayed abroad to avoid capture, legal experts said.
“To get the CEO to plead guilty should not be scoffed at,” said Daniel Silva, a partner at law firm Buchalter and former federal prosecutor.
The settlement also bars Zhao from “any present or future involvement in operating or managing” Binance, which he founded in 2017 and has maintained a tight grip on since. He remains a major shareholder and said on Tuesday he will be “available to the team to consult as needed, consistent” with the deal.
“This could give him a hook on which to exercise control – through the usual corporate governance channels (e.g., shareholder voting,” Yesha Yadav, a law professor at Vanderbilt University, wrote in an email to Reuters.
“At the same time, I imagine that the Binance will be looking to be very careful.”
Binance’s crypto dominance under threat after loss of founder Changpeng Zhao
US compliance squeeze means new chief executive Richard Teng will be hard-pressed to keep exchange competitive
in London 5 HOURS AGO
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?”
CNBC TECH
Binance users pull more than $1 billion from the exchange after CEO leaves, pleads guilty
PUBLISHED WED, NOV 22 202310:31 AM ESTUPDATED 2 HOURS AGO
KEY POINTS
Binance has seen outflows amounting to more than $1 billion in the past 24 hours, not including bitcoin, according to data from blockchain analysis firm Nansen.
Founder and CEO Changpeng Zhao and others were charged with violating the Bank Secrecy Act by failing to implement an effective anti-money-laundering program and for willfully violating U.S. economic sanctions.
Binance agreed to forfeit $2.5 billion to the government and pay a fine of $1.8 billion — a combined $4.3 billion — in “one of the largest penalties we have ever obtained,” according to U.S. Attorney General Merrick Garland.
Outflows from Binance have amounted to more than $1 billion in the past 24 hours, not including bitcoin, according to data from blockchain analysis firm Nansen, after founder and CEO Changpeng Zhao stepped down and pleaded guilty Tuesday in a deal with the Department of Justice.
Meanwhile, liquidity has dropped 25% over the same time frame as market makers pull back their positions, according to data provider Kaiko.
The outflows are significant and close to what happened previously when the exchange and its founder were charged with 13 securities violations by the SEC.
The exchange’s native token, BNB, is down more than 8% in the last 24 hours. Binance holds around $2.8 billion worth of BNB tokens, according to Nansen. And in March, after Binance phased out zero-fee trading of crypto asset pairs including bitcoin, a key incentive for customers, the exchange began to see its share of all spot trading drop.
Binance remains the world’s largest crypto exchange globally, processing billions of dollars in trading volume every year.
Binance agreed to pay $4.3 billion in fines to the U.S. government. The plea deals end a yearslong investigation into the crypto exchange.
Assets of more than $65 billion remain on the platform, according to Nansen, meaning that Binance is likely capitalized enough to withstand a sudden rush of investors away from the platform. And while withdrawals are on the up, there has not yet been a “mass exodus” of funds from the exchange.
“After the momentary shock of the agreement with the announcement, there is no significant impact on most assets,” said Grzegorz Drozdz, a market analyst at investment firm Conotoxia Ltd.
“The cryptocurrency that seems to have suffered the most, losing more than 9%, is the BNB token from Binance. Of the top 100 cryptocurrencies, as many as 98 have seen a noticeable rebound over the past 24 hours. Bitcoin, meanwhile, fell 4% before rebounding and remaining with a loss of 1.3%,” he said.
Drozdz added that it may be a net positive for the industry now that the dispute with regulators is behind Binance and that the company has pledged to increase security measures.
“This, combined with the likely imminent approval of an ETF based on bitcoin quotes, could positively impact the crypto market in the long term,” said Drozdz.
Can Binance survive at this stage?
That’s the multibillion-dollar question the cryptocurrency giant faces after Zhao agreed to a plea deal and stepped down from the company.
Started by the Chinese-born entrepreneur in 2017, Binance went from being a relatively obscure name to being a major force in crypto in a matter of weeks.
Experts CNBC spoke with said that Binance is likely to make it through the ordeal despite a turbulent situation. They cited the company’s decision to comply with the DOJ process and implement a three-year strategy to get its operations into compliance, and the amount of assets held within the company’s reserves.
“The sum of $4 billion is clearly very large and will create real pain for Binance’s balance sheet,” Yesha Yadav, Milton R. Underwood professor of law and associate dean at Vanderbilt University, told CNBC via email.
“However, this fine does not appear aimed at dealing a fatal blow to the exchange. Based on Binance’s dominant position within the crypto-ecosystem over a number of years, CZ’s personal wealth … and continuing trading volumes despite declines in overall crypto trading volume as well as in Binance’s market share relative to other venues, I doubt that Binance will face risks to its solvency in paying this fine.”
$4.3 billion plea deal
Zhao and others were charged with violating the Bank Secrecy Act by failing to implement an effective anti-money-laundering program and for willfully violating U.S. economic sanctions “in a deliberate and calculated effort to profit from the U.S. market without implementing controls required by U.S. law,” according to the Justice Department.
Binance has agreed to forfeit $2.5 billion to the government and to pay a fine of $1.8 billion, for a total of $4.3 billion.
U.S. Attorney General Merrick Garland said in a press conference Tuesday that it’s “one of the largest penalties we have ever obtained.”
“Using new technology to break the law does not make you a disruptor. It makes you a criminal,” Garland said. “Binance prioritized its profits over the safety of the American people.”
Zhao said Tuesday in a post on X, formerly Twitter, that he had “made mistakes” and “must take responsibility.”
Richard Teng, a former Abu Dhabi financial services regulator, was named as Zhao’s replacement. Teng was most recently the global head of regional markets at Binance.
He was also previously director of corporate finance at the Monetary Authority of Singapore.
The action against Binance and its founder was a joint effort by the Department of Justice, the Commodity Futures Trading Commission and the Treasury Department.
The Securities and Exchange Commission was notably absent.
Treasury Secretary Janet Yellen said in a release Tuesday that the exchange allowed illicit actors to make more than 100,000 transactions that supported activities such as terrorism and illegal narcotics and that it allowed more than 1.5 million virtual currency trades that violated U.S. sanctions.
It also allowed transactions associated with terrorist groups such as Hamas’ Al-Qassam Brigades, Palestinian Islamic Jihad, al-Qaida and ISIS, Yellen said in the release, noting Binance “never filed a single suspicious activity report.”
Zhao has been released on a $175 million personal recognizance bond secured by $15 million in cash and has a sentencing hearing scheduled for Feb. 23.
Binance to continue
Binance will continue to operate but with new ground rules. The company is required to maintain and enhance its compliance program to ensure its business is in line with U.S. anti-money-laundering standards. The company is required to appoint an independent compliance monitor.
The case against Binance, which was unsealed Tuesday, shows that three criminal charges were brought against the exchange, including conducting an unlicensed money-transmitting business, violating the International Emergency Economic Powers Act, and conspiracy.
Some of its rivals may look to take advantage of the situation, particularly Coinbase, Kraken, and OKX.
Coinbase and Kraken are currently waging their own respective legal battles with the SEC. In June, the agency hit Coinbase with a lawsuit similar to the one it brought against Binance, alleging it operates as an unauthorized securities exchange, broker and clearing agency. And on Monday the SEC sued Kraken, alleging that the exchange commingled $33 billion in customer crypto assets with its own company assets, creating the potential for a significant risk of loss to its users.
Vanderbilt’s Yadav said Binance’s reserves were likely to come under scrutiny as investors assess where to go after the exit of the company’s CEO. Attempts by Binance to create strategic transparency since the FTX collapse have “floundered,” she added.
Binance published its proof of reserves, a system to show its number of assets and liabilities. But this proof is based on limited information that can be divulged from public blockchains, and is not on par with a full-scale audit.
“There is no doubt that Binance’s reserves will be coming under scrutiny in the months and years to come,” Yadav explained. “A big question that has hung over Binance is how it is run, the state of its internal governance and risk management.”
“This is a venue that has long been known for its opacity as well as an impenetrable capital and organizational structure whose complexity has caused regulators like the CFTC to investigate these organizational interconnections as possible avenues for Binance to engage in activities violating applicable regulations,” Yadav said.
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