Record-breaking Binance punishment could be good news for FinTech

The legal settlement between Binance and the US Treasury has been described as a heavy blow for crypto in general and exchanges in particular, but closer analysis reveals a more nuanced message.

Image: Unsplash / Vadim A.

 Crypto: The Boiling Frog

 On 21st November, US Treasury Secretary Janet Yellen announced that, in conjunction with the US FinCEN (Financial Crimes Enforcement Network) and OFAC (Office of Foreign Assets Control) agencies, a total of around $4.3 billion in fines and penalties would be levied against crypto exchange Binance, described as a "convertible virtual currency platform."

In addition, Binance founder Changpeng Zhao admitted his guilt to federal charges and will pay a fine of $50 million, as well as stepping down as CEO and facing some limitations on his travel and business freedoms. That may not be the end of Zhao's punishment: he could potentially face up to 18 months in jail once sentencing takes place.

Interestingly, the US SEC (Securities and Exchange Commission) was not involved in this action. It has been pursuing its own lawsuit against Binance and other exchanges since June, although some observers believe that the Treasury's settlement now makes it less likely that the SEC will win its case, or even continue to pursue it.

Crypto in the cross-hairs

The US Treasury has long been investigating crypto companies, looking for fraud, accounting irregularities, breaches of sanctions, money laundering and other crimes. In October 2022 the Bittrex exchange was penalised over $50m by the Treasury for a variety of regulatory breaches. At the time, that was the largest penalty ever levied by the US Treasury against a virtual currency firm – around 1% of the fines levied against Binance little over a year later.

The SEC too has made no secret of "going after" crypto exchanges, launching a flurry of lawsuits since June against Binance, Coinbase, Kraken and others. Under the Biden administration, new laws and regulatory tools have been made available to bring crypto exchanges to heel.

Cheering on this aggressive litigation, there's been an interesting bias to some of the reporting about the Binance ruling. "Another Crypto Boss Falls" proclaimed The Economist. The word “Crypto” here could easily be swapped with “Mafia” without changing the tone of the headline. Schadenfreude is in the air.

Contrast this aggressive approach and attitude with the fallout from the 2008 credit crisis, when it became clear that the CEOs of some retail banks had turned a blind eye to (and probably encouraged) fraudulent mortgage lending to sub-prime borrowers. None were successfully prosecuted, press cheerleaders for such action were few, and no major fines were levied, despite such reckless lending taking the global economic system to the brink of collapse.

Charitably, one might argue that the Treasury and SEC learned from that mistake and no longer consider the prosecution of CEOs and big financial firms to be outside their remit. Less charitably, crypto as a whole represents a potential threat to the established banking order, so naturally it will be scrutinised harder than the traditional financial infrastructure.

Just what is crypto anyway?

It may not be a vendetta, but to some in the crypto business it probably feels like one, especially that the SEC is acting on the basis that crypto coins are securities rather than commodities. Many in the industry disagree with that assertion, believing instead that crypto-currencies are commodities and therefore should be regulated (if at all) in the US by the Commodity Futures Trading Commission (CFTC).

Another crypto exchange in the SEC's sights is Kraken, which has already fallen foul of the Commission in the past for its crypto-staking service, parts of which it has now terminated in the US. Kraken's stated defence against the SEC’s more recent lawsuit is that the company can't be prosecuted for breaking laws when it has not yet been determined which laws actually apply to its business – on the face of it, a reasonable rebuttal.

This again comes back to the commodity-versus-security debate. Is a crypto coin/token a security, a commodity, a currency, a digital trinket or something else? One could say it's just a string of numbers inside a computer but then that's true of 98% of money (or at least credit) today.

Even though that debate may not be settled – except perhaps in the eyes of the SEC and its supporters – lawsuits are being filed on the basis that various forms of crypto are securities. For example, at the time of writing, the footballer Cristiano Ronaldo is the target of a class-action lawsuit. The suit seeks damages against him for heavily promoting Binance’s “CR7” NFTs, which the exchange launched in collaboration with the footballer. Crucially, under US law celebrities must disclose to the public how much they are paid to endorse securities. Apparently Ronaldo did not do that with these NFTs. If the case reaches trial, it may help settle the “security or not” argument once and for all.

Binance: guilty as charged

Regardless of definitions, Binance was clearly guilty of breaking several laws. There's no doubt at all about this, not least that the company itself admitted as much in accepting its punishment, as did Zhao.

 To quote Janet Yellen directly: “Our work revealed that Binance claimed to have exited the U.S. market years ago, but actually did not, retaining U.S. users and other significant ties with the United States. It also had critical gaps in its anti-money laundering program and practices, from a lack of risk-based procedures for various offerings to instructing staff to withhold information from law enforcement. It deliberately undermined its own sanctions monitoring controls, and it failed to report suspicious transactions.”

Yellen continued, “This meant Binance was allowing illicit actors to transact freely, supporting activities from child sexual abuse, to illegal narcotics, to terrorism, across more than 100,000 transactions. That includes transactions associated with terrorist groups like Hamas’s Al-Qassam Brigades, Palestinian Islamic Jihad, Al Qaeda, and ISIS. Binance processed these transactions, but it never filed a single suspicious activity report. And it also allowed over 1.5 million virtual currency trades that violated U.S. sanctions.”

According to Attorney General Merrick Garland, Zhao himself “engaged in a deliberate and calculated effort to profit from the U.S. market without implementing the controls that are required by U.S. law.”

That’s an impressive litany of crimes, which makes it surprising that Zhao appears to have escaped with little more than a slap on the wrist, at least so far.

Down but not out

Despite the scale of the fine, Binance is likely to continue to operate and will probably thrive. The sums involved do not appear to represent an immediate threat to the company's future. However, they have affected sentiment.

Various sources claim that up to $1.2 billion of assets were withdrawn from Binance in the days following the Treasury judgement, but it’s not clear how much of that represents normal trading withdrawal value and how much is a direct reaction to the ruling. No doubt many people withdrew some or all of their funds as a precaution against a total collapse of Binance, but so far that appears an unlikely prospect.

Binance is no FTX, and the withdrawal represents less than 2% of the firm’s stated holdings. Binance’s own issued coin did suffer a significant drop in value but other crypto-currencies barely shifted. Bitcoin went briefly down and then up, but since it does that all the time, there’s no telling whether the move had anything to do with the Binance ruling.

It’s worth noting that there are big differences between Binance and FTX. The latter’s CEO, Sam Bankman-Fried, is one of the other two “Crypto Bosses” that The Economist mentioned. Binance appears to have been run efficiently but in defiance of certain US laws; FTX appears to have collapsed because it was run chaotically by people who didn't really know what they were doing, although since Bankman-Fried was recently criminally convicted of wire fraud, conspiracy and money laundering, US prosecutors clearly saw malice rather than incompetence.

Good for business

In spite of the massive size of the penalties against Binance, this ruling could be positive news for crypto exchanges in general. Binance broke the law and was punished for it, but the Treasury could potentially have eviscerated the company and made it extremely hard for Binance to continue trading. That didn’t happen, which could be seen as a tacit acknowledgement by Yellen and others that, whether they like it or not, crypto is here to stay. Nobody could really claim that the outcome was unfair.

It’s a positive development because it clears the air, draws a line under Binance’s sometimes-illicit past and allows all exchanges to move forward in a business environment that is more clearly defined. There’s still the SEC threat looming, but ultimately that’s also a regulatory threat, not an existential one.

Image: Unsplash

What about crypto in Germany?

There’s no such division between commodity and security regulation in Germany as in the US. BaFin is charged with regulating both, although in contentious new areas it tends to follow the US model of regulation but with a slight lag to see what effect new laws might have before implementing them.

Germany remains one of the most crypto-friendly countries in the world, and the US ruling is unlikely to change that. New EU regulations, such as MiCA, will have some impact when they come into force, but like the US Binance ruling, they mainly serve to clarify the rules by which all firms must operate.

FinTech companies already incorporating crypto offerings into their products and services can continue to do so. The US Treasury’s actions may have hurt Binance, at least in the short term, but they’ve done no significant harm to the FinTech and crypto industry in general.