November 22, 2023
Greg Cipolaro

Research Weekly - A Big Overhang is Lifted as Binance and CZ Plead Guilty


  • Yesterday, in a long-awaited case, Binance and its CEO CZ plead guilty to a variety of criminal and civil charges, resulting in CZ stepping down and over $4B in penalties.
  • The news eliminates a big overhang for the market, which had feared what regulatory and criminal charges might bring for the industry’s largest exchange.
  • Binance will continue to operate, but under close monitoring by US regulators and under new management, with new CEO Richard Teng.
  • While many are pointing to the 2020 case involving BitMEX executives as a template for the Binance and CZ case going forward, the prior did not carry a guilty criminal plea at the corporate level like the Binance case.
  • Binance’s influence on the industry had already been on the downslide well ahead of the charges, lessening the impact of the actions.
  • Crypto markets have survived through far worse and while Binance has been an important fixture in the industry, plenty of alternative trading venues exist for investors.

Binance and its Founder CZ Plead Guilty to Criminal, Civil Charges

Yesterday afternoon, Binance and its CEO Changpeng Zhao (CZ) were charged with and pled guilty to several criminal charges from the DOJ. In addition, the organization settled civil charges from Treasury (FinCEN) and the CFTC. Binance agreed to $4.3B in penalties and forfeitures to settle the charges, while CZ agreed to individually pay a $50M fine. Binance agreed to a 5-year monitorship by regulators and to exit the US market entirely. CZ, the omnipresent figure since Binance’s rise to prominence in 2017, agreed to step down as CEO as part of the deal, with Richard Teng taking over as CEO.

The deal and charges are the culmination of years of investigatory work by law enforcement and regulators, with implications for the broader crypto markets. Optimistically, this can be viewed as a removal of a long-standing overhang on the industry, one that kept many investors at bay. The flip side is that because Binance had such a dominant share of trading in spot and futures, liquidity, which has been an increasing concern throughout the year, will likely suffer. This probably isn’t an issue for the major digital assets like bitcoin but may present a bigger challenge for small and illiquid altcoins where Binance accounted for the lion’s share of trading.

BitMEX Offers a Partial Roadmap, But the Corp Was Never Charged Criminally

On October 1, 2020, DOJ charged 3 BitMEX individuals with criminal violations of the Bank Secrecy Act (BSA). This ultimately led to guilty pleas by the individuals as well as civil penalties against the trading platform itself (its various corporations) under CFTC and FinCEN charges. While many are pointing to the BitMEX executives case as a blueprint for Binance and CZ (BitMEX at one point dominated unregulated offshore derivatives trading after pioneering the perpetual swap), there is one big difference – none of the corporate entities associated with BitMEX were charged with or settled criminal violations, as is the case with Binance. BitMEX eventually lost its stature in derivatives trading as competition, regulatory scrutiny, and the events of “Black Thursday” in March 2020 took a toll on its prominence.

DOJ, Treasury, CFTC Part of the Settlement, but not SEC

The settlement included criminal charges from the DOJ as well as civil charges from FinCEN (Treasury) and the CFTC. However, notably absent was any settlement of civil charges leveled by the SEC. As a reminder, the CFTC filed charges against Binance and CZ on March 27, 2023, and while the two financial regulators often work together on major enforcement cases such as this one, the SEC did not file civil charges against Binance and CZ until June 5th, 2023. While we don’t know the reason for the the SEC’s absence in the settlement, it could be that CZ and Binance have decided to fight the securities charges, employing similar arguments regarding the scope of the SEC’s authority over secondary trading of token as those being made by Coinbase and Ripple in their cases with the SEC.

Binance Has Gradually Lost Share Through the Cycle

Binance has been the 800 lbs. gorilla in both spot and derivatives trading markets ever since rising to prominence in the 2017 cycle. However, as of late, its share of trading volume has been on the decline, making yesterday’s news less impactful than it once might have been. Binance’s share of spot trading has fallen from over 62% earlier in the year to just over 37%, according to data from The Block. Its leading position in open interest on futures products was leapfrogged by the CME, however, trading of futures on Binance remains multiples of the those on the CME. Had this enforcement action come earlier in the year, it is likely that its impact on the market would have been even more significant.

Liquidity Likely Suffers, Particularly for Tail-End/Alts

As mentioned, Binance made its name as being one of the most aggressive platforms for the listing and trading of altcoins, so the news is likely more impactful on low market cap and liquidity tokens and less likely impactful on bitcoin trading. Binance does have a variety of zero-fee trading programs to incentivize bitcoin trading, but we saw no actions on the programs in conjunction with yesterday’s news. Presently, the most popular bitcoin trading pair on the platform ($2B of daily volume), BTC/FDUSD, has zero taker fees.

Final Thoughts

Yesterday’s Binance news resolves a long-standing overhang on the industry, one that has kept many investors at bay. While Binance has done much to promote digital asset across the world, that does not give it a pass to shirk US laws and regulations. Major asset trading markets like bitcoin will likely not be as affected by Binance’s reduced stature, but trading in altcoins, where Binance thrived, might be more impacted. Ultimately, we see this as good long-term news for investors, who can be more assured of the safety and soundness of digital asset markets, as well as compliance with US laws and regulations.

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