Is Binance in Trouble? Yes, Here Is Why… (July 2024)

The CEO of Binance Holdings Limited (aka Binance), the largest cryptocurrency exchange in the world, pleaded guilty in November 2023 and agreed to pay $4 billion to resolve the investigation into violations related to the Bank Secrecy Act (BSA)—i.e., failure to register as a money-transmitting business.

How did this happen? Let’s dive in.

Impact on Binance

Despite the settlement allowing Binance to continue its operations temporarily, the exchange’s legal challenges remain unresolved. Internal communications from 2018 (just a year after Binance launched) disclosed that compliance issues were acknowledged early on.

Reduced Market Access 

Non-compliance has led to Binance being denied access to markets, facing operational restrictions, and encountering reluctance from governments and financial institutions to engage with them or their partners.

What Do These Troubles Mean to Investors?

The SEC emphasizes the risks and lack of transparency associated with these platforms. As a result, existing customers risk experiencing a range of adverse outcomes, including but not limited to: 

• Increased scrutiny of operations

• Potential disruptions in services

• Withdrawal halt/pause

• Increased KYC requirements to fulfill withdrawal requests

• Potential legal and financial consequences for the exchange significant loss of liquidity

Main Takeaways for Investors Regarding Binance

Legal Concerns

A notable observation from recent legal documents is that Bitcoin was mentioned only six times in the 136-page document, none of which had negative implications.

Key Issues Investors Should Be Aware Of

Serious Legal Concerns: Growing uncertainty about Binance’s compliance has led many investors to withdraw Bitcoin from the exchange while seeking clarity on its legal troubles.

Potential Violations: Multiple government lawsuits suggest possible breaches of laws and regulations, including:

• Fraud

• Wash Trading

• Money Laundering

Expert Insights

In an April 17th blog post, Swan Lead Analyst Sam Callahan published an in-depth report, Binance: Raising Eyebrows Since 2017, shedding light on long-standing concerns surrounding Binance’s operations. You can access this detailed analysis here.

Exclusive Report Access: The original report was provided exclusively to Swan Private clients on April 14, 2023.

Binance Liquidity Concentration Confirmed by Kaiko

Key Findings

According to Kaiko’s latest Crypto Liquidity Concentration Report, Binance:

• Market Depth: Accounted for 30.7% of the global market depth in 2023.

• Trading Volume: Controlled a significant 64.3% of global crypto trading volume.

Insights for Investors

Market Dominance: The report reveals that the eight largest exchanges collectively control 91.7% of market depth and 89.5% of trading volume.

Market Impact: Binance’s dominance means changes in its liquidity, regulations, or operations can significantly impact the broader crypto market.

Learn more details in the Kaiko Insight Report.

Insight into the Latest Filing

• The SEC’s recent filing raises concerns about the audit of Binance.US and highlights difficulties in ensuring the company was fully collateralized.

• The filing further alleges that Binance has used BAM, the entity managing Binance.US, for unlawful purposes.

Wall Street Journal Exposé

• The Wall Street Journal published an exposé over the Christmas 2023 weekend titled The Crypto Queen Pulling the Strings at Binance, shedding light on Yi He’s significant influence over Binance’s marketing and investment operations.

• Yi He is a former talk show host and Changpeng Zhao’s longtime romantic partner.

Several Key Executives Have Left Binance in 2023

1. Sept. 6, 2023: Helen Hai announces her resignation.

2. Sept. 6, 2023: Vladimir Smerkis announces his departure.

3. Sept. 6, 2023: Gleb Kostarev announces his resignation.

4. Sept. 4, 2023: Mayur Kamat, product lead at Binance, announces his resignation.

5. Aug. 31, 2023: Leon Foong, head of Asia-Pacific at Binance, announces his resignation.

6. July 7, 2023: Steven Christie, senior vice president for compliance at Binance, announces his resignation.

7. July 6, 2023: Patrick Hillmann, chief strategy officer of Binance, announces his resignation.

8. July 6, 2023: Han Ng, general counsel at Binance, announces his resignation.

9. July 6, 2023: Steve Milton, global vice president of marketing and communications at Binance, announces his resignation.

10. July 6, 2023: Matthew Price, senior director of global investigations and intelligence at Binance, announces his resignation.

11. October 19, 2023: Stéphanie Cabossioras stepped down from her position as the Executive Director of Binance France.

12. October 19, 2023: Saulius Galatiltis has stepped down as chief executive officer of Bifinity UAB, a payment processor that serves as a gateway for fiat transactions by customers of the Binance cryptocurrency exchange.

Key Developments Surrounding Binance.US Workforce Cuts and Regulatory Issues

Workforce Reductions

September 13, 2023: Binance.US laid off one-third of its workforce and lost its CEO Brian Shroder.

Employee Concerns

• At a summer meeting after the layoffs, employees voiced their concerns to Changpeng Zhao (CZ). According to messages reviewed by the Wall Street Journal, one anonymous employee criticized the lack of advance notice and the two-week severance package, asking if it was a “respectful” way to treat laid-off employees.

Regulatory Obstacles

Russian Bank Involvement

• In late August, the Wall Street Journal revealed that some Binance customers were involved with sanctioned Russian banks. Binance has faced scrutiny over potential violations and addressed the issue by fully exiting the Russian market.

Discontinuation of RUB Support

• On September 27, Binance published a blog post explaining its sale to CommEx and the decision to discontinue support for the Russian Ruble (RUB).

• Binance denied media claims that it helped customers transfer funds from sanctioned Russian banks out of the country.

The decision follows the exchange’s denial of media reports, two months ago, suggesting its involvement in assisting customers in transferring funds from sanctioned Russian banks out of the country.

SEC’s Concerns Surrounding Ceffu and Binance’s Operations

Investor Points of Interest

Ceffu’s Role

• The SEC is scrutinizing Ceffu, an institutional crypto custodian and Binance partner.

• The regulator suspects Ceffu facilitated the transfer of U.S. customer funds between Binance.US and Binance Holdings, potentially moving these funds outside the U.S. jurisdiction.

Financial Transactions Under Investigation

Convertible Note Details

• Legal documents from Binance.US’s legal team reveal that BAM Management U.S. Holdings issued a $250 million convertible note to Changpeng Zhao (CZ) in December.

• The documents also state that Zhao used Binance USD (BUSD), allocating $183 million to Paxos Trust Company (issuer of BUSD) to convert the stablecoin into USD.

Implications

Regulatory Scrutiny

• These activities have attracted regulatory attention due to potential financial improprieties, emphasizing the importance of compliant fund management practices within Binance.

Investor Awareness

• Keeping up with these developments is crucial for investors to understand the evolving landscape of crypto regulations and potential risks associated with Binance’s global operations.

Learn more about Ceffu here.

Twitter Allegations and CZ’s Response

Allegations by Dylan LeClair

• On Twitter, crypto analyst Dylan LeClair criticized Changpeng Zhao (CZ) for the $250 million BUSD transfer between Binance.US and Binance’s international exchange.

CZ’s Response

• CZ responded by stating that “Binance.US has never utilized Ceffu or Binance Custody.”

Contradictory Findings from SEC Documents

Unsealed SEC Documents

• Newly revealed documents contradict Zhao’s claims, indicating that Binance.US “obtained custody software and support services from Ceffu,” an institutional custodian.

Historical Financial Transactions

Earlier Reports

• In February, Reuters reported that Binance.US transferred $400 million from its platform to Merit Peak Ltd., a trading firm managed by Zhao, based on bank records and internal messages.

Impact on Binance.US Operations

October 16th Announcement

• On October 16th, Binance.US announced that it would stop supporting USD withdrawals.

Updated Terms

• Find the updated terms of use, including the PDF version, here.

Binance’s Shift Away from Bitcoin Dominance

Initial Focus on Bitcoin Trading

Initially, Binance had a limited selection of tokens, featuring cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and its native coin, Binance Coin (BNB).

However, it later gained fame for offering an extensive range of cryptocurrencies and digital assets. Binance continues to expand its token offerings and supports launching new projects through programs like the Launchpad platform.

Binance’s initial shift away from Bitcoin to a mostly altcoin-dependent exchange and business model can be attributed to several factors:

• By expanding its altcoin offerings, Binance attracted traders interested in a broader range of cryptocurrencies.

• Altcoins often provide different features, use cases, or technologies than Bitcoin, which can appeal to traders seeking varied investment opportunities.

• Binance recognized the growing interest and demand for altcoins among traders and adjusted its business model to cater to these preferences.

• Binance has actively supported new altcoin projects through Initial Coin Offerings (ICOs) and token launches on its platform. ICOs provide the ideal conditions for a Cantillon Effect distribution of network control by the token team.

Binance’s Shift Away from Bitcoin Dominance: Understanding Its Business Model Evolution

Initial Focus on Bitcoin

Early Days: Binance initially focused on popular cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and its native Binance Coin (BNB), offering a limited selection.

Transition to a Diverse Altcoin Portfolio

Expanded Offerings

• Binance gained popularity for listing many cryptocurrencies, evolving its business model to feature many altcoins.

• Programs like Launchpad facilitate new project launches, offering token-based fundraising.

Reasons for the Shift

Broader Asset Options

• By offering more altcoins, Binance enabled traders to diversify their investments.

Market Demand and Trends

• Responding to the growing demand for altcoins, Binance tailored its offerings to align with emerging market trends.

Innovation and Token Launches

• Binance actively supported new altcoin projects through Initial Coin Offerings (ICOs) and token launches, providing an innovative platform for network growth.

Competitive Advantage

• Expanding its altcoin offerings gave Binance a competitive edge, attracting users interested in varied investment opportunities beyond Bitcoin.

Supporting New Projects

Initial Coin Offerings (ICOs)

• Binance facilitated ICOs, which enabled altcoin teams to distribute tokens and control the network. Learn more about ICOs here.

Cantillon Effect

• The distribution of new tokens often mirrors the Cantillon Effect, where initial participants gain the most benefits. Learn more about the Cantillon Effect here.

Overview of Binance Launchpad

Crowdfunding Platform

• Binance Launchpad is a Binance-owned crowdfunding platform that helps crypto startups raise funds by offering their tokens to Binance users.

Birth of the IEO Model

• Launchpad was the first to introduce the Initial Exchange Offering (IEO) model, a popular fundraising method many crypto startups use across exchanges.

How Binance Launchpad Supports Startups

Global Access

• Startups can leverage Binance’s global user base to reach a large audience and secure funding.

Secure and Trusted

• Users trust the IEO process because Binance vets each project, reducing the risks often associated with other fundraising methods.

Comprehensive Support

• Launchpad provides startups comprehensive resources, from project assessment to technical advice and marketing support.

The Impact of IEOs

Efficient Fundraising

• IEOs offer a streamlined fundraising process through the exchange, giving projects immediate access to funds and participants.

The Launchpad has come under increased scrutiny in recent years for several reasons: 

1. Regulatory compliance concerns

2. Questions about project quality and due diligence

3. Allocation and fairness issues

4. Market volatility and speculation

5. Investor protection concerns

Definition and Implications of Unregistered Securities

SEC’s Charges Against Binance

• On June 5th, the SEC filed charges against Binance Holdings Ltd., its U.S. affiliate BAM Trading Services Inc., and CEO Changpeng Zhao (CZ) for violating securities laws.

• Binance was accused of misleading investors by claiming it restricted U.S. customers from accessing Binance.com while secretly allowing high-value U.S. customers to trade on the platform.

Failure to Restrict U.S. Investors From Accessing Binance.com 

Misleading Investors 

Know Your Customer (KYC)/Anti-Money Laundering (AML) 

• Binance has a notorious reputation for allowing actors to use its exchange for various money laundering schemes, terrorist financing, and other illicit activities.

• Exchanges must enforce strong KYC and AML measures to deter money laundering, terrorist financing, and illicit activities.

• The U.S. has found evidence that American investors could easily access and use the platform due to lax KYC/AML account setup and maintenance standards.

SAFU? 

SAFU: Secure Asset Fund for Users

• Binance created the 'Secure Asset Fund for Users' (SAFU) in July 2018 to protect user funds.

• Binance allocates a portion of its trading fees to this fund, which includes BNB, BTC, USDT, and TUSD wallets.

During unexpected maintenance, CZ tweeted a reassuring message to users:

Origin of the Term

• In 2018, a viral YouTube video by Bizonacci popularized the phrase “Funds Are Safu” after CZ reassured users during unexpected maintenance. This meme evolved into a community term meaning user funds are secure

“Not Your Keys, Not Your Coins”

• Despite SAFU, user funds are never completely secure on any exchange because withdrawals can be halted at any time for any reason. Users are left with no recourse if this happens.

NOTE: There is nothing the end user can do once this happens. 

Binance Proof of Reserves and Security Measures

Proof of Reserves

1:1 Asset Backing

• Binance claims its user assets are fully backed at a minimum ratio of 1:1.

• However, most of Binance’s corporate holdings are stored in separate wallets not included in proof-of-reserves calculations.

Binance Chain Hack

Binance Chain Hack

October 2022 Attack

• In October 2022, Binance Chain suffered a hack involving the withdrawal of $2 million BNB, valued at $570 million.

• Learn more about the hack and ecosystem update from BNB Chain here.

Importance of Due Diligence for Investors

Protecting Against Scams

Thorough due diligence helps investors safeguard themselves by providing insights into a project’s:

• Legitimacy

• Team

• Technology

• Use case and financial health

Due Diligence Criteria

Comprehensive research and analysis should cover the following:

• Fundamentals: Key financial and market factors.

• Technology: Quality and security of the technology involved.

• Team: The qualifications and experience of the project team.

• Market Viability: Demand, growth potential, and competitive landscape.

• Regulatory Compliance: Adherence to relevant regulations.

Binance’s Legal Battles and Compliance Challenges

Regulatory Challenges

Binance has faced numerous legal issues, including:

• Alleged regulatory violations.

• Non-compliance with securities laws.

• Challenges adapting to evolving regulatory standards. 

Legal Challenges Faced By Binance in Various Jurisdictions

Binance operations have faced regulatory scrutiny and legal challenges in several jurisdictions, including:

United States (U.S.)

Regulatory Concerns

• Binance had been operating in a limited capacity in the U.S. through its subsidiary, Binance.US.

• U.S. regulators have scrutinized Binance’s subsidiary, Binance.US, over compliance issues with local laws, such as registration requirements and potential securities violations.

• In June 2023, the SEC charged Binance with misleading U.S. investors

United Kingdom (U.K.)

FCA Scrutiny

• The Financial Conduct Authority (FCA) demanded that Binance halt its regulated activities and expressed concerns over regulatory compliance, due diligence, and anti-money laundering (AML) measures

• The Financial Conduct Authority (FCA) demanded that Binance halt its regulated activities and expressed concerns over regulatory compliance, due diligence, and anti-money laundering (AML) measures.

• On October 8, 2023, Binance tried restoring some local services via a partnership with a regulated entity, Rebuildingsociety.com Ltd.

• A week later, on October 16, Binance stopped onboarding new U.K. users.

China

Initial Ban

• In 2017, China’s government banned domestic crypto exchanges, prompting Binance to relocate its headquarters.

• Despite the ban, Binance continues to handle $90 billion in monthly transactions involving Chinese traders, accounting for 20% of global volume

Japan

FSA Warning

• In March 2018, the Financial Services Agency (FSA) warned Binance of operating without proper registration

• Binance plans to obtain a license to operate in Japan and comply with local regulations.

Canada

OSC Investigation

• In March 2021, the Ontario Securities Commission (OSC) accused Binance of violating securities laws by operating an unregistered trading platform. 

India

Government Crackdown

• In late December 2023, India began blocking local access to international exchanges like Binance, as reported by Bloomberg.

• Apple removed Binance, Kucoin, and OKX apps from its App Store after a government order.

• On January 12, 2024, Google removed Binance and other global crypto apps from its Play Store in India.

Recent Developments: Key Updates

Prominent Delisting

Monero Delisting

• On February 6, Binance announced that it would delist Monero (XMR) from the exchange on February 20, 2024.

CZ’s Guilty Plea

• On November 21, 2023, Changpeng Zhao (CZ) pleaded guilty in U.S. court to violating the Bank Secrecy Act by failing to implement adequate KYC and AML protocols for U.S. customers.

• As part of the plea deal, he placed $15 million in a trust account and secured guarantors pledging $250,000 and $100,000. CZ is scheduled for sentencing on February 23, 2024.

Fines and Penalties

• Zhao and the DOJ agreed to a $50 million fine without prison time mentioned.

• Binance will pay $4.3 billion in penalties to various federal agencies and will undergo oversight from multiple monitors for five years.

Settlement Agreements

• Binance settled charges with FinCEN, OFAC, and the CFTC, addressing issues related to money laundering, sanctions, and commodities regulations.

Leadership Changes and Restrictions

CZ’s Resignation

• As part of the DOJ settlement, Zhao resigned from Binance and cannot participate in its operations or management for three years following the appointment of a monitor.

Yi He’s Influence

• Yi He, Zhao’s romantic partner and the mother of his three children, is now the largest Binance shareholder currently working for the company.

• She oversees Binance’s marketing and investment departments and significantly influences the company’s overall operations.

So, is Binance in Trouble?

Even though CZ is stepping down, the exchange is not out of the woods yet. Act accordingly. Get your Bitcoin off ALL exchanges today and consider moving it into a Bitcoin IRA.

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