Top 6 Reasons Binance is in Trouble (2024)
Binance, has suddenly found itself in potentially grave trouble. With Binance CEO CZ pleading guilty to money laundering and fraud charges… What’s next for the world’s largest exchange?
We’ll explore in detail below!
The uncertainty surrounding Binance has never been higher since it was issued a lawsuit by the U.S. Securities and Exchange Commission (SEC) on June 5th, 2022.
UPDATE: On November 21st, 2023, Binance CEO Changpeng Zhao “CZ” agreed to a settlement with U.S. federal prosecutors. The settlement requires Zhao to plead guilty to violating criminal U.S. anti-money-laundering laws. On the same day, CZ announced the news on Twitter:
As part of CZ’s plea, Zhao will be personally subjected to a $50 million fine. Additionally, Binance will be required to pay $4.3 billion in fines as part of the plea deal. CZ was released on $175M bond and is scheduled to be sentenced in February, 2024.
For more details about the CZ plea, click here.
The settlement will allow Binance to continue operating (for now)… but the exchange’s legal troubles are far from over.
In this article, we’ll dive deeply into what CZ stepping down means, examine how and if Binance is in trouble, how these new developments will affect its customer base, and what is next for the world’s largest exchange!
Not a big reader, not a problem. Click any of the 'Overview' links below to move directly to that section.
Binance, the world’s largest cryptocurrency exchange platform, was founded in 2017 by Changpeng Zhao (also known as CZ). It provides a platform for users to buy, sell, and trade various cryptocurrencies.
The exchange offers a wide range of features, including spot trading, futures trading, options trading, margin trading, and more. Binance has a native cryptocurrency called Binance Coin (BNB), which can be used for discounted trading fees on the platform and other purposes within the Binance ecosystem.
“We are operating as a fk’ing unlicensed securities exchange in the USA, bro.”
- Binance’s Chief Compliance, 2018
The above statement was found in internal communications during the discovery process by the U.S. government. This acknowledgment, first made in 2018, occurred only a year after Binance launched. This information indicates Binance has been actively engaged in criminal behavior since shortly after launch and suggests Binance is in trouble.
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.
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 Binance 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
** In the entire 136-page document, Bitcoin was mentioned only six times — none with a negative connotation. **
Serious Legal Concerns
With the increasing uncertainty surrounding Binance, many investors are withdrawing Bitcoin from the exchange and are seeking additional information on why Binance is in trouble. Multiple government lawsuits indicate potential violations of laws or regulations by Binance, including but not limited to:
Fraud
Wash Trading
Money Laundering
None of this should come as a surprise to Swan Signal Blog regulars. On April 17th, Swan Lead Analyst Sam Callahan published an in-depth report titled Binance: Raising Eyebrows Since 2017.
This report was originally sent to Swan Private clients on April 14th, 2023.
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On November 21, 2023, Zhao pleaded guilty to violating the Bank Secrecy Act in a U.S. court. The charges were related to failing to implement proper know-your-customer (KYC) and anti-money laundering (AML) protocols for U.S. customers on Binance.
As part of his court agreement, Zhao posted $15 million in a trust account and will forfeit these funds if he violates the terms of his release. He has also secured two guarantors pledging $250,000 and $100,000. CZ’s sentencing is scheduled for February 23, 2024.
Zhao’s release conditions include typical provisions like not breaking the law, not tampering with witnesses or victims, and not taking non-prescribed controlled substances. Interestingly, the order appears to allow him to leave the U.S. but requires him to return two weeks before his sentencing, though federal prosecutors are seeking to appeal this provision.
CZ has agreed to remain in Seattle until November 27, allowing time for the DOJ and his attorneys to discuss this matter with the district judge. By pleading guilty under an agreement, Zhao waives his right to appeal any sentence over 18 months. Additionally, Zhao and the DOJ agreed to a $50 million fine without mentioning prison time.
As part of the settlement with the U.S. Department of Justice, Zhao was required to resign from Binance. The company will pay $4.3 billion in penalties to various federal agencies and will be subject to oversight by multiple monitors for five years. Binance also settled charges with FinCEN, OFAC, and the Commodity Futures Trading Commission, addressing issues related to money laundering, sanctions, and federal commodities regulations.
Trading volume on Binance.US is now down 99.2% over the last 6 months.
In the latest filing by the SEC, the regulator says that the Binance.US audit found it “very difficult to ensure the company was fully collateralized.”
Worse, as the SEC has demonstrated, Binance has a long history of controlling BAM to serve Binance’s own unlawful purposes.
On September 5th, Ikigai Asset Management founder Travis Kling published a historical timeline outlining a history of “negative events” at Binance since December 2022, attracting attention from some of the exchange’s top brass.
Sept. 6, 2023: Helen Hai announces her resignation.
Sept. 6, 2023: Vladimir Smerkis announces his departure.
Sept. 6, 2023: Gleb Kostarev announces his resignation.
Sept. 4, 2023: Mayur Kamat, product lead at Binance, announces his resignation.
Aug. 31, 2023: Leon Foong, head of Asia-Pacific at Binance, announces his resignation.
July 7, 2023: Steven Christie, senior vice president for compliance at Binance, announces his resignation.
July 6, 2023: Patrick Hillmann, chief strategy officer of Binance, announces his resignation.
July 6, 2023: Han Ng, general counsel at Binance, announces his resignation.
July 6, 2023: Steve Milton, global vice president of marketing and communications at Binance, announces his resignation.
July 6, 2023: Matthew Price, senior director of global investigations and intelligence at Binance, announces his resignation.
October 19, 2023: Stéphanie Cabossioras stepped down from her position as the Executive Director of Binance France.
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.
The week of September 13th, 2023, saw Binance.US cut ⅓ of its workforce.
During a summer meeting after the workforce reductions, employees openly expressed their concerns to Zhao, as revealed by messages reviewed by the Wall Street Journal. This marked an uncommon instance of criticism.
An anonymous employee queried Zhao in the chat during the all-hands meeting, stating, “Certain individuals who were laid off received no advance notice and only discovered their job status when they couldn’t access the system anymore. Is this a respectful way to treat them? Is a two-week severance package considered respectful?”
Nine other employees endorsed this question with upvotes. However, Zhao did not respond to a new Wall Street Journal article published on September 26th.
Also recently reported by the WSJ, Binance faced another obstacle in late August when the Journal released a report about Binance customers' involvement with sanctioned Russian banks. The Journal has also mentioned that the DOJ is investigating Binance regarding potential breaches of U.S. sanctions on Russia.
Binance made a blog post on September 27th addressing the sell to CommEx. 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.
The SEC is particularly interested in Ceffu, an institutional crypto custodian and a partner of Binance. The regulatory body suspects that Ceffu has served as an intermediary between Binance US and Binance Holdings, facilitating the movement of U.S. customer funds outside the United States.
According to legal documents submitted by Binance.US’s legal team, BAM Management U.S. Holdings issued a convertible note worth $250 million to Zhao in December. The documents state that Zhao utilized BUSD (Binance USD), with $183 million directed to Paxos Trust Company, the issuer of BUSD, to convert BUSD into USD.
Dylan LeClair called CZ out on Twitter about the $250M of $BUSD from Biannce that moved between Binance.US and the international exchange:
In response to these allegations, Zhao posted on Twitter regarding the claim, asserting that “Binance.US has never utilized Ceffu or Binance Custody.”
However, newly unsealed SEC documents reveal that the American exchange “obtained custody software and support services from Ceffu,” contradicting Zhao’s statement.
Reports of enigmatic financial transactions are not novel. Earlier in February, Reuters reported that Binance.US had transferred $400 million from its platform to Merit Peak Ltd., a trading firm overseen by Binance CEO Changpeng Zhao, as bank records and internal company messages indicated.
On October 16th, Binance.US announced it will no longer allow USD withdrawals. You can download the PDF version here.
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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:
Broader Asset Options
Market Demand and Trends
Innovation and Token Launches
Competitive Advantage
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.
The cryptocurrency market is dynamic, and altcoins have gained retail popularity over time. 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.
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Binance Launchpad is a Binance-owned crowdfunding platform that assists crypto-startups in raising funds by offering their tokens to Binance users. It is the pioneer of the Initial Exchange Offering (IEO) mechanism, a widely popular method among crypto-startups to gather funds.
According to CoinMarketCap, a website Binance acquired in March 2020, since its inception in 2019, Binance Launchpad has raised over $107 million for 49 projects at the time of writing in early-November 2023.
The Launchpad has come under increased scrutiny in recent years for several reasons:
Regulatory Compliance Concerns
Questions About Project Quality and Due Diligence
Allocation and Fairness Issues
Market Volatility and Speculation
Investor Protection Concerns
The SEC charged Binance Holdings Ltd., its U.S. affiliate BAM Trading Services Inc., and founder Changpeng Zhao on June 5th with securities law violations and are accused of misleading investors by claiming to restrict U.S. customers from trading on Binance.com while allowing high-value U.S. customers to trade secretly.
The SEC also alleges that Binance controlled Binance.US despite portraying it as an independent platform. Furthermore, Binance and Zhao are accused of commingling and diverting customer assets and engaging in manipulative trading.
Multiple digital assets listed on Binance’s platform are under scrutiny by the U.S. government for potentially being unregistered securities.
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.
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SAFU stands for the 'Secure Asset Fund for Users.'
It was created by Binance in July 2018 as a protective measure for users' funds. Binance dedicated a portion of trading fees to grow the fund, ensuring it reached a substantial amount to provide user security.
The SAFU fund includes BNB, BTC, USDT, and TUSD wallets.
During unexpected maintenance, Binance CEO Changpeng Zhao (CZ) tweeted a reassuring message to users:
In 2018, a YouTube video titled “Funds Are Safu" was uploaded by a content creator named Bizonacci, gaining rapid popularity as a viral meme. Since then, the community has adopted the phrase: “Funds are SAFU.”
Not your keys, not your coins!
In reality, your funds are never SAFU on ANY exchange. Any exchange operator can halt withdrawals of customer funds whenever they want, for any reason they desire, and for however long they would like. There is nothing the end user can do once this happens.
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MartyParty, a popular a crypto analyst, recently presented a bleak outlook for Binance and its vast user base of 150 million people. The analyst’s analysis began by explaining why BNB has maintained a value above $212 despite the decline of Bitcoin on Thursday, August 17th.
Many people think this new development means the giant exchange is close to experiencing an FTX-like collapse.
Liquidation happens at 1.0.
MartyParty indicates that Binance is in “self-preservation mode.” CEO Changpeng “C.Z.” Zhao reportedly sold BTC from a specific wallet to acquire TUSD, which was then invested in BNB to maintain its value above $212.
Additionally, the analyst proposes an intriguing theory. U.S. financial regulators might be selling crypto holdings from the U.S. Marshals Service to forcefully liquidate Binance’s loan and potentially remove C.Z. from the crypto industry.
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In a blog post from October 2022, Binance Chain was hit with a $570 million hack. BNB Chain detailed the attack that the hacker withdrew $2 million of the BNB cryptocurrency — worth around $570 million.
Due diligence safeguards investors from scams by involving comprehensive research and analysis of listed cryptocurrencies. This process provides insights into a cryptocurrency’s legitimacy, team, technology, use case, and financial health, aiding in detecting red flags and reducing the risk of investing in dubious or subpar projects.
Due diligence involves comprehensive research and analysis of the project’s:
Fundamentals
Technology
Team
Market Viability
Regulatory Compliance
Binance has faced numerous legal battles and compliance challenges, including lawsuits and regulatory investigations including:
Alleged regulatory violations
Non-compliance with securities laws,
Difficulties adapting to evolving regulatory requirements
Binance operations have faced regulatory scrutiny and legal challenges in several jurisdictions. Here are some key examples:
Binance had been operating in a limited capacity in the U.S. through its subsidiary, Binance.US. However, U.S. regulators have raised concerns about the compliance of Binance’s operations with local laws, including registration requirements and potential violations of securities regulations.
The U.K. The Financial Conduct Authority (FCA) required Binance to halt regulated activities in the country. The FCA expressed concerns about Binance’s regulatory compliance and ability to conduct proper due diligence and anti-money laundering checks.
On October 8, Binance tried to restore certain local services by partnering with Rebuildingsociety.com Ltd, a regulated entity.
On October 16th, Binance halted the onboarding of new users in the U.K.
Binance, founded initially in China, faced challenges when the Chinese government introduced strict regulations on cryptocurrency-related activities. In 2017, Chinese authorities banned domestic cryptocurrency exchanges, leading Binance to relocate its headquarters to other jurisdictions.
Even though the website is blocked in China, $90 billion in monthly transactions are made by China’s Binance, accounting for 20% of volume worldwide, excluding trades made by a subset of substantial traders.
In March 2018, the Japanese Financial Services Agency (FSA) issued a warning to Binance, stating that it was operating in Japan without the necessary registration. Subsequently, Binance announced its plans to obtain a license to operate in Japan and comply with local regulations.
In March 2021, the Ontario Securities Commission (OSC) stated that Binance may have violated securities laws by operating an unregistered cryptocurrency trading platform. The OSC initiated an investigation into Binance’s activities.
Binance has faced scrutiny or warnings from regulators in various countries, including Thailand, Germany, Italy, Malta, and Malaysia regarding potential regulatory violations or lack of proper licenses.
Many European countries have been exceedingly closing their doors to Binance.
Binance’s troubles can significantly impact the entire cryptocurrency industry. Anytime the leading market maker finds itself in trouble, it may lead to increased regulatory scrutiny and compliance requirements, decreased investor confidence, and heightened market volatility spillover effect.
These situations generally lead to massive shifts in the exchange landscape, reinforced industry standards, and the evolution of cryptocurrency regulations.
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.
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