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By HAYVN Research
Key Takeaways
- Binance's $4.3Bn Anti-Money Laundering (AML) settlement represents crypto's largest fine yet, but may signal a pivotal evolution of industry compliance.
- Despite recent volatility triggered by the ruling, Binance retains massive reserves with capital adequate to weather penalties.
- Binance executed a prescient $3.9Bn stablecoin transfer pre-settlement, affirming balance sheet resilience even as skittish retail traders withdrew funds.
- Legacy banks faced similar eight/nine-figure fines just last year for AML violations, so penalties - however sizable in aggregate - may pave the road to normalised governance.
- Though jarring initially, the precedent set by the settlement could accelerate crypto's path to regulated mainstream status by demanding accountability and cooperation with authorities.
Introduction
Changpeng Zhao, commonly referred to as "CZ," the CEO of Binance, has stepped down from his leadership role and pleaded guilty to anti-money laundering charges. This move comes as part of a settlement resolving a years-long probe by US authorities into Binance's operations, which reportedly included violations of US anti-money laundering and sanctions laws, and failure to report suspicious transactions. As part of the settlement, Zhao will pay $50Mn personally, while Binance will pay a total of $4.3Bn , including a $2.51Bn forfeiture.
Even though Zhao has resigned from his position, he will retain his ownership in Binance. With his substantial net worth estimated at $10.2Bn, his considerable influence in the cryptocurrency sector will likely remain. This turn of events is generally viewed as beneficial for Zhao, particularly given that he was at risk of facing more severe legal accusations. Richard Teng, a long time Binance executive, will take over leadership at Binance. The company acknowledges its responsibility for past compliance violations and looks to move forward under new leadership.
The departure of Zhao as CEO and the substantial financial penalties imposed on Binance mark a significant development in the cryptocurrency industry, which we highlight below, first through the market impacts, and then on the long lasting outcomes of such a development.
Market Impacts
The settlement announcement spurred a wave of liquidations in crypto futures markets. Over $65Mn worth of Bitcoin futures positions were liquidated, as exchanges saw nearly $227Mn in total liquidations across perpetual swap contracts based on data from Coinglass. The majority of these forced sales came from overleveraged longs, accounting for close to 80% of liquidated positions last Wednesday. This represented one of the largest single-day liquidation events so far in 2023.
In tandem with the futures sell-off, the world’s biggest spot exchange Binance saw accelerating client withdrawals in the 24 hours following the settlement reveal. According to on-chain data provider Defillama, net outflows from Binance topped $1Bn as of Wednesday. This pace of withdrawals markedly exceeded recent trends, pointing to skittishness from retail traders concerned about potential solvency issues given the scale of penalties agreed.
Further analysis shows Binance executed a transaction on November 9th to bolster liquidity ahead of the settlement reveal. Specifically, Binance transferred approximately $3.9Bn worth of stablecoins from an internal cold storage wallet into another company-controlled wallet created in August 2022. This receiving wallet "Binance 3" now holds over $3.6Bn in assets, predominantly in Tether’s USDT stablecoin. Tether has stated most of the 88.3 Bn USDT supply circulates on the Tron blockchain.
Source: Tronscan (blockchain explorer)
These cold storage wallets have previously been described by Binance as responsible for safeguarding a majority of corporate assets. Available data confirms Binance currently oversees 12 tagged wallets, including 3 defined as cold storage.
The recent transfer of close to $4 Bn into the “Binance 3” wallet signals Binance maintains sizable reserves exceeding $60Bn even with spiking withdrawal volumes to meet short-term liquidity needs and support partners. As the world's top crypto trading platform, Binance retains the capital strength to address fines and continue operations amid periods of volatility. Its balance sheet depth paired with extensive cold storage holdings should mitigate any lingering solvency concerns given the scale of penalties levied by regulators this week.
Source: @21co (Binance Balance Over Time) Dune dashboard
Analysing on-exchange activity, Binance saw a roughly 10% week-over-week decline in transaction volume according to data from Chainalysis. Binance currently accounts for 42.9% of all CEX transactions, down from its typical 50%+ share. Rival exchange Coinbase absorbed some of this transaction flow, with its portion of CEX volume rising from 26.1% last week to 38.4% post-settlement. So while Binance maintains its clear #1 spot by trading activity, some users migrated transactions to other platforms following the news.
Source: HAYVN Research, Dune analytics
However, on-chain data hints longtime crypto investors viewed the selloff as a buying opportunity. One whale entity known for well-timed BNB accumulation at price lows purchased $646,000 worth of tokens after the settlement drop. This whale has amassed over $4Mn in BNB at an average cost basis of $253 since May 10th this year. Its continued purchases indicate belief from sophisticated traders that both Binance and crypto markets will rebound from this short-term uncertainty.
Source: BSCscan (blockchain explorer)
Conclusion
While the scale of penalties against Binance seems daunting at first glance, this development marks a pivotal moment for greater accountability and maturity in the cryptocurrency industry. Binance's $4.3Bn settlement represents one of the largest anti-money laundering (AML) fines in history. However, investigations and nine-figure fines for AML violations have become relatively commonplace for global financial institutions in recent years.
Major banks like Danske Bank and Credit Suisse faced fines of over $2Bn and $200Mn respectively in just the last year. Domestically, Santander's UK division saw a £108Mn penalty in December 2022 for repeated AML failures. And fellow crypto exchange Bittrex agreed to forfeit over $29Mn to authorities this year as well.
So while the Binance case captured headlines, it reflects a broader crackdown on entities that do not adequately comply with Know Your Customer, transaction monitoring, and reporting requirements. Much like the early days of cryptocurrency when fraud and hacking incidents bred negative perceptions, maturing compliance protocols – even if reactionary and forced via fines – can bolster institutional confidence in crypto's longevity.
In fact, Binance's new CEO Richard Teng has already pledged "a comprehensive review of our legal, compliance and corporate governance frameworks...to put in place preventive measures against criminal behaviour." This shift echoes post-scandal overhauls at legacy institutions, albeit on a compressed timeline versus entrenched banking players.
Just as stock markets endured manipulation scandals and technology companies faced growing pains around data privacy early on, cryptocurrency's path toward mainstream adoption depends on recognising and rectifying past deficiencies, then rebuilding trust. So while painful in the short-term, Binance's record settlement may accelerate cooperation between crypto entities and global watchdogs to align regulatory frameworks. This collaboration can ultimately enhance legitimacy and provide guardrails to prevent further exploitation by bad actors.
If cryptocurrency aims to evolve into a transparent, securely regulated asset class integrating both decentralised and centralised elements, settlements that codify consequences for non-compliance can pave the way for sustainable growth. The precedent set by Binance's agreement with US authorities will likely prompt intensified diligence from players across the still-nascent crypto ecosystem. And much like $100Mn + fines are now relatively commonplace in banking, exponentially greater scrutiny of virtual asset transactions will one day feel equally routine.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.