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

Education

The uncertainity surrounding Binance hasn’t become any clearer inJuly of2024. How much trouble might Binance find itself inand what can weexpect from the world’s most popular exchange? Let’s divein!

The CEO ofBinance HoldingsLimited (aka Binance), the largest cryptocurrency exchange inthe world, pleaded guilty inNovember 2023 and agreed topay $4 billion toresolve the investigation into violations related tothe Bank Secrecy Act (BSA)—i.e., failure toregister asamoney-transmittingbusiness.

How did thishappen? Let’s divein.

Impact onBinance

Despite the settlement allowing Binance tocontinue its operations temporarily, the exchange’s legal challenges remainunresolved. Internal communications from 2018 (just ayear after Binance launched) disclosed that compliance issues were acknowledged early on.

Reduced Market Access

Non-compliance has led toBinance being denied access tomarkets, facing operational restrictions, and encountering reluctance from governments and financial institutions toengage with them ortheirpartners.

What DoThese Troubles Mean toInvestors?

The SEC emphasizes the risks and lack oftransparency associated with theseplatforms. Asaresult, existing customers risk experiencing arange ofadverse outcomes, including but not limited to:

• Increased scrutiny ofoperations

• Potential disruptions inservices

• Withdrawal halt/pause

• Increased KYC requirements tofulfill withdrawal requests

• Potential legal and financial consequences for the exchange significant loss ofliquidity

Main Takeaways for Investors Regarding Binance

Legal Concerns

Anotable observation from recent legal documents isthat Bitcoin was mentioned only six times inthe 136-page document, none ofwhich had negative implications.

Key Issues Investors Should BeAware Of

Serious Legal Concerns:Growing uncertainty about Binance’s compliance has led many investors towithdraw Bitcoin from the exchange while seeking clarity onits legaltroubles.

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

• Fraud

• Wash Trading

• Money Laundering

Expert Insights

InanApril 17th blog post, Swan Lead Analyst Sam Callahan published anin-depth report,Binance: Raising Eyebrows Since 2017, shedding light onlong-standing concerns surrounding Binance’soperations. You can access this detailed analysishere.

Exclusive Report Access:The original report was provided exclusively toSwan Private clientsonApril 14, 2023.

Binance Liquidity Concentration Confirmed byKaiko

Key Findings

According toKaiko’s latestCrypto Liquidity Concentration Report, Binance:

• Market Depth:Accounted for 30.7% ofthe global market depth in2023.

• Trading Volume:Controlled asignificant 64.3% ofglobal crypto tradingvolume.

Insights for Investors

Market Dominance:The report reveals that the eight largest exchanges collectively control 91.7% ofmarket depth and 89.5% oftradingvolume.

Market Impact:Binance’s dominance means changes inits liquidity, regulations, oroperations can significantly impact the broader cryptomarket.

Learn more details intheKaiko Insight Report.

Insight into the Latest Filing

• The SEC’s recent filing raises concerns about the audit ofBinance.US and highlights difficulties inensuring the company was fully collateralized.

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

Wall Street Journal Exposé

• The Wall Street Journal published anexposé over the Christmas 2023 weekend titledThe Crypto Queen Pulling the Strings atBinance, shedding light onYiHe’s significant influence over Binance’s marketing and investmentoperations.

• YiHeisaformer talk show host and Changpeng Zhao’s longtime romanticpartner.

Several Key Executives Have Left Binance in2023

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

2. Sept. 6, 2023: Vladimir Smerkis announces hisdeparture.

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

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

5. Aug. 31, 2023: Leon Foong, head ofAsia-Pacific atBinance, announces his resignation.

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

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

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

9. July 6, 2023: Steve Milton, global vice president ofmarketing and communications atBinance, announces his resignation.

10. July 6, 2023: Matthew Price, senior director ofglobal investigations and intelligence atBinance, announces his resignation.

11. October 19, 2023: Stéphanie Cabossioras stepped down from her position asthe Executive Director ofBinanceFrance.

12. October 19, 2023: Saulius Galatiltishas stepped down aschief executive officer ofBifinity UAB, apayment processor that serves asagateway for fiat transactions bycustomers oftheBinancecryptocurrencyexchange.

Key Developments Surrounding Binance.US Workforce Cuts and Regulatory Issues

Workforce Reductions

September 13, 2023: Binance.US laid off one-third ofits workforce and lost its CEO BrianShroder.

Employee Concerns

• Atasummer meeting after the layoffs, employees voiced their concerns toChangpeng Zhao (CZ). According tomessages reviewed bythe Wall Street Journal, one anonymous employee criticized the lack ofadvance notice and the two-week severance package, asking ifitwas a“respectful” way totreat laid-offemployees.

Regulatory Obstacles

Russian Bank Involvement

• Inlate August, the Wall Street Journal revealed that some Binance customers were involved with sanctioned Russianbanks. Binance has faced scrutiny over potential violations and addressed the issue byfully exiting the Russianmarket.

Discontinuation ofRUB Support

• OnSeptember 27, Binance published ablog post explaining its sale toCommEx and the decision todiscontinue support for the Russian Ruble (RUB).

• Binance denied media claims that ithelped customers transfer funds from sanctioned Russian banks out ofthecountry.

The decision follows the exchange’s denial ofmedia reports, two months ago, suggesting its involvement inassisting customers intransferring funds from sanctioned Russian banks out ofthecountry.

SEC’s Concerns Surrounding Ceffu and Binance’s Operations

Investor Points ofInterest

Ceffu’s Role

• The SEC isscrutinizing Ceffu, aninstitutional crypto custodian and Binancepartner.

• The regulator suspects Ceffu facilitated the transfer ofU.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 toChangpeng Zhao (CZ) inDecember.

• The documents also state that Zhao used Binance USD (BUSD), allocating $183 million toPaxos Trust Company (issuer ofBUSD) toconvert the stablecoin intoUSD.

Implications

Regulatory Scrutiny

• These activities have attracted regulatory attention due topotential financial improprieties, emphasizing the importance ofcompliant fund management practices withinBinance.

Investor Awareness

• Keeping upwith these developments iscrucial for investors tounderstand the evolving landscape ofcrypto regulations and potential risks associated with Binance’s globaloperations.

Learn more about Ceffuhere.

Twitter Allegations and CZ’s Response

Allegations byDylan LeClair

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

CZ’s Response

• CZresponded bystating that “Binance.US has never utilized Ceffu orBinance 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,” aninstitutionalcustodian.

Historical Financial Transactions

Earlier Reports

• InFebruary, Reuters reported that Binance.US transferred $400 million from its platform toMerit Peak Ltd., atrading firm managed byZhao, based onbank records and internalmessages.

Impact onBinance.US Operations

October 16th Announcement

• OnOctober 16th, Binance.US announced that itwould stop supporting USD withdrawals.

Updated Terms

• Find the updated terms ofuse, including the PDF version, here.

Binance’s Shift Away from Bitcoin Dominance

Initial Focus onBitcoin Trading

Initially, Binance had alimited selection oftokens, featuring cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and its native coin, Binance Coin (BNB).

However, itlater gained fame for offering anextensive range ofcryptocurrencies and digitalassets. Binance continues toexpand its token offerings and supports launching new projects through programs like the Launchpadplatform.

Binance’s initial shift away from Bitcoin toamostly altcoin-dependent exchange and business model can beattributed toseveral factors:

• Byexpanding its altcoin offerings, Binance attracted traders interested inabroader range ofcryptocurrencies.

• Altcoins often provide different features, use cases, ortechnologies than Bitcoin, which can appeal totraders seeking varied investment opportunities.

• Binance recognized the growing interest and demand for altcoins among traders and adjusted its business model tocater tothese preferences.

• Binance has actively supported new altcoin projects through Initial Coin Offerings (ICOs) and token launches onitsplatform. ICOs provide the ideal conditions for aCantillon Effect distribution ofnetwork control bythe token team.

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

Initial Focus onBitcoin

Early Days:Binance initially focused onpopular cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and its native Binance Coin (BNB), offering alimitedselection.

Transition toaDiverse Altcoin Portfolio

Expanded Offerings

• Binance gained popularity for listing many cryptocurrencies, evolving its business model tofeature manyaltcoins.

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

Reasons for the Shift

Broader Asset Options

• Byoffering more altcoins, Binance enabled traders todiversify their investments.

Market Demand and Trends

• Responding tothe growing demand for altcoins, Binance tailored its offerings toalign with emerging markettrends.

Innovation and Token Launches

• Binance actively supported new altcoin projects through Initial Coin Offerings (ICOs) and token launches, providing aninnovative platform for networkgrowth.

Competitive Advantage

• Expanding its altcoin offerings gave Binance acompetitive edge, attracting users interested invaried investment opportunities beyondBitcoin.

Supporting New Projects

Initial Coin Offerings (ICOs)

• Binance facilitated ICOs, which enabled altcoin teams todistribute tokens and control thenetwork. Learn more about ICOshere.

Cantillon Effect

• The distribution ofnew tokens often mirrors the Cantillon Effect, where initial participants gain the mostbenefits. Learn more about the Cantillon Effecthere.

Overview ofBinance Launchpad

Crowdfunding Platform

• Binance Launchpad isaBinance-owned crowdfunding platform that helps crypto startups raise funds byoffering their tokens toBinanceusers.

Birth ofthe IEO Model

• Launchpad was the first tointroduce theInitial Exchange Offering(IEO) model, apopular fundraising method many crypto startups use acrossexchanges.

How Binance Launchpad Supports Startups

Global Access

• Startups can leverage Binance’s global user base toreach alarge audience and securefunding.

Secure and Trusted

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

Comprehensive Support

• Launchpad provides startups comprehensive resources, from project assessment totechnical advice and marketingsupport.

The Impact ofIEOs

Efficient Fundraising

• IEOs offer astreamlined fundraising process through the exchange, giving projects immediate access tofunds and participants.

The Launchpad has come under increased scrutiny inrecent 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 ofUnregistered Securities

SEC’s Charges Against Binance

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

• Binance was accused ofmisleading investors byclaiming itrestricted U.S. customers from accessing Binance.com while secretly allowing high-value U.S. customers totrade ontheplatform.

Failure toRestrict U.S. Investors From Accessing Binance.com

Misleading Investors

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

• Binance has anotorious reputation for allowing actors touse its exchange for various money laundering schemes, terrorist financing, and other illicit activities.

• Exchanges must enforce strong KYC and AML measures todeter money laundering, terrorist financing, and illicitactivities.

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

SAFU?

SAFU: Secure Asset Fund for Users

• Binance created the 'Secure Asset Fund for Users' (SAFU) inJuly 2018 toprotect userfunds.

• Binance allocates aportion ofits trading fees tothis fund, which includes BNB, BTC, USDT, and TUSD wallets.

During unexpected maintenance, CZtweeted areassuring message tousers:

Origin ofthe Term

• In2018, aviral YouTube video byBizonacci popularized the phrase “Funds Are Safu” after CZreassured users during unexpected maintenance. This meme evolved into acommunity term meaning user funds are secure

“Not Your Keys, Not Your Coins”

• Despite SAFU, user funds are never completely secure onany exchange because withdrawals can behalted atany time for anyreason. Users are left with norecourse ifthishappens.

NOTE: There isnothing the end user can doonce this happens.

Binance Proof ofReserves and Security Measures

Proof ofReserves

1:1 Asset Backing

• Binance claims its user assets are fully backed ataminimum ratio of1:1.

• However, most ofBinance’s corporate holdings are stored inseparate wallets not included inproof-of-reserves calculations.

Binance Chain Hack

Binance Chain Hack

October 2022 Attack

• InOctober 2022, Binance Chain suffered ahack involving the withdrawal of$2 million BNB, valued at$570million.

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

Importance ofDue Diligence for Investors

Protecting Against Scams

Thorough due diligence helps investors safeguard themselves byproviding insights into aproject’s:

• Legitimacy

• Team

• Technology

• Use case and financial health

Due Diligence Criteria

Comprehensive research and analysis should cover the following:

• Fundamentals:Key financial and marketfactors.

• Technology:Quality and security ofthe technologyinvolved.

• Team:The qualifications and experience ofthe projectteam.

• Market Viability:Demand, growth potential, and competitivelandscape.

• Regulatory Compliance:Adherence torelevant regulations.

Binance’s Legal Battles and Compliance Challenges

Regulatory Challenges

Binance has faced numerous legal issues, including:

• Alleged regulatoryviolations.

• Non-compliance with securitieslaws.

• Challenges adapting toevolving regulatory standards.

Legal Challenges Faced ByBinance inVarious Jurisdictions

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

United States (U.S.)

Regulatory Concerns

• Binance had been operating inalimited capacity inthe U.S. through its subsidiary, Binance.US.

• U.S. regulators have scrutinized Binance’s subsidiary, Binance.US, over compliance issues with local laws, such asregistration requirements and potential securitiesviolations.

• InJune 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.

• OnOctober 8, 2023, Binance tried restoring some local services via apartnership with aregulated entity, Rebuildingsociety.comLtd.

• Aweek later, onOctober 16, Binance stopped onboarding new U.K. users.

China

Initial Ban

• In2017, China’s government banned domestic crypto exchanges, prompting Binance torelocate its headquarters.

• Despite the ban, Binance continues tohandle $90 billion inmonthly transactions involving Chinese traders, accounting for 20% ofglobal volume

Japan

FSA Warning

• InMarch 2018, the Financial Services Agency (FSA) warned Binance ofoperating without proper registration

• Binance plans toobtain alicense tooperate inJapan and comply with local regulations.

Canada

OSC Investigation

• InMarch 2021, the Ontario Securities Commission (OSC) accused Binance ofviolating securities laws byoperating anunregistered trading platform.

India

Government Crackdown

• Inlate December 2023, India began blocking local access tointernational exchanges like Binance, asreported byBloomberg.

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

• OnJanuary 12, 2024, Google removed Binance and other global crypto apps from its Play Store inIndia.

Recent Developments: Key Updates

Prominent Delisting

Monero Delisting

• OnFebruary 6, Binance announced that itwould delist Monero (XMR) from the exchange onFebruary 20, 2024.

CZ’s Guilty Plea

• OnNovember 21, 2023, Changpeng Zhao (CZ) pleaded guilty inU.S. court toviolating the Bank Secrecy Act byfailing toimplement adequate KYC and AML protocols for U.S. customers.

• Aspart ofthe plea deal, heplaced $15 million inatrust account and secured guarantors pledging $250,000 and $100,000. CZisscheduled for sentencing onFebruary 23, 2024.

Fines and Penalties

• Zhao and the DOJ agreed toa$50 million fine without prison timementioned.

• Binance will pay $4.3 billion inpenalties tovarious federal agencies and will undergo oversight from multiple monitors for fiveyears.

Settlement Agreements

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

Leadership Changes and Restrictions

CZ’s Resignation

• Aspart ofthe DOJ settlement, Zhao resigned from Binance and cannot participate inits operations ormanagement for three years following the appointment ofamonitor.

YiHe’s Influence

• YiHe, Zhao’s romantic partner and the mother ofhis three children, isnow the largest Binance shareholder currently working for thecompany.

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

So, isBinance inTrouble?

Even though CZisstepping down, the exchange isnot out ofthe woodsyet. Act accordingly. Get your Bitcoin off ALL exchanges today and consider moving itinto aBitcoin IRA.

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