Binance pleads guilty to money laundering, yet crypto-prices surge – what is going on and will it last
When the US attorney general and the secretary of the Treasury hold a joint news conference to announce criminal charges, you know that matters are serious. When the target involves the world’s largest crypto-exchange, the possible death of an industry might cross an observer’s mind. Binance and its founder/CEO Changpeng Zhao (CZ) were charged with three counts of money-laundering and sanctions evasion. Binance pleaded guilty which resulted in historic settlements with the Justice Department, the Treasury Department and the Commodity Futures Trading Commission, marking the end of years of intense investigations. The legal settlement included a $4.3 billion fine to Binance – one of the largest fines ever leveraged in corporate America – and a $50 million penalty for Zhao. Zhao also had to step down from his CEO position and is facing the prospect of 18 months behind bars.
Mandated government monitors will take the company on a leash for at least the next three to five years. Though Binance was brought to heel, it might be spared the fate of rivals like FTX. Still, it is hard to imagine that it will ever reach its glorious days when it used to process two thirds of all global crypto trades.
The real surprise was not the settlement
Neither the criminal charges nor the settlement came as a surprise. Already back in 2022 I explained in a New York Times interview that Binance was cutting corners and it was only a matter of time when US regulators would clamp down on their operations. A year ago, many saw in Zhao the antidote to FTX’s founder Sam Bankman-Fried (SBF). He kept a low-profile, did not spend millions to court celebrities like Tom Brady and get politicians elected, did not own an $35-million frat house in the Bahamas, and he sported an actually credible claim of humbleness and strategic savvy. Yet industry experts familiar with the US finance system and Binance’s operations could easily see where this was headed to. The real surprise is that the tremendous fine had no negative impact on the crypto-market cap. On the contrary.
Binance’s guilty plea is only one of many earthquakes that have shaken crypto-land recently. About a year ago it had witnessed the dissolution of FTX, one of Binance’s two major rivals. In the meantime, its founder SBF was convicted of fraud and could be sentenced to life in prison.
Money laundering, tax evasion, scammers in shorts – all the things crypto-critics had bemoaned ever since Satoshi had penned his paper have materialized. Crypto scandals are so common that they can – and do – fill entire books. And the failures just keep growing in scale. Yet instead of killing off the industry, the crypto market is now stronger than ever. How can this be explained? Shouldn’t this kind of bad news sink the decentralized ship?
After all, past examples often triggered long and harsh crypto-winters. When Mount Gox, the globally dominant exchange in ancient crypto days, imploded in 2014 it pushed the crypto-world onto the brink of collapse. The fall of the algorithmic stablecoin Terra/Luna made crypto-prices plummet the same way the unravelling of FTX did at the end of last year.
Unlike banking, the crypto-sector knows no too-big-to-fail companies. Companies are neither licensed, nor insured. Exchanges are not bound to any liquidity requirements and no taxpayer dollar will ever be spent to bail out investors. Their link to the off-chain economy is weak. So, the effect of their failure will be contained, yet very serious for the industry itself.
The fact that the Binance settlement defies the patterns of previous crypto-firm failures spectacularly demonstrates that the crypto space has passed a crucial milestone. Its market cap is no longer dependent on individual companies but determined by much more reliable forces.
The future of cryptoassets is written by TradFi rather than crypto exchanges
The Securities and Exchange Commission (SEC) is taking the fight to other exchanges as well. They filed lawsuits against Kraken and Coinbase. The latter is the last of the big three global exchanges still standing. It is unlikely that Coinbase will end up like FTX or Binance. After all, Coinbase is a US-based exchange that was initially designed to follow, rather than circumvent US rules. And it is publicly listed, which means that the transparency is incomparably higher than that of its rivals. And while nobody can tell for certain whether the lawsuit will be successful, it doesn’t really make a difference. The fortunes of the crypto-industry do not depend on Coinbase, nor any other exchange. Ever since the publication of my first book Blockchain Babel I have continuously argued that the future of blockchains (both centralized or decentralized) will be determined by the dominant players in the traditional finance sector and tech giants rather than centralized or decentralized blockchain organizations.
For support of my argument look no further than the development of crypto-prices following the Binance news. The trend was going into one direction only: The bitcoin price surged from close to $38,000 at the time of the settlement to beyond $42,000 yesterday. Even Binance’s native BNB token did not crash but fell by only 12%.
The explanation for that is simple: While exchanges are by far the largest companies in the crypto-ecosystem in terms of revenues and profits, they are very easily dispensable. In fact, as soon as people will be able to buy digital coins at trusted and regulated financial institutions and as soon as they bet their money on rising crypto-value via traditional financial products (e.g. ETFs) they will. There is little reason to stick with exchanges. The prices might be significantly lower in the beginning, but those will converge soon. So why go through the hassle of opening up a new account, passing KYC, and getting familiar with a new interface only to park your money at an exchange that could implode?
The only viable, large-scale alternative to commercial banks will be tech giants. Apple and Google Pay are already striving to become the one-stop shop for your personal finance, so why not invest in crypto-assets there? If Meta is serious about its push into the metaverse, they will have to offer decentralized assets too. And Amazon would also have all the necessary tools and incentives to build up a crypto exchange functionality.
The market optimism is driven by an expected green light the SEC should give to some high-profile Bitcoin ETFs. Asset management giants BlackRock and Fidelity have both sought to get Bitcoin ETFs approved. The SEC has rejected such FTEs in the past, but this time is different. A U.S. federal appeals court recently sided with Grayscale Investments in its effort to launch a spot bitcoin ETF, thereby ruling against the SEC’s cautious stance.
Every exchange failure enhances regulation
Long gone are the days in which individual cases of money laundering and fraud were rubbing off on either blockchain-technology or cryptocurrency as an asset class. Bitcoin and the other blue-chip coins have become mainstream assets. There are more than 400 million crypto-users, comprehensive frameworks like the EU’s MiCa have conferred legitimacy on crypto-assets, and banking incumbents are opening up to them as well.
Scandals could even have a positive long-term effect. With each high-profile case in the crypto-sphere regulators and lawmakers announce harsher rules and controls. Sometimes they even implement them. And in doing so, they step by step breathe more legitimacy into the industry and open the gates for the giants of finance and tech. Retail and institutional investors too appreciate legal certainty. It is an irreversible trend.
NOTE: This article does not impart any financial advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments
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