The Breakdown - CZ Guilty, Binance Settles Criminal Charges with the US Gov't

Episode Date: November 23, 2023

A major and dramatic conclusion to the Binance story. CZ is OUT and has pleaded guilty to criminal charges. Binance itself will face a $4.3B fine. BUT...it lives to fight another day. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Wednesday, November 22nd, and today, of course, we are talking about CZ and Binance. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, massive news, of course, to close out the holiday week. I alluded to it yesterday, but now we have the full story. If somehow you have missed this, CZ is out at Binance and has pleaded guilty to criminal charges.

So let's talk about what this means, whether it's good for Binance, whether it's good for the crypto industry, just what the heck it all means, really. Yesterday afternoon, U.S. authorities announced a settlement with Binance and its CEO, CZ on criminal charges and some civil matters. Binance has agreed to pay $4.3 billion in fines after pleading guilty. to violations of the Bank Secrecy Act, failing to register as a money transmitter and violating the International Emergency Economic Powers Act. Put more simply, the most serious charges relate to sanctions violations, facilitating money laundering, and failure to report suspicious

activity. In addition, Chang Peng Xiao, better known as CZ, has agreed to step down as Binance CEO. He pleaded guilty to criminal charges in a Seattle federal court yesterday and can serve up to 18 months in prison once sentenced. Now, this is one of the largest criminal settlements with the corporation in U.S. history and involved record-breaking fines from a multiple, multitude of prosecuting agencies. In case you needed a sense of how big a deal this was, the settlement was announced during a press conference featuring Attorney General Merrick Garland, Assistant Attorney General Nicole Argenteri, U.S. Treasury Secretary Janet Yellen, and CFTC Chair Rosten Benham. Garland argued that Binance had facilitated over 900 million in transactions

between U.S. and Iranian users in violations of sanctions. In addition, he said that Binance had facilitated transactions between U.S. users and entities in Syria, as well as Russian-occupied Ukrainian regions. Garland asserted that, quote, its platform accommodated criminals across the world who used Binance to move their stolen funds and other criminal proceeds. Binance prioritized its profits over the safety of the American people. Garland delivered his bottom line with a stern warning to the crypto industry, stating that, the message here should be clear. Using new technology to break the law does not make you a disruptor. It makes you a criminal. This Justice Department has no tolerance for crimes that threaten our economic institutions and undermine public trust and fairness of those institutions.

Yellen reinforced that this was a statement prosecution intended to bring the crypto industry to heal. She said, We are also sending a message to the virtual currency industry more broadly today and for the future. If virtual currency exchanges and financial technology firms wish to realize the tremendous benefits of being a part of the U.S. financial system, they must play by the rules. If they do not, the U.S. government will take action. Benham announced that the CFTC had resolved its civil complaint against Binance and its executives as part of the broader settlement.

He said, Binance and its leaders sought to dupe and indoctrinate their employees and customers, building a cult-like following premise on circumventing their own compliance controls to maximize corporate profits above all else. Now, the absence of SEC Chair Gary Gensler was notable. Presumably, his agency's lawsuit against Binance will remain ongoing. Now, across the country in a Seattle district court, CZ appeared ready to face the music on criminal charges.

Appearing in person, he told the judge, I want to close the issue, so I want to take responsibility and close this chapter in my life. CZ explained that he viewed his UAE citizenship, as an honor and did not want to use it as protection. The judge found this argument compelling, stating that, I think that your actions maybe speak louder than the worries in the sense that you had no obligation to come to the country. You did. And as you said, your intent is you would like to resolve the case, not run. An order was made allowing CZ to continue to reside in the UAE pending a sentencing hearing which is expected in February. Later in the evening, he was released on a $175 million

bond. CZ's plea agreement contained a waiver of his right to appeal if his prison sentence is 18 months or less, which is in line with federal sentencing guidelines on the charges. Additionally, as part of the settlement, CZ has agreed to step away from managing Binance for three years. Richard Tang, the former head of regional markets, has been named as his successor as CEO. C.Z will retain, however, his stake in the company. In a Twitter thread, CZ expanded on the situation stating that, today I stepped down as CEO of Binance. Admittedly, it was not easy to let go emotionally, but I know it is the right thing to do. I made mistakes and I must take responsibility. This is best for our community, for Binance, and for myself.

Binance is no longer a baby. It is time for me to let it walk and run. I know Binance will continue to grow and excel with the deep bench it has. He also highlighted that after negotiating the charges across multiple agencies included no allegations that Binance misappropriated user funds or engaged in any market manipulation. Now, according to the early reporting, the DOJ had been concerned about the second order effects of the prosecution. Sources say they were careful not to cause Binance to collapse triggering broader problems throughout the crypto markets. Alongside the record $4.3 billion fine, Binance has agreed to some of the most onerous monitoring requirements in the history of financial crime. The monitorship will be overseen by the

Treasury's FinC but will also ensure compliance by undertakings given to OFAC and the CFTC. This monitorship will last for five years. Its stated objective is to ensure that the exchange no longer services U.S. customers and that illicit activity ceases on the platform. During this period, the Treasury states it will, quote, retain access to books, records, and systems of finance through a monitor. Now, the plea agreement with the DOJ also includes three years of monitoring. And while it's not clear how focused the monitorship will be on uncovering evidence of other crimes throughout the crypto ecosystem, it's not hard to imagine some questionable industry figures are concerned about Binance's books being open to the U.S. government.

Yellen stated that one of the first orders of business for the monitor will be directing Binance staff to pour over transactions and retroactively file suspicious activity reports. She claimed that there were more than 1.5 million transactions that would qualify. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if?

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from the worst case scenario. The exchange hasn't been shut down. We didn't wake up yesterday to see the Binance domain seized by the FBI as we have in some other cases. There was no international manhunt for CZ. He appeared voluntarily in court after almost a year of negotiations. Fundamentally, Binance was treated as a deeply noncompliant financial institution rather than an organized crime entity. CZ was treated like a cooperating white collar criminal rather than a mob boss. There seemed to be a recognition throughout the process that the crypto industry is fundamentally legitimate, if still rife with bad actors. And given that Binance now serves 150 million users worldwide and employs thousands of people, this seems appropriate. The exchange reflected on

their situation in an official statement. They claim that the company intends to emerge stronger as it lays the quote foundation for the next 50 years. In an internal memo, CZ said to his staff, Binance will be fine. I will have to deal with some pain, but we'll survive. We will get through, although with some changes in structure. It might not be a bad thing when we look back in a few years' time. I needed a break anyway, and now I got it, while you guys must continue to work hard and not complain about me being lazy. In some ways, the fate of finance is now in the hands of its users. On-chain analysts have been closely monitoring outflows since the settlement was announced. Throughout Tuesday, there were 2.6 billion in digital asset outflows. Strong inflows meant that the exchange closed the day

servicing around $820 million. We have no way of knowing how many Fiat withdrawals are being demanded, But so far, this looks similar to other runs on finance deposits over the past year. According to their last monthly proof of reserves, Binance held over 65 billion in digital assets. There are no concrete signs that the exchange is dealing with anything more serious than delays in servicing heavy withdrawals. Of course, none of that is any advice to keep working with finance or keep your assets on Binance. I'm simply pointing out that it's not nearly the situation that some might have imagined. Now, the overwhelming sentiment on crypto Twitter is that this could have been so much worse for Binance. Bitcoin Magazine CEO David Bailey said,

If all they got CZ on is money laundering and sanctions violations, then the Binance Bears were wrong, needs to be said. Nick Carter responded, yep, insolvency was what they were worried about. Kobe tweeted, when I regrettably publicly predicted criminal charges for CZ at the start of the year and the whole internet shouted at me, I decided I would stop being an internet poster. As CZ pleads guilty to criminal charges, I only find myself happy with the outcome for Binance and CZ. It could have been much worse. I think it's a great outcome for Binance users, for finance for CZ, and the removal of overhang in crypto. CZ made mistakes. but built something gigantic in just a few years.

Pintoshi tweeted, CZ Gone in Billions and Fines was the most obvious outcome that could have come to. In the end, the best choice for them too. Now this will finally be out of the way and a resolution to an event that has been a cloud over our heads. Lawyer Bill Hughes wrote, If I was him facing the facts they were alleging,

I'd take that deal in a heartbeat and hope they didn't change their minds about it after the fact. And I think this says a lot more about how big Binance has gotten and how much its implosion would affect millions of people's lives around the world as much as it does anything else. Once you are seen as systemically important, the rules start to change. Now, what about whether it's good for the industry?

I did a poll on Twitter, highly scientific, I know. And up more than 1,300 people about 73% said it was good versus 27% who said it was bad. Others explored this same theme. Arthur, the founder of Defiance Capital, wrote, Very bullish outcome, actually, this removal of one of the biggest overhangs for the industry, and I consider this an orderly resolution. Ryan Selkis from Masari wrote, Binance De-risking is one of the biggest catalysts we could have in crypto.

investor Adam Cochran said, with this chapter closed, 2024 will be a face-ripper. We've got some things to improve as an industry, but the worst stuff is out of the way. We're on our way to being global liquidity assets and have a bright future ahead. I'm hanging up my Binance Fudd hat now and hope the new executive team cleans up house and joins us as we print good green candles into the future. David Hoffman from Bankless said, a DOJ settlement with Binance is hugely bullish. Binance takes a hit, but gains U.S. approval and regulatory clarity moving forward. The whole industry gets further legitimized. Finally, there was John Newman who said, of CZ signals the beginning of a new era and the conclusive end to crypto's wild west days.

CZ did what innovators have always done, pumped up a legal industry by exploiting legal gray areas until forced to stop. Now, a few other details that are worth pulling out from all of this. One had to do with the U.S. seeming to talk a bit about defy when it didn't really need to. Assistant Attorney General Argentieri signaled that the DOJ would continue to prosecute noncompliance within the industry, stating that authorities had, quote, sent an unmistakable message to crypto and defy companies. If you serve U.S. customers, customers you bust obey U.S. law. Many found the reference to defy compliance ominous, considering that defy was not an issue in the Binance prosecution. Hottel Magoo writes,

message coming from the DOJ news conference is that Defy is about to get bent over. Avi Feldman, the head of digital asset trading at Golden Tree said, they're telling you what's coming next. Crypto lawyer Orlando Cosme said 100%. She really emphasized defy and it came out of nowhere. Nothing related to Defy has been discussed. Now, one of the most common takes was that the resolution of Binance's legal issues clears the way for Bitcoin ETF approvals. One could make a fairly strong argument that most of the concerns about market manipulation and elicit activities using Bitcoin are sufficiently addressed by yesterday's settlement. Nick Carter again said, cleared for takeoff. EC always cared about manipulation in the

spot markets. Binance dominated spot. Hopefully this is another feather in the crypto markets cap. Dylan Leclair said, D.OJ enforcement before the ETF rollout was an obvious outcome. If CZ didn't agree to step down, it would have been much more ugly. Finally, Alex Kruger said, Binance uncertainty out of the way, its activities will now be monitored by an independent compliance monitor. That equals much higher ETF approval odds, waiting for the market to agree with me that this is actually bullish. Now, what about little old me? Well, I am firmly in the camp of this being a net positive for crypto. Like, almost unreservedly so. Had this been before Sam and FTX, maybe we would have been shocked. But the allegations are nothing compared to

that. There's no outright fraud allegations. There's no criminal mastermind allegations. there's just basically the non-caring when it comes to KYC and Bank Secrecy Act norms. Now, that's a big deal, especially in a world of terrorist financing and yada, yada, yada, but it's a very different deal as my point. Seasy leaving is a dramatic step, but it makes a sharp break with the past. We now have the entire contingent, basically, of leaders of the last bull run, who are either behind bars or facing charges, and in any case, just out of the way and ready to let the rest of the industry move on.

Ever since FTX happened, this has been the big dramatic overhang in the industry. It was the thing that was dangling over our heads, ready to crush us at any time, but now it's not. Of course, I wish a newly compliant finance nothing but the best of luck going forward. But even if it doesn't feel like it or even if it's a weird thing to say, this was a very good day for crypto. Anyways, friends, that is going to wrap up this episode, and that is going to wrap up my coverage for this Thanksgiving week. I hope you are heading to a wonderful holiday celebration, or at least one filled with good food. I will catch you back here on Monday. Until next time, be safe and take care of each other.

Peace.