Sophia’s Thoughts On CZ Stepping Down
Binance CEO Changpeng Zhao — or CZ as he is known in cryptoworld — just stepped down and pleaded guilty to money laundering charges. Meanwhile, Binance settled with the US Department of Justice and the SEC sued Kraken again. What does this all mean?
These are Sophia's Thoughts:
CZ stepped down as part of a guilty plea in the US Department of Justice investigations into his involvement with Binance’s money laundering activities. It is unclear whether CZ will need to serve jail time.
Binance also implicitly admitted guilt, agreeing to settle with different US agencies in exchange for a USD 4 billion fee.
The market initially reacted poorly to the news. Binance Coin lost 11% and dragged the market down by 5%.
But there are some glimmers of hope, with the possibility for Binance to resurface under new leadership and the US Government pursuing additional crypto regulation.
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The crypto market gained 4.6% last week while Bitcoin (BTC) only gained 2.6%. The biggest winner of the week was Render (RNDR), gaining an explosive 47%. This came after the ouster of OpenAI’s CEO Sam Altman, which has provided a lift for blockchain-based AI apps like Render. The biggest loser was 0x Protocol (ZRX). It lost 23%, reverting its rally from last week.
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👑 The King has fallen
Changpeng Zhao (“CZ”) founded Binance in 2017. Within a few months, Binance became the largest crypto exchange in the world. And CZ was the undisputed king of crypto. But that meteoric rise was accompanied by a series of complaints from US regulators. Which brings us to today: CZ has stepped down from his position as the CEO of the world’s largest crypto exchange.
The magnitude of this news can hardly be overstated. Let’s break down what exactly happened. There were several investigations by a series of regulators and prosecutors in the US. They are mostly directed against Binance. But CZ was also targeted because of his role as the CEO and effective owner of the company.
In March, the Commodity Futures Trading Commission (CFTC) filed a civil lawsuit against Binance and CZ. The accusation was that Binance and CZ ran an unregistered derivatives exchange.
In June, the Securities and Exchange Commission (SEC) also sued Binance and CZ for operating an unregistered securities exchange. Going beyond the CFTC lawsuit, the SEC lawsuit also accused Binance and CZ of misusing customer funds.
CZ agreed to step down as Binance CEO as part of his guilty plea in the Department of Justice charges, which took place today in a courtroom in Seattle, Oregon. The plea deal imposes a $50 million criminal fine on CZ. It allows him to retain his shareholdings of Binance. But it prevents CZ from taking on an executive role at Binance during a 3-year period during which the company will be under a compliance monitoring program.
CZ provided the following statement on X, the social media platform formerly known as Twitter
An unresolved piece of the plea deal is a potential jail time for CZ. He faces up to 18 months of prison time based on federal regulations. But it is possible that CZ might get away with probation rather than jail time. That was the outcome in a similar case against the former BitMEX CEO Arthur Hayes. We’ll learn more on the sentencing date, which is set for February 23, 2024.
🌅 The exchange stands
Binance also entered its own deal with the US Justice Department. It agreed to pay $4.3 billion to settle both the criminal case and the CFTC lawsuit against Binance. The Justice Department negotiated the settlement with the CFTC and the Treasury Department.
“This is one of the largest penalties we have ever obtained from a corporate defendant in a criminal matter,”
The deal imposes a requirement for Binance to appoint an independent compliance monitor for three years. The company is required to report the results of the compliance monitoring to the U.S. government. In spite of the imposed fines and the constraints, Binance feels optimistic that the settlement will ultimately benefit the company in the long run.
“We are confident that Binance will emerge as a stronger company as we lay the foundation for the next 50 years,”
And Binance will have to work hard to regain customer trust. The Justice Department accused Binance of enabling illegal transactions for sanctioned Iranian, Russian, and Syrian users. It also accused Binance of failing to prevent transactions with terrorists, including Hamas and Al Qaeda. The market did not react positively to the settlement. Binance Coin (BNB) lost 11% over the course of the day. And Sophia’s estimate of social chatter sentiment for Binance is currently very negative.
Still, the settlement for Binance and CZ does not resolve the SEC case. It remains to be seen how that will culminate.
🐙 Chasing the Kraken
Talking about the SEC, yesterday the agency sued San-Francisco-based Kraken for operating an unregistered securities exchange. But, similar to Binance, the SEC also accused Kraken of commingling customer funds with corporate assets. In that sense, the SEC suit against Kraken is somewhat more serious that the similar suit against Coinbase.
Kraken has vowed to defend itself. Dave Ripley, the CEO of Kraken, suggested that the lawsuit is unjustified because the SEC does not provide a clear pathway for crypto exchanges to register. He indicated that crypto regulation in the US requires action from legislators.
Ripley got support from Senator Cynthia Lummis. The Senator opposes the “regulation by enforcement” approach that the SEC has pursued in the recent past. Together with Senator Kirsten Gillibrand, Senator Lummis co-sponsored new bipartisan crypto regulation that is currently considered in the US Senate.
🤨 Where to next?
News of the Binance settlement and the Kraken lawsuit started dispersing on Monday, November 20. At that point, the market reacted fairly calmly to the developments. Bitcoin (BTC) actually gained 0.24% and the crypto market only lost 0.15% over the course of the day. Investors were hoping for some resolution for Binance: Binance Coin (BNB) gained 2.7% on November 20.
It all changed earlier today when CZ admitted guilt, stepped down, and the scope of the criminal allegations against Binance became clear. By the end of the day, Binance Coin (BNB) lost 11% and the broader crypto market dropped by 5%.
But there are several glimmers of hope. First, the fact that the Department of Justice sought to settle with Binance showcases the systemic importance of the exchange for the overall crypto market. Binance is a key part of the crypto ecosystem and shutting it down would not be easy. By settling, the US Government is effectively enabling the crypto market to progress past the failings of Binance.
In addition, removing CZ as head of Binance makes it possible to bring on board new leadership that can manage the company in a responsible way. Coinbase has led the way in leading a crypto exchange in a compliant way under the leadership of Brian Armstrong. Brian said in a statement today: “I knew we needed to embrace compliance to become a generational company that stood the test of time.”
Of course, Coinbase is also facing lawsuits and investigations in the US. But, for all intents and purposes, Coinbase is compliant and regulated. And Coinbase is working with US legislators to develop additional regulation that could make the crypto market safer.
Sophia seems to agree with some of the more optimistic voices in the market. Today, Sophia’s mood for the crypto market is positive. This is mostly driven by the fact that Sophia perceives fundamentals to be strong now. As of the time of writing this newsletter, Bitcoin (BTC) is up and trading above USD 36,000 once again.
The impact of the events of today will only be understood over time. So stay tuned with Indicia Labs. You can try us out for free for 3 months. Use the offer code SophiasThoughts when you sign up for a 3-month membership.
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