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LONDON, Nov 24 (Reuters) - Spiralling compliance costs, ongoing legal headaches and a shrinking share of the market: Binance's new chief Richard Teng faces daunting challenges in turning a new leaf for the world's biggest crypto exchange.

Teng was quickly appointed CEO this week after Binance's founder Changpeng Zhao pleaded guilty to breaking U.S. anti-money laundering laws, part of a $4.3 billion deal to resolve a years-long U.S. investigation.

Now Teng must deal with years of intrusive U.S. financial monitoring, an ongoing U.S. Securities and Exchange Commission (SEC) lawsuit and the potential loss of its dominance of the crypto sector, analysts, investors and former regulators said.

Teng faces an especially tough task in transforming the culture of Binance, four of the people said. U.S. Treasury Secretary Janet Yellen said on Tuesday that Binance "turned a blind eye to its legal obligations in the pursuit of profit" as it "allowed money to flow to terrorists, cybercriminals, and child abusers."

Teng, who before working for Binance was a financial regulator, said on social media that he would focus on reassuring users of Binance's "financial strength, security and safety" and collaborate with regulators "to uphold high standards globally."

"Teng is seen as steady hands," said Carol Alexander, professor of finance at the University of Sussex, who has tracked Binance for years. Still, leading a cultural shift at Binance - a firm shaped by Zhao in his own image - would be "hugely difficult," she said. Investors pulled almost $1 billion from Binance in the 24 hours after Zhao's demise, among its biggest daily outflows of the last year. The reaction is a sign of the challenges ahead for Teng, who previously ran Binance's regional markets.

While the U.S. settlement bars Zhao from future involvement in operating or managing Binance, he is still a major shareholder. Yi He, Binance's co-founder and the mother of Zhao's children, remains a top executive at the company. "New page," she posted on Tuesday.

Contacted by Reuters with a summary of this article, Binance did not make Teng available for an interview.

Binance spokesperson Simon Matthews told Reuters that Binance had lacked "compliance controls adequate for the company that it was quickly becoming" and made "misguided decisions" as it grew quickly.

"Richard was hired two years ago to help Binance mature and move past these historical issues," Matthews said, adding that Binance had "worked hard to restructure our organization and personnel and upgrade our systems." The firm has "new leadership" in place with experience in compliance, law enforcement and major corporations, he added.

Zhao's lawyers did not respond to a request for comment.

As part of the resolution, the U.S. authorities will subject Binance to five years of "financial monitorship" overseen by the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN).

FinCEN will keep access to Binance's books, records and systems, "oversee remedial undertakings" needed to address Binance's non-compliance with anti-money laundering and sanctions rules, the Treasury said on Tuesday.

Such steps are unusual, challenging and costly, even for mainstream financial companies with deep experience of dealing with regulators, said lawyers and former regulators.

"It's a real millstone - everything you are doing is subject to scrutiny," said John Reed Stark, a former chief of the SEC's Office of Internet Enforcement.

While the exchange has said it has ramped up compliance spending, Zhao for years sought to shield it from regulators, Reuters reported in a series of articles in 2022.

Still, Binance should be able to cover both additional compliance costs and the U.S. fines, investors have said.

"The fundamentals of our business are VERY strong," Teng posted on social media on Wednesday. "Our capital structure is debt-free, expenses are modest, and, despite the low fees we charge our users, we have robust revenues and profits."

Hired by Zhao as Binance's Singapore chief in 2021, Teng has been CEO of Abu Dhabi Global Market from 2015 to 2021. His previous roles included chief regulatory officer at Singapore Exchange (SGX).

He was promoted to head Binance's regional markets in May and was widely seen as a potential successor to Zhao.

His rise to the top job is for Binance "an opportunity to move past mounting enforcement actions and chart a path towards stability and a fresh beginning," said Rajeev Bamra, head of digital assets strategy at Moody's Investors Service.

Complicating prospects for a clean slate, however, are outstanding legal headaches.

Binance is facing an SEC lawsuit for allegedly operating a "web of deception," including artificially inflating its trading volumes and diverting customer funds. Binance has denied the allegations.

It is also under investigation in France for alleged aggravated money-laundering.

On the business front, too, Binance is under pressure.

For years it dominated the crypto market, but this year has rapidly lost market share. Last month it controlled 32% of crypto spot and 50% of derivatives trading, according to crypto firm CCData, down from 55% and 62% respectively in January.

Fuelling the decline has been an end to Binance's zero-fees transaction promotions, as well as its regulatory problems, analysts said.

Other exchanges, such as Seychelles-registered OKX, have gained market share this year, according to CCData. OKX is the second-largest exchange after Binance by market share.

In the longer term, the exchange may lose further market share because of reduced marketing and business development budgets following the U.S. fines, said Joseph Edwards, head of research at London crypto firm Enigma Securities.

"But that's talking quite far down the line - they are a very strong incumbent overall."

Reporting by Tom Wilson and Elizabeth Howcroft; editing by Elisa Martinuzzi and Louise Heavens

Our Standards: The Thomson Reuters Trust Principles.

Tom covers crypto companies, regulation and markets from London, focusing through 2022 on the Binance crypto exchange. He has worked at Reuters since 2014, with a previous posting to Tokyo where he uncovered abuses in Japans immigration system and won a joint Overseas Press Club award for reporting on the tobacco giant Philip Morris.

Reports on the intersection of finance and technology, including cryptocurrencies, NFTs, virtual worlds and the money driving "Web3".

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Binance CEO Teng braced for uphill battle in post-Zhao era - Reuters

Binance Holdings Limited (Binance), the entity that operates the worlds largest cryptocurrency exchange, Binance.com, pleaded guilty today and has agreed to pay over $4 billion to resolve the Justice Departments investigation into violations related to the Bank Secrecy Act (BSA), failure to register as a money transmitting business, and the International Emergency Economic Powers Act (IEEPA).

Binances founder and chief executive officer (CEO), Changpeng Zhao, a Canadian national, also pleaded guilty to failing to maintain an effective anti-money laundering (AML) program, in violation of the BSA and has resigned as CEO of Binance.

Binances guilty plea is part of coordinated resolutions with the Department of the Treasurys Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) and the U.S. Commodity Futures Trading Commission (CFTC).

Binance became the worlds largest cryptocurrency exchange in part because of the crimes it committed now it is paying one of the largest corporate penalties in U.S. history, said Attorney General Merrick B. Garland. In just the past month, the Justice Department has successfully prosecuted the CEOs of two of the worlds largest cryptocurrency exchanges in two separate criminal cases. The message here should be clear: using new technology to break the law does not make you a disruptor, it makes you a criminal.

Binance turned a blind eye to its legal obligations in the pursuit of profit. Its willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform, said Secretary of the Treasury Janet L. Yellen. Todays historic penalties and monitorship to ensure compliance with U.S. law and regulations mark a milestone for the virtual currency industry. Any institution, wherever located, that wants to reap the benefits of the U.S. financial system must also play by the rules that keep us all safe from terrorists, foreign adversaries, and crime or face the consequences.

A corporate strategy that puts profits over compliance isnt a path to riches; its a path to federal prosecution, said Deputy Attorney General Lisa O. Monaco. Todays charges and guilty pleas combined with a more than $4 billion financial penalty sends an unmistakable message to crypto and defi companies: if you serve U.S. customers, you must obey U.S. law.

Changpeng Zhao made Binance, the company he founded and ran as CEO, into the largest cryptocurrency exchange in the world by targeting U.S. customers, but refused to comply with U.S. law, said Acting Assistant Attorney General Nicole M. Argentieri of the Justice Departments Criminal Division. Binances and Zhaos willful violations of anti-money laundering and sanctions laws threatened the U.S. financial system and our national security, and each of them has now pleaded guilty. Make no mistake: when you place profits over compliance with the law, you will answer for your crimes in the United States.

Binances crimes gave sanctioned customers unfettered access to American capital and financial services, said Assistant Attorney General Matthew G. Olsen of the Justice Departments National Security Division (NSD). This prosecution is a warning that companies that do not build sanctions compliance into their services face serious criminal penalties, as do the executives who lead them.

From the beginning of its existence, Binance and founder Changpeng Zhao chose growth and personal wealth over following financial regulations aimed at stopping the laundering of criminal cash, said Acting U.S. Attorney Tessa M. Gorman for the Western District of Washington. Because Changpeng Zhao knowingly operated a financial platform without basic anti-money laundering safeguards, the company caused illegal transactions between U.S. users and users in sanctioned jurisdictions such as Iran, Cuba, Syria, and Russian-occupied regions of Ukraine transactions for which Binance profited with significant fees.

Binances activities undermined the foundation of safe and sound financial markets by intentionally avoiding basic, fundamental obligations that apply to exchanges, all the while collecting approximately $1.35 billion in trading fees from U.S. customers, said Chairman Rostin Behnam of the Commodity Futures Trading Commission (CFTC). American investors, small and large, have demonstrated eagerness to incorporate digital asset products into their portfolios. It is our duty to ensure that when they do so, the full protections afforded by our regulatory oversight are in place, and that illegal and illicit conduct is swiftly addressed. When, as here, an entity goes even further, deliberately avoiding to employ meaningful access controls, intentionally avoiding knowing customers identities, and actively concealing the presence of U.S. customers on its platforms, there is no question that the CFTC will strike hard and aggressively.

When you put growth above compliance, you end up in hot water, said Chief Jim Lee of the IRS Criminal Investigation (IRS-CI). Our team of investigators uncovered that Binance disregarded anti-money laundering Know Your Customer laws, failed to register as a money transmitter, and willfully violated U.S. sanctions tied to the International Emergency Economic Powers Act. When you do so, your business becomes a playground for bad actors. Hundreds of millions of dollars in illicit proceeds from ransomware variants, darknet transactions, and various internet-related scams moved through Binance in an attempt to evade detection by law enforcement.

According to court documents, Binance admitted to prioritizing growth and profits over compliance with U.S. law. Binance launched in 2017 and focused on attracting high-volume customers, including U.S.-based customers. Binance quickly became the largest cryptocurrency exchange in the world, with the greatest share of its customers coming from the United States. As a result of serving U.S. customers, Binance was required to register with FinCEN as a money services business and to implement an effective AML program that was reasonably designed to prevent Binance from being used to facilitate money laundering. Binance chose not to comply with U.S. law and failed to implement controls and procedures to prevent money laundering. Binance also did not implement controls that would have prevented U.S. customers from conducting transactions with customers in sanctioned jurisdictions, despite knowing that the system it used to match customers for transactions would necessarily cause transactions in violation of IEEPA.

Instead of complying with U.S. law, in 2019, Binance announced that it would block U.S. customers and launched a separate U.S. exchange, Binance.US. Despite this announcement, Binance took steps to maintain a substantial number of U.S. customers. In particular, Binance focused on retaining valuable VIP customers, which were responsible for a large portion of Binances trading volume and revenue. These VIP customers were critical to Binances business because they helped provide the necessary liquidity to facilitate trades of digital assets. For example, Binance executives, including Zhao, made a plan to contact VIP customers and help the VIP register a new account for an offshore entity and transfer holdings to that account. Binance employees also called U.S. VIPs to encourage them to provide information that suggested the customer was not located in the United States.

Binance also did not implement the core components of an effective AML program: Binance did not implement comprehensive know-your-customer (KYC) protocols or systematically monitor transactions, and Binance never filed a suspicious activity report (SAR) with FinCEN. For years, Binance allowed users to open accounts and trade without submitting any identifying information beyond an email address. Binance began requiring all users to provide KYC information in August 2021 but allowed users who had not provided KYC to continue trading on the exchange until May 2022. Between August 2017 and October 2022, U.S. users, including VIPs, conducted trillions of dollars in transactions on the platform, generating over $1.6 billion in profit for Binance.

As Binances internal communications showed, Binances compliance employees recognized that Binance did not have protocols to flag or report transactions for money laundering risks, which employees recognized would attract criminals to the exchange. As one compliance employee wrote, we need a banner is washing drug money too hard these days - come to binance we got cake for you. Due in part to Binances failure to implement an effective AML program, illicit actors used Binances exchange in various ways, including conducting transactions for mixing services that obfuscated the source and ownership of cryptocurrency; transferring illicit proceeds from ransomware variants; and moving proceeds of darknet market transactions, exchange hacks, and various internet-related scams.

Binance also knew that U.S. sanctions laws prohibited U.S. persons including its U.S. customers from trading with its customers subject to U.S. sanctions, including customers in comprehensively sanctioned jurisdictions, such as Iran. Binance knew that it had a significant number of users from comprehensively sanctioned jurisdictions and a substantial number of U.S. users and that its matching engine would necessarily cause U.S. users to transact with users in sanctioned jurisdictions in violation of U.S. law. Nonetheless, Binance did not implement controls that would prevent U.S. users from trading with users in Iran; and, because of this intentional failure, between January 2018 and May 2022, Binance willfully caused over $898 million in trades between U.S. users and users ordinarily resident in Iran.

As part of the plea agreement, Binance has agreed to forfeit $2,510,650,588 and to pay a criminal fine of $1,805,475,575 for a total financial penalty of $4,316,126,163. Binance has also agreed to retain an independent compliance monitor for three years and remediate and enhance their anti-money laundering and sanctions compliance programs. Binance separately has also reached agreements with the CFTC, FinCEN, and OFAC, and the Department will credit approximately $1.8 billion toward those resolutions.

The Department reached its resolution with Binance based on a number of factors, including the nature, seriousness, and pervasiveness of the offense, as a result of which Binance processed billions of dollars of cryptocurrency transactions for U.S. persons and caused U.S. customers to engage in transactions in violation of U.S. sanctions. Binance did not make a timely and voluntary disclosure of wrongdoing, but it received partial credit for its cooperation with the Departments investigation, and it has taken steps to remediate its compliance program. Binance did not receive full credit for its cooperation because it delayed producing relevant evidence, including recorded meetings in which Binance executives discussed U.S. legal requirements. Accordingly, the total criminal penalty reflects a 20% reduction off the bottom of the applicable U.S. sentencing guidelines fine range.

In addition, according to court documents, Zhao, Binances founder, owner, and CEO, admitted that he understood that Binance served U.S. users and was thus required to register with FinCEN and implement an effective AML program. Zhao knew that U.S. users were essential to Binances growth and were a significant source of revenue and knew that an effective AML program would include KYC protocols that would mean that some customers would choose not to use Binance. Zhao told employees it was better to ask for forgiveness than permission, and prioritized Binances growth over compliance with U.S. law. Without an effective AML program, Binance caused transactions between U.S. users and users in jurisdictions subject to U.S. sanctions. These illegal transactions were a clear and foreseeable result of Zhaos decision to prioritize Binances profit and growth over compliance with the BSA.

IRS-CI is investigating the case. The case is being prosecuted by Bank Integrity Unit Deputy Chief and National Cryptocurrency Enforcement Team Deputy Director Kevin Mosley and Trial Attorney Elizabeth Carr of the Criminal Divisions Money Laundering and Asset Recovery Section (MLARS), Trial Attorneys Beau Barnes and Alex Wharton of NSDs Counterintelligence and Export Control Section (CES), and Assistant U.S. Attorney (AUSA) Mike Dion for the Western District of Washington. Trial Attorney Julia Jarrett, formerly of MLARS and currently an AUSA for the District of Oregon, and Trial Attorney Matthew Anzaldi, formerly of CES and currently with NSDs National Security Cyber Section, made substantial contributions to this investigation and prosecution.

MLARSs Bank Integrity Unit investigates and prosecutes banks and other financial institutions, including their officers, managers, and employees, whose actions threaten the integrity of the individual institution or the wider financial system. The Criminal Division has surged resources to the Bank Integrity Unit, which has imposed over $12 billion in penalties on financial institutions for sanctions violations over the last decade. NSDs Counterintelligence and Export Control Section investigates and prosecutes individuals and corporations for violations of export control and sanctions laws, in addition to other national security crimes. NSD continues to expand its corporate enforcement efforts including growing the ranks of prosecutors dedicated to this work and establishing a Chief Counsel and Deputy Chief Counsel for Corporate Enforcement.

Excerpt from:

Binance and CEO Plead Guilty to Federal Charges in $4B Resolution - Department of Justice

Will Coinbase profit from Binance's legal issues? | Credit: Shutterstock

Key Takeaways

A few days following the U.S. Department of Justices (DOJ) declaration of a $4.3 billion fine in a resolution with cryptocurrency exchange Binance, it remains uncertain whether it has significantly impacted the company.

Initially, it appeared that there were no significant outflows, but within a day, the situation underwent a dramatic shift, favoring Coinbase.

Within the initial 12 hours after the announcement, on-chain analytics firm Nansen reported on X that there was no clear indication of a mass exodus of funds.

Nansens report has shown that Binance has previously handled larger volumes of outflow and negative netflow. These events occurred in June 2023 following the SECs lawsuit against Binance, in December 2022 amidst rumors of insolvency, and immediately following the collapse of FTX.

However, the situation changed after another 12 hours had passed, considerably. Data indicated that Binance had experienced $2.2 billion in outflows, suggesting that at least some retail investors were concerned enough to withdraw their coins from the exchange.

Nevertheless, the firm still maintained a substantial asset base of over $58 billion, with stablecoins making up $10 billion of this total.

Moreover, data from CryptoQuant suggests that some of these funds have been flowing out of Binance and making their way onto rival crypto exchange Coinbase. Analysts have observed a movement of funds between the two exchanges, with Coinbases reserves increasing by around 12,000 BTC over the same period that Binances reserves decreased by 5,000 BTC.

Matrixport, a crypto services provider, believes that the acceptance of a plea deal by a former Binance executive could significantly increase the likelihood of a spot Bitcoin ETF being approved by the U.S. Securities and Exchange Commission (SEC).

The firm believes that this outcome would be highly beneficial for the cryptocurrency industry as it would force it to adhere to the same regulatory standards as traditional finance (TradFi) firms.

This, in turn, would make Bitcoin more attractive to institutional investors, who are often hesitant to invest in assets that lack regulatory clarity. Additionally, Matrixport believes that a spot Bitcoin ETF could further solidify Bitcoins position as a safe-haven asset in investors portfolios.

The recent price volatility triggered by the action against Binance and CZ appears to have resulted in significant losses for leverage traders. Coinglass data revealed that in the 12 hours following the announcement of the settlement, $110 million in Bitcoin long positions were liquidated, compared to $37.2 million in short positions.

BNB, which doesnt trade as actively as Bitcoin due to most users staking it, witnessed $3.73 million being liquidated in long positions, compared to $1.61 million in short positions, according to Coinglass. Options volume for BNB has shown a notable increase, surging by 68% to $2.41 million, while options open interest has experienced a 29% surge to reach $3.47 million.

That being said, Coinbase seems to remain resilient, boasting a 200% increase in stock value this year and a market capitalization surpassing $25 billion. Brian Armstrong, the co-founder and CEO, finds satisfaction as two significant competitive threats have faced setbacks.

In a post on the social media platform X, Armstrong acknowledged the challenges faced by Coinbase in keeping pace with faster-moving competitors, emphasizing the difficulty and cost associated with adopting a compliant approach. The recent developments with Binance, as per Armstrong, validate Coinbases commitment to a more rigorous path.

Coinbase has traditionally been regarded as the blue-chip and relatively safe choice for crypto investments. While this approach has resulted in slower growth, the Binance revelations could potentially provide a long-term advantage for Coinbase. The pressure from a larger rival, facing increased scrutiny and regulation, might alleviate concerns and solidify Coinbases position in the market.

These developments suggest that some investors are losing confidence in Binance and are choosing to move their funds to Coinbase, which is perceived as a more stable and established platform. It remains to be seen whether this trend will continue, but it is certainly a situation that Binance will need to monitor closely.

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Binance shakeup, Bitcoin resilience & An AI President? | The Crypto ... - Proactive Investors UK

Binances arguments used in its motion to dismiss a lawsuit from the United States securities regulator relies on an incorrect legal analysis and have no basis in law, the regulator has argued.

In a Nov. 7 court filing the SEC rebuffed Binances earlier bid to toss the regulators suit saying no court has adopted Binances tortured interpretation of the law.

The SEC sued Binancein June alleging it, Binance.US and its founder Changpeng CZ Zhao sold unregistered securities and failed to register as an exchange in the United States.

Binance argued the SEC failed to introduce crypto guidelines, misinterpreted securities laws and applied them to crypto and called the suit an overstep of its authority.

In its latest rebuttal, the SEC claimed Binance never complied with federal securities laws which was a deliberate choice.

It added Binances arguments that compared crypto to supermarket items like oranges [...] are absurd and claimed the crypto exchanges crypto sales are investment contracts under the Howey test.

Related: SEC Inspector General says prohibition on crypto ownership hinders agency hiring

The regulator reiterated its claims the BNB (BNB) initial coin offering violated securities laws and Binance USD (BUSD) along with the yield-bearing staking, Vault and Earn programs are investment contracts.

It also rebuffed Binances argument that the suit violated the major questions doctrine a 2022 U.S. Supreme Court ruling saying Congress doesnt delegate authority to agencies, which other crypto firms have cited in their aim to push back on the SECs claimed authority.

The SEC claimed granting Binances dismissal request would dismantle decades of foundational precedent upon which the nations securities laws operate and in its place would be a rigid framework that upends the broad, flexible regime of the current laws.

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Binance used 'tortured' interpretation of law in bid to toss suit, says SEC - Cointelegraph