Binance Deals $4 Billion Settlement While Challenging SEC

In a recent development, Binance, the world's largest cryptocurrency exchange, has found itself at the center of a significant legal resolution.

Top officials from the Biden administration convened at the Justice Department to unveil a $4.3 billion settlement with Binance. Notably absent from this gathering was Gary Gensler, the chair of the Securities and Exchange Commission (SEC), who has his own ongoing legal disputes with Binance. The SEC filed a lawsuit against Binance in June, marking a significant regulatory challenge within the cryptocurrency world.

During the months-long negotiations leading to Binance's guilty plea and the settlement of Treasury's civil charges, the SEC was notably absent.

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News 2023-11-23

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This absence highlights the challenges of reaching a settlement with a civil regulatory body that lacks the authority to imprison individuals but possesses the power to disrupt American crypto businesses. Even before the SEC initiated its lawsuit against Changpeng Zhao (founder of Binance), Binance, and its US affiliate, both parties struggled to reach a consensus on settlement terms.

Had Binance agreed to the SEC's terms at that time, it might have been required to cease most of its crypto-trading operations in the US and admit to engaging in manipulative trading through its affiliates. Binance, however, expressed confidence in its case against the SEC and remained committed to vigorously defending its platform.

Before Binance, regulatory authorities urged the company to accept an injunction that would prohibit Binance.US from offering trading services for numerous crypto assets on its platform. Compliance with such an injunction would likely have spelled the end of Binance.US, according to experts.

Another significant hurdle in the legal battle was the SEC's allegation that Binance violated investor-protection laws by selling BNB, its native cryptocurrency token, in 2017. Settling this claim could have rendered it nearly impossible to trade BNB in the US, potentially affecting its global value.

The SEC's litigation efforts took a toll on Binance.US, with its attorneys citing the stress and financial burden caused by the lawsuit. The average monthly value of Binance.US assets plummeted by nearly 90%, and the platform lost nearly half of its monthly users since the SEC initiated legal proceedings, according to Binance.US attorney Matthew Laroche.

In the negotiations, both prosecutors and the Treasury Department held substantial leverage to persuade Binance to settle. The Justice Department even issued a threat to indict Binance and Changpeng Zhao if they refused to plead guilty. Fearing that such an indictment could prompt a mass withdrawal of customer assets and potentially cripple the business, Binance decided to explore a settlement.

The Treasury Department also raised the stakes by considering naming Binance as a primary money-laundering concern. This designation would effectively cut off Binance from the US financial system, making it impossible for customers to convert their crypto assets into dollars.

In contrast, Binance and its affiliates felt more confident about confronting the SEC in court. Their confidence stemmed from the belief that the SEC's case hinged on categorizing cryptocurrencies as securities. If a court were to rule otherwise, the foundation of the SEC's case would crumble.

Lee Reiners, a lecturing fellow in economics at Duke University, noted, “They have more of a chance prevailing in court against the SEC than other agencies. They also probably don't want to settle because the industry is waging a holy battle against the SEC, and they want to do their part.”

Binance's guilty plea and Changpeng Zhao's agreement to step down as its chief executive paved the way for the company to continue its operations, even in the US. The guilty plea entails Binance implementing robust anti-money laundering and sanctions compliance programs, overseen by a court-appointed monitor. Binance aims to satisfy the monitor while retaining its valuable customers, ensuring its continued viability.

Stuart Alderoty, chief legal officer of Ripple, a digital-asset company that recently experienced success in litigation against the securities regulator, commented on the situation, stating, “It's not a resolution that is guaranteed to kill.”

Additionally, as part of the settlement reached last month, Binance resolved a separate legal dispute with the Commodity Futures Trading Commission (CFTC). The CFTC had sued Binance earlier in the year, alleging that the exchange offered risky crypto derivatives to American users without the required licensing and protections.

While the CFTC traditionally played a secondary role compared to the SEC in crypto regulation, its chair, Rostin Behnam, shared the stage with Attorney General Merrick Garland and Treasury Secretary Janet Yellen when announcing the $4.3 billion deal with Binance on November 21. The CFTC is set to receive approximately $950 million from the settlement.

Behnam's prominent role in the announcement highlighted the CFTC's growing influence in the digital asset civil enforcement space. This development marked a significant moment as the SEC, led by Gary Gensler, has initiated numerous crypto enforcement actions and filed lawsuits against major crypto exchanges, including Coinbase and Kraken.

In summary, Binance's journey through the legal landscape has been marked by a complex battle with the SEC and a challenging negotiation process. While the guilty plea and settlement have provided a path for Binance to continue its operations, the crypto industry's broader struggle against regulatory authorities continues.

Bottom Line

Binance, the world's largest cryptocurrency exchange, has settled a $4.3 billion legal dispute with the US government while continuing its fight against the Securities and Exchange Commission (SEC). The settlement, which includes a guilty plea and regulatory compliance measures, allows Binance to navigate the ever-evolving cryptocurrency regulatory landscape. However, the crypto industry's broader battle against regulatory authorities persists, highlighting the ongoing challenges and uncertainties facing the cryptocurrency market.