Binance could get a record fine from the man... to whom it offered a job

The last few weeks have not been kind to the leading cryptocurrency exchange, which is Binance and its company operating in the United States - Binance US. The stock exchange has more and more problems with financial supervision in the US, which, unfortunately, may also affect its global business and the outflow of clients from around the world. On Sunday, a journalistic investigation came to light, suggesting that Binance US was de facto fully dependent on the Binance exchange, which may result in a powerful financial penalty for which the exchange... is already preparing.

Black clouds over Binance

According to a Wall Street journalistic investigation Journal, the largest cryptocurrency exchange, which is Binance, created the Binance US platform from scratch, which served clients on the American market, feigning its independence and thus wanting to avoid problems with the effects of American regulations that could affect Binance's global business. WSJ journalists gained access to internal conversations of Binance employees on Telegram, and also received a copy of a presentation that assumed various strategies for circumventing US regulations by the exchange.

The collected materials show that Binance shared some employees with Binance US for a long time, also maintaining financial ties. In addition, the WSJ article shows that the global branch of the Binance exchange had access to the database of users of the Binance US platform, which would be a significant violation of US regulations. This is important not only in the context of the growing image problems of the world's largest exchange in terms of volume, but also the SEC's ongoing since the beginning of last year proceedings regarding the linking of Binance US with two companies that were market makers for the exchange, while belonging to Changpeng Zhao, the president and founder of Binance.

Moreover, since December last year, the US Department of Justice proceedings against Binance US for a potential violation of US AML (anti-money laundering) regulations have been pending. Last month, Patrick Hillmann, director of strategy at Binance, admitted that the exchange expects significant financial penalties from US regulators, preparing financial reserves for this purpose.

A few days ago, one of the SEC representatives stated that, according to the Commission, Binance US is operating as an unregistered stock exchange, which is a violation of US law.

Former and future president of financial supervision as an advisor?

An interesting plot from a Wall Street journalistic investigation The Journal is an alleged attempt by Binance US to hire Gary Gensler as an advisor on financial regulations. Gensler, as the former head of the CFTC (in 2009-2014), i.e. the American supervision of derivatives, was also intended to bring Binance US closer to the environment of American officials responsible for the supervision of cryptocurrency exchanges in the USA.

Gensler is currently the chairman of the American Securities and Exchange Commission (SEC), but in 2018-2021 he worked as an academic lecturer at the Massachusetts Institute of Technology. And it was then, at the turn of 2018 and 2019, that Ella Zhang (head of Binance Venture Capital) and Harry Zhou (founder of Koi Trading, which received funding from Binance) met with Gensler twice, offering him the role of advisor at Binance US. The former president of the CFTC did not accept this offer, which was not the only one - at that time, various cryptocurrency exchanges operating in the USA were to address him with similar proposals.

Harry Zhou would later write in an internal chat that while Gensler "wasn't interested in being an advisor, he was quite effusive when it came to sharing tips to help with licensing."

Gary Gensler has been the head of the SEC since April 2021, and less than a year later, in February 2022, the Commission led by him initiated proceedings against Binance US. It was about business relations with two companies that are market makers for the American platform - Sigma Chain and Merit peak. Both were directly controlled by Changpeng Zhao, president of Binance, which, according to the SEC, could violate competition rules and act to the detriment of market participants.

The case did not get much publicity at the time. Also interesting was the comment of the Binance US press officer , who did not age very well. She then stated that the use of market makers who are somehow related by capital to the exchange itself is a "market standard", giving as an example... the FTX exchange and its market maker Alameda research. Both companies filed for bankruptcy in November last year after it emerged that they had been involved in a series of irregularities that left several billion dollars of customers' accounts missing from the exchange's accounts.

Unsinkable Binance is history

Binance exchange has long been positioned as a role model among cryptocurrency exchanges. Existing since the second half of 2017, the platform achieved spectacular success, becoming the leading crypto exchange in terms of trading volume in the first few months of operation. Until late last year, Binance was considered "too big to fail." Image problems began after the high-profile bankruptcy of the FTX exchange. Shortly after, in November last year, Binance released a Proof of Reserves report , which was supposed to confirm that the exchange has full coverage of the funds that its clients hold on the platform and that it will not share the fate of FTX. In late December, however, it came to light that the Binance report did not confirm this at all, which led to massive withdrawals of customer funds from the exchange. However, it must be admitted that Binance had no problems with the execution of withdrawal orders even on such a large scale - within a week, customers withdrew funds worth over $3.5 billion from Binance, and its president Changpeng Zhao rightly noted that such a cyclical "stress test" would be useful for any exchange.

Binance's panic and image problems resulted in an over 25% drop in the market capitalization of the flagship stable-coin of the Binance USD exchange, which clearly shows that it has lost a large part of its previous trust. However, this is not the end of the problems, because in mid-February the SEC announced that it would take legal action regarding Binance USD, which - according to the regulator - is an unregistered security, which violates the "collective interests of investors from the United States". In addition, the New York Department of Financial Services (NYDFS) initiated proceedings against Paxos Trust, which is the issuer of BUSD, while prohibiting it from releasing new units of the token Binance USD to the market. As if that wasn't enough, last week the Coinbase exchange announced that on March 13, it will remove stablecoin Binance USD from all its trading platforms, justifying it by the fact that BUSD no longer meets the stringent conditions necessary for the instrument to be listed on the platform. This was another image blow for Binance, which in itself resulted in BUSD capitalization already falling by 55% from its peak in mid-November last year.