5 takeaways from America’s biggest crackdown on crypto in history

New York
CNN
 — 

The US government just sent a clear message to the world of cryptocurrency, a market valued at around $1.4 trillion.

Just as crypto investors were hoping to move on from the historic conviction of Sam Bankman-Fried, the disgraced founder and former CEO of the collapsed FTX crypto exchange, US officials displayed yet another show of force against criminal activity surrounding crypto.

Changpeng Zhao, the billionaire founder of the world’s largest cryptocurrency exchange, Binance, pled guilty on Tuesday to failing to maintain an effective anti-money laundering program, potentially allowing bad actors of all kinds to use the platform to move money.

Here are five takeaways from the largest penalty ever imposed on a money services business in United States history, which just so happens to be a crypto firm:

Zhao and Bankman-Fried were largely seen as the faces of the crypto industry. Now his guilty plea, along with Bankman-Fried’s conviction, means that good actors in the crypto industry will have to make a more convincing case to skeptics to prove the two were exceptions and not the norm.

In light of Tuesday’s news, Brian Armstrong, the CEO of Coinbase, took the opportunity to distinguish the crypto exchange he heads from Binance, which admitted to engaging in anti-money laundering, unlicensed money transmitting and sanctions violations.

“Since the founding of Coinbase back in 2012 we have taken a long-term view. I knew we needed to embrace compliance to become a generational company that stood the test of time,” Armstrong said in a post on X Tuesday afternoon.

“Today’s news reinforces that doing it the hard way was the right decision. We now have an opportunity to start a new chapter for this industry,” he added.

At the same time, the government agencies overseeing crypto regulation and compliance don’t want people to forget Bankman-Fried and Zhao.

“In just the past month, the Justice Department has successfully prosecuted the CEOs of two of the world’s largest cryptocurrency exchanges in two separate criminal cases,” Attorney General Merrick Garland said in a press conference on Tuesday. “The message here should be clear: Using new technology to break the law does not make you a disrupter. It makes you a criminal.”

Cryptocurrencies dipped on Tuesday as investors digested the latest regulatory news out of Washington DC. But by Wednesday, they had made a roaring comeback.

Binance coin initially dropped about 6% after the US Department of Justice announced that it had brought charges against Zhao following a multi-year investigation into Binance. On Wednesday morning, prices had swung 3.5% higher.

Other cryptocurrencies suffered on Tuesday as a larger crackdown by the Feds also roped in crypto firms like Kraken and Tether.

Bitcoin dropped by about $420, 1.1%, to $37,071. Ethereum, meanwhile, fell by $40, or 2%, to $1,997 per coin.

By Wednesday, both bitcoin and ethereum were back up. Bitcoin was up by 2.4%, and ethereum was 5% higher.

So what explains the swings?

Some reports out late on Tuesday suggested that Zhao’s deal with the Department of Justice could allow him to keep the majority of Binance’s shares. That buoyed investors’ hopes. They were also simply eager to see the long investigation finally wrap up.

Overall, it’s been a good year for crypto. Bitcoin is up by about 120% year-to-date. Ethereum has risen nearly 70% over the same period.

The deal Binance reached with the government requires it to cease operating in the US.

On Tuesday evening people based in the US were greeted with a notice on the Binance.com site saying it “is unavailable in your country or region.” But there’s a bit of fine print.

“If you are in the United States or select U.S. territories, Binance.US is a U.S. regulated platform where you can buy, trade, convert, and stake crypto with low fees,” the notice continued.

Binance.US is a subsidiary of Binance that was created in 2019 to “to serve U.S. consumers and adhere to U.S. regulations,” according to a post on the site.

Binance.US is not impacted by Tuesday’s announcement, since it is a registered money services business, Treasury officials said. That means that people in the US could still buy and sell crypto under the Binance roof.

Tuesday’s announcement is a vivid example of the federal government’s tough stance on illicit activities involving crypto. To put it simply, the feds — from the Securities and Exchange Commission to the Treasury Department — aren’t playing around.

Just this week, the SEC sued Kraken, another crypto exchange, alleging that it is operating as an unregistered securities exchange. The agency’s suit also alleges that the exchange comingled customers’ assets with the company’s own holdings.

That is not the first time the SEC has sued Kraken. In fact, it is one of several suits the agency has filed just this year against crypto companies such as Bittrex and Coinbase. The SEC’s suit against Binance for allegedly violating investor-protection laws remains in litigation.

Despite suffering some unfavorable rulings this year, the SEC is expected to continue to aggressively clamp down on crypto firms by taking them to court.

But if Tuesday’s major announcement made anything clear, it is not only the SEC that is trying to keep crypto malfeasance at bay: It is the entire federal government.

That also includes the Justice Department, the Commodity Futures Trading Commission, and the Treasury Department. There is even a National Cryptocurrency Enforcement Team within the Justice Department actively identifying and investigating criminal cases involving digital assets.

“While criminal and civil enforcement actions are subject to different legal standards, this collective effort represents the whole-of-government approach that we are taking to combat corporate crime,” Garland said Tuesday.

US officials already have a nifty toolbox of regulations at their disposal to root out financial crimes, such as laws criminalizing money laundering and bank fraud.

That is precisely how the feds secured the first ever corporate settlement with a crypto exchange.

“You have seen both in our actions today and in prior cases that we will be relentless in using every tool that we currently have to deploy against those who seek to use technologies in a way that abuse those platforms … or [that] don’t prevent the use of those platforms for illicit activities,” Deputy Attorney General Lisa Monaco said during Tuesday’s presser.

But officials suggested that there’s room for new regulation.

Calls for “regulatory clarity” are not new, and new crypto regulations could help both investors and law enforcement officials discern legitimate crypto products from criminal facades.

It is unclear how or when comprehensive crypto regulation would come about. One way is through rulemaking at the agency level either at the SEC or CFTC, which would still be subject to judicial review if challenged in the courts, and another is through Congress.

“I’ve advocated for filling in some of these gaps, specifically around commodity tokens, and I do think if we’re able to do that, obviously with Congress’s help, we can prevent these actions from happening and not have to be here after the fact,” CFTC Chair Rostin Benham said Tuesday.