Binance’s Busy Day, Kraken’s Second SEC Fight

Binance
is
paying
one
of
the
largest
fines
in
corporate
history
to
the
U.S.
Department
of
Justice,
while
its
founder
and
CEO,
Changpeng
“CZ”
Zhao,
stepped
down
from
his
role
running
the
platform
as
part
of
a
settlement
with
multiple
federal
agencies.
Meanwhile,
Kraken
is
facing
a
lawsuit
from
the
U.S.
Securities
and
Exchange
Commission
that
echoes
the
SEC’s
previous
wave
of
suits.

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Binance
settled
charges
with
multiple
U.S.
agencies
(with
one
major
exception),
ending
one
of
the
most
highly
anticipated
regulatory
actions
in
crypto.

Binance
is
the
world’s
largest
crypto
exchange
by
volume,
and
just
agreed
to
pay
what
federal
officials
are
describing
as
some
of
the
nation’s
largest
fines.

Binance
and
Changpeng
“CZ”
Zhao
settled
with
multiple
federal
agencies
on
Tuesday,
agreeing
to
pay
billions
of
dollars
in
a
deal
that
will
also
see
Zhao
face
potential
prison
time,
Binance
make
a
“complete
exit”
from
the
U.S.
and
agree
to
strict
oversight
from
monitors
over
the
next
several
years.

If
you
missed
Tuesday’s
regulatory
extravaganza:

If
you
noticed
the
numbers
don’t
add
up,
you’re
right.
It’s
a
confusing
mess,
largely
because
the
amounts
overlap
with
each
other
and
involve
some
financial
punishments
that
are
put
off
unless
the
company
strays
again.
An
actual
total
of
$4.3
billion
will
move
from
Binance
to
U.S.
government
coffers,
officials
said.
FinCEN
is
collecting
$780
million.
Another
$150
million
is
a
suspended
penalty,
while
$2.47
billion
will
be
credited
to
the
DOJ
and
CFTC.
OFAC
will
collect
another
$70
million
and
credit
another
$898
million
to
the
DOJ.
CoinDesk’s
Jesse
Hamilton
checked
and
the
CFTC
is
for
sure
getting
the
$1.35
million
fine.

So
in
total:

“One
of
the
things
that
Treasury
works
hard
in
collaboration
with
the
Justice
Department
on
is
that
a
substantial
amount
of
this
penalty
will
go
to
the
victims
of
state-sponsored
terrorism
in
a
fund
that
supports
payments
to
those
families
and
individuals,”
a
senior
Treasury
official
said.

Binance’s
role
as
a
major
crypto
exchange
that
operated
secretively
within
the
U.S.
is
maybe
the
bigger
story.
The
exchange
targeted
“VIP
users”
in
the
U.S.
to
drive
its
growth
in
the
early
days,
court
filings
said.
Zhao
knew
about
this,
and
knew
that
somewhere
around
one
third
of
his
platform’s
users
were
from
the
U.S.,
and
spent
time
figuring
out
how
to
conceal
that
these
users
were
on
the
platform
instead
of
removing
them.

Moreover,
the
exchange
had
a
lot
of
users
from
sanctioned
locations,
the
DOJ
alleged,
citing
Binance’s
discovery
of
“600
‘verified
level
2’
users
from
Iran”
in
November
2019
as
just
one
example.
Nearly
$1
billion
in
trades
between
U.S.
users
and
users
in
sanctioned
nations
occurred
on
Binance’s
platform.

Many
of
the
allegations
are
repeats
or
tied
to
what
we
saw
in
the
CFTC
lawsuit
from
March
–
that
the
exchange
knowingly
and
deliberately
allowed
U.S.
persons
to
trade
on
its
platform
without
conducting
know-your-customer
or
anti-money
laundering
checks,
and
without
registering
properly.
The
exchange
allowed
U.S.
customers
to
trade
against
customers
from
sanctioned
nations,
which
is
pretty
obviously
illegal.

“The
Justice
Department
is
also
imposing
a
monitorship,
as
well
as
reporting
requirements
on
Binance
as
part
of
today’s
resolution,”
Attorney
General
Merrick
Garland
said.
“Moving
forward,
Binance
must
file
the
suspicious
activity
reports
that
were
required
by
law.
The
company
is
required
to
review
past
transactions
and
report
suspicious
activity
to
federal
authorities.
This
will
advance
our
criminal
investigations
into
malicious
cyber
activity
and
terrorism
fundraising,
including
the
use
of
cryptocurrency
exchanges
to
support
groups
such
as
Hamas.”

The
DOJ
monitor
will
be
in
place
for
three
years.
FinCEN
is
also
appointing
a
monitor
who
will
be
in
place
for
five
years,
and
who
will
be
granted
access
to
all
of
Binance’s
books
and
records.

This
seems
to
go
well
beyond
just
U.S.
users,
and
I
imagine
there
are
regulators
around
the
world
who
may
be
interested
in
what
exactly
the
U.S.
finds
in
those
past
transactions.

There
was
one
notable
absence
on
Tuesday:
Securities
and
Exchange
Commission
Chair
Gary
Gensler
was
not
among
the
federal
officials
announcing
settlements
with
the
exchange.

There’s
an
easy
answer
to
why
this
may
have
been
the
case:
The
SEC
is
likely
looking
for
court
wins
it
can
point
to
as
part
of
its
ongoing
effort
to
treat
crypto
exchanges
similarly
to
U.S.
stock
exchange
systems.
The
other
agencies
secured
wins
and
massive
penalties,
but
most
of
those
allegations
were
basically
the
same:
Binance
offered
U.S.
people
access
to
products
and
services
without
following
the
law.

We’ll
get
into
this
more
below,
but
the
SEC
is
currently
on
a
mission
to
have
crypto
trading
platforms
divide
up
their
exchange,
clearinghouse
and
broker/dealer
functions,
like
how
stock
trading
works.
Binance
(and
more

Binance.US
than

Binance.com)
is
one
of
those
companies
that
doesn’t
treat
these
functions
differently.

For
more
on
Tuesday’s
actions,
read
our
coverage.

On
first
blush,
this

suit
sounds
really
familiar.

Many
of
the
arguments
tread
familiar
ground.
Kraken
is
operating
an
unregistered
securities
broker,
clearinghouse
and
exchange,
the
regulator
alleged,
offering
the
U.S.
investing
public
access
to
similarly
unregistered
securities
without
making
full
disclosures
to
that
public.
We’ve
seen
this
a
few
times
before.
The
SEC
has
secured
two
settlements
(which
aren’t
nothing,
legal
precedent-wise,
but
which
also
aren’t
really
a
whole
lot)
and
sued
a
few
other
exchanges
which
are
currently
fighting.

“Without
registering
with
the
SEC
in
any
capacity,
Kraken
has
simultaneously
acted
as
a
broker,
dealer,
exchange,
and
clearing
agency
with
respect
to
these
crypto
asset
securities.
In
doing
so,
Kraken
has
created
risk
for
investors
and
taken
in
billions
of
dollars
in
fees
and
trading
revenue
from
investors
without
adhering
to
or
even
recognizing
the
requirements
of
the
U.S.
securities
laws
that
are
designed
to
protect
investors,”
the
suit
alleged.

Unlike
the
Coinbase
lawsuit,
but
similarly
to
the
Binance
and

Binance.US
suit,
the
SEC
is
alleging
commingling
of
customer
and
corporate
funds,
as
well
as
poor
controls
and
recordkeeping
–
things
“that
would
also
be
prohibited
at
any
properly
registered
securities
intermediary,”
per
the
filing.

In
a
blog
post,
Kraken
made
the
argument
that
the
SEC
hadn’t
alleged
any
customer
funds
were
lost
or
that
any
customers
were
harmed.
This
is
a
similar
argument
to
what
Binance
argued
in
its
early
defenses
to
the
SEC
lawsuit
against
it.

It’s
unclear
how
much
this
will
actually
matter
though.
As
Judge
Lewis
Kaplan
said
during
Sam
Bankman-Fried’s
criminal
trial,
the
issue
isn’t
whether
customers
can
or
will
be
made
whole,
it’s
that
the
funds
were
taken
in
the
first
place.

“The
crime
charged
is
that
Bankman-Fried
took
the
money
…
what
he
did
with
it
afterward
doesn’t
matter,”
he
said
last
month.

On
the
other
hand,
Judge
Amy
Berman
Jackson,
who’s
overseeing
the
Binance
case,
was
visibly
frustrated
when
she
was
unable
to
get
a
clear
answer
to
the
question
of
whether
Binance
had
moved
customer
assets
overseas.

There’s
some
important
differences
–
Jackson
was
in
a
hearing
where
the
SEC
sought
a
temporary
restraining
order,
civil
versus
criminal,
etc.
–
but
if
this
case
does
proceed
to
a
trial,
it
is
an
important
distinction
that’s
likely
to
come
up.

The
other
interesting
detail
from
Monday’s
Kraken
suit,
which
CoinDesk’s
Danny
Nelson
pointed
out,
is
the
SEC
detailed
how
Kraken,
specifically,
promoted
the
various
cryptocurrencies
the
regulator
alleges
are
unregistered
securities.

In
previous
suits,
the
SEC
detailed
how
it
believed
different
cryptocurrencies,
like
the
FIL
token
associated
with
the
Filecoin
network,
may
be
securities.
But
the
suits
usually
ended
those
analyses
with
the
focus
on
the
tokens’
issuers.

Tuesday’s
suit
referred
to
“public
statements
made
by
Kraken”
as
the
platform
listing
these
digital
assets
and
making
them
available
to
the
investing
public,
where
the
exchange
“reinforced
investors’
reasonable
expectation
of
profits,”
if
they
invested
in
the
tokens.

Pretty
important
details,
if
you’re
trying
to
suggest
the
exchange
deliberately
violated
federal
securities
laws.

If
you’ve
got
thoughts
or
questions
on
what
I
should
discuss
next
week
or
any
other
feedback
you’d
like
to
share,
feel
free
to
email
me
at

nik@coindesk.com
or
find
me
on
Twitter

@nikhileshde.

You
can
also
join
the
group
conversation
on

Telegram.

See
ya’ll
next
week!