The challenges facing Binance post-CZ

A little more than 4 months after his conviction, the former iconic boss of Binance, Changpeng Zhao, walked free last Friday from the Long Beach (California) halfway house, where he was serving the remainder of his sentence handed down on 30 April, after reaching an agreement with the US authorities that included a fine of 4.3 billion dollars, admitting in particular to charges of money laundering. A record for a crypto platform and one of the largest fines in the history of finance.

An important step for the man nicknamed "CZ" as it officially marks the end of his legal troubles in the United States, but above all, a new page of development for the platform he founded in 2017 in Shanghai with Yi He with whom he had a relationship for several years.

While CZ remains a shareholder in the company, the agreement with the US courts prohibits it from holding positions of responsibility within the company or influencing its strategic direction.

Since November 2023 and his resignation, Richard Teng has held the position of CEO. Quite a symbol, since the much more institutional style of the Singaporean contrasts sharply with that of his predecessor and embodies a large part of Binance's future.

Capturing the US market

At the end of August, Richard Teng travelled to the United States to meet with controllers as well as government officials. In particular, he presented a plan to recruit at least 1,000 people, many of them in compliance positions, at a cost of more than $200 million.

According to the new CEO, the platform currently has around 500 people in charge of compliance. This number is set to rise to 700 by the end of the year. The company is said to have 5,000 employees in total.

While it has paid a record fine, Binance is far from out of the woods, having been placed under US supervision for the next 5 years, 3 of which will be in the US. According to Richard Teng, the two firms tasked with monitoring the platform's efforts (Forensic Risk Alliance and Sullivan & Cromwell) have already "begun their work".

Another important detail: the SEC (Securities and Exchange Commission) is not part of the agreement that led to the fine and continues to pursue the platform independently, in particular because of its failings relating to regulations linked to financial securities.

For the time being, the US market is largely closed to Binance and its US counterpart, Binance US, which has been forced to lay off two-thirds of its workforce and recorded a drop in revenues of more than 75%. But for how much longer?

The US presidential election could be important, with the key to an unblocking allowing the emergence of specific regulation for the sector. With this on the horizon, Binance looks like a credible candidate to carve out a share of this market, which almost no company can imagine doing without.

The countdown has begun in Europe

In Europe, it will be imperative for exchange platforms to have MiCA (Markets in Crypto-Assets) approval, the European regulation that aims to harmonise the various crypto regulations between the 27 member countries. And for the time being, Binance is a long way from doing so.

Yet things had got off to a good start when, in November 2021, Changpeng Zhao appeared alongside Cédric O, then Minister for Digital Affairs, to announce the arrival of Binance in France, which then wanted to make it its European stronghold by setting up its headquarters here.

Even more so when, on 5 May 2022, the platform triumphantly announced that it had obtained its registration as a digital asset service provider (DASP), the only regulatory sesame then required by the authorities to operate on a regulated basis in the territory.

An important milestone, because even at the time, Binance was already seeking to begin its major regulatory shift and rid itself of its "pirate company" image. But in the space of two years, the situation has become seriously complicated.

Because of the US cases, the French authorities have stalled the investment services provider (ISP) authorisation process, which prohibits Binance from offering its European customers crypto derivatives for which the platform was renowned, as well as its PSAN authorisation, virtually equivalent to MiCA authorisation, which will absolutely have to be held in spring 2026 to continue operating (simple registration will disappear).

The platform is also still the subject of several investigations in France, notably by the section of the Paris public prosecutor's office responsible for combating organised financial crime.

Binance has also lost the right to offer its bank payment card to European users and access to the SEPA (Single Euro Payments Area) network, due to a lack of approvals or suitable partners.

"The Binance team clearly did not have sufficient regulatory culture and made many mistakes that were avoidable in my view. Yet this is essential, particularly in Europe," says a former banker who worked for the group for a few months.

"While the situation seems complicated, to say the least, Binance is far from having abandoned France and Europe," a source close to the matter tells The Big Whale.

To continue to present "honourable" management after CZ's conviction, Binance France changed shareholders last May. Until now the subsidiary's sole shareholder, CZ gave way to Lihua He and Yulong Yan, both of Chinese nationality and presented as members of Binance's founding team.

In early June, the platform also announced that it was going to restrict access to stablecoins not regulated in Europe such as Tether's USDT, even though the 1st part of MiCA concerning them has been in force since July 1.

Although many points remain unclear for the time being, including the date by which platforms will have to strictly delist them, Binance is one of the players to have taken the lead. In recent months, the platform has increased its listings of euro stablecoins, including EURITE issued by Luxembourg bank Banking Circle.

Read also - Stablecoins: finally time for the euro?

A change of culture that could cost dearly

Despite the various regulatory and legal fronts that Binance has been facing for several years now, it remains the number 1 platform on the crypto market.

While it is virtually absent from traditional dollar-denominated flows, due to its difficulties in accessing the traditional banking system, Binance still concentrates more than a third of crypto/crypto volumes today (data including stablecoins) by totalling 335 billion trading volumes in the month of September 2024 out of a total of $945 billion according to data compiled by The Block.

"Even if the company still has a very large shadow section, its volumes enable it to offer the best prices on the market. Even today, it remains unavoidable", explains a French PSAN executive.

Binance also remains solidly established in Asia or in the Gulf region via the United Arab Emirates in particular, but it will be impossible for it to do without regions such as Europe or the United States in the long term.

Read also - Marwan Alzarouni (Dubai): "Our regulation will strengthen as the ecosystem develops"

The company will have to recruit, as well as spend more on compliance, and above all evolve its products, which could ultimately damage its image. Will this restructuring be likely to alienate its long-standing client base through increased KYC checks or a more restrictive cryptocurrency listing?

"The question is how Binance will still be able to pull its weight by scrupulously following the regulations," says a knowledgeable insider. "If it succeeded in attracting such a large number of users, it was also because it allowed things that its more regulated competitors did not," he huffs.

In their complaints, the US regulators have in particular pointed the finger at the fact that the platform does not make a clear distinction between Binance monde and its subsidiaries. The new requirements of the various regulators could therefore adversely affect liquidity on the platform, which until now has been one of its strengths.

Finally, it will inevitably miss the leadership embodied by CZ. While Richard Teng's polished style seems much better suited to the situation and likely to reassure the various regulators around the world, he will not have the same ability to unite a large part of the crypto ecosystem.

"Richard Teng seems the best placed person to initiate this cultural change, which must be profound. Too many mistakes with regard to regulation have been made in the past", breathes a person close to the company.