Five lessons from the largest-ever crypto crackdown in US history

The US government recently delivered a significant message to the cryptocurrency market, currently valued at around $1.4 trillion, with actions that underscore its commitment to regulating this burgeoning sector.

Following the high-profile conviction of Sam Bankman-Fried, founder and former CEO of the now-defunct FTX crypto exchange, US authorities have made another impactful move against illicit activities in the crypto sphere.

Changpeng Zhao, the billionaire founder of Binance, the world’s largest cryptocurrency exchange, pleaded guilty to charges related to inadequate anti-money laundering measures on the platform. This failure potentially allowed various nefarious entities to launder money through Binance.

Here are five key insights from this event, which resulted in the largest penalty ever imposed on a money services business in the US, and notably, the target was a firm in the cryptocurrency industry:

It will require further time for the cryptocurrency sector to shed its negative reputation.

The recent guilty plea of Changpeng Zhao, the billionaire founder of Binance, and the conviction of Sam Bankman-Fried, former CEO of FTX, have significantly impacted the public perception of the cryptocurrency industry. Both Zhao and Bankman-Fried were considered prominent figures in the sector, and their legal troubles have cast a shadow over the industry. Now, legitimate players in the crypto world face the challenge of convincing skeptics that these cases are anomalies rather than indicative of broader industry practices.

Following these developments, Brian Armstrong, CEO of Coinbase, seized the moment to differentiate his company from Binance. Armstrong emphasized Coinbase’s commitment to compliance since its inception in 2012, suggesting that this recent news validates their approach and opens a new chapter for the industry.

Meanwhile, US government agencies responsible for regulating and overseeing the crypto market are keen to remind the public and industry players about the importance of legal compliance. Attorney General Merrick Garland, referencing the successful prosecutions of Zhao and Bankman-Fried, stressed that using technology to circumvent the law doesn’t make one an innovator but a criminal. This statement underscores the government’s stance on upholding legal standards in the rapidly evolving world of cryptocurrency.

This isn’t the FTX firestorm for crypto.

The cryptocurrency market experienced notable fluctuations this week in response to recent regulatory developments in Washington DC. Following the announcement of charges against Binance founder Changpeng Zhao by the US Department of Justice, Binance coin initially saw a decrease of approximately 6%. However, by Wednesday morning, it had rebounded, showing an increase of 3.5%.

The broader crypto market also reacted to these regulatory actions. On Tuesday, other major cryptocurrencies like Bitcoin and Ethereum witnessed declines amid a more extensive crackdown by federal authorities, which involved crypto firms like Kraken and Tether. Bitcoin fell by about $420, a 1.1% decrease, to $37,071, while Ethereum dropped by $40, or 2%, settling at $1,997 per coin.

Despite these initial drops, the market showed resilience with a swift recovery by Wednesday. Bitcoin’s value increased by 2.4%, and Ethereum saw a 5% rise.

Analysts attribute this volatility to several factors. Late Tuesday reports indicated that Zhao’s agreement with the Department of Justice might allow him to retain most of his shares in Binance, which lifted investor sentiment. Additionally, the market seemed relieved to see the long-running investigation reaching a conclusion.

Overall, the cryptocurrency market has performed robustly this year. Bitcoin has recorded an impressive increase of about 120% year-to-date, while Ethereum has also experienced a significant rise, gaining nearly 70% over the same period.

Although Binance is leaving the US, it is not going away.

As part of its agreement with the US government, Binance, the global cryptocurrency exchange, is required to halt its operations in the United States. Users in the US attempting to access the Binance.com website were met with a notification stating the site’s unavailability in their country or region. However, the notice also included important information for US-based users.

The notice informed US users about Binance.US, a subsidiary of Binance established in 2019 specifically to comply with US regulations and serve American consumers. Binance.US operates as a separate entity, catering to the needs of US customers in a regulatory-compliant manner.

According to Treasury officials, Binance.US remains unaffected by the recent announcement regarding Binance’s global operations. Being a registered money services business in the US, Binance.US continues to provide services that allow people in the US to buy, sell, and engage in other crypto-related transactions under the Binance brand, albeit through this distinct and compliant US-based platform.

As part of its agreement with the US government, Binance, the global cryptocurrency exchange, is required to halt its operations in the United States. Users in the US attempting to access the Binance.com website were met with a notification stating the site’s unavailability in their country or region. However, the notice also included important information for US-based users.

The notice informed US users about Binance.US, a subsidiary of Binance established in 2019 specifically to comply with US regulations and serve American consumers. Binance.US operates as a separate entity, catering to the needs of US customers in a regulatory-compliant manner.

According to Treasury officials, Binance.US remains unaffected by the recent announcement regarding Binance’s global operations. Being a registered money services business in the US, Binance.US continues to provide services that allow people in the US to buy, sell, and engage in other crypto-related transactions under the Binance brand, albeit through this distinct and compliant US-based platform.

These days, the government is focusing much more on cryptocurrency.

Tuesday’s announcement underscores the US federal government’s stringent approach toward regulating the cryptocurrency industry and cracking down on illegal activities. Various federal agencies, including the Securities and Exchange Commission (SEC), the Treasury Department, and others, are demonstrating a serious commitment to overseeing this sector.

This week, the SEC took action against Kraken, another major cryptocurrency exchange, accusing it of operating as an unregistered securities exchange and alleging mismanagement of customer assets. This lawsuit against Kraken is part of a broader pattern of SEC actions against crypto firms. The agency has filed similar lawsuits this year against other companies like Bittrex and Coinbase, and it is currently engaged in ongoing litigation against Binance for alleged violations of investor-protection laws.

Despite encountering some setbacks in court, the SEC appears determined to maintain a strong regulatory stance by pursuing legal actions against crypto firms.

The commitment to regulate the crypto industry extends beyond the SEC to encompass the entire federal government. This includes the Justice Department, the Commodity Futures Trading Commission, and the Treasury Department. Notably, the Justice Department has established a National Cryptocurrency Enforcement Team dedicated to identifying and prosecuting criminal activities involving digital assets.

Attorney General Merrick Garland emphasized the coordinated effort across various government agencies, reflecting a “whole-of-government approach” to combat corporate crime, including malpractices within the crypto industry. This collective effort aligns with different legal standards for criminal and civil enforcement but signifies a unified stance towards maintaining legal and ethical standards in the rapidly evolving world of cryptocurrency.

There remains a desire for additional regulations.

The United States has an array of existing regulatory tools designed to combat financial crimes, including laws against money laundering and bank fraud. These tools have proven effective, as evidenced by the first-ever corporate settlement with a cryptocurrency exchange, highlighting the federal government’s commitment to tackling financial crimes in the crypto sector.

Deputy Attorney General Lisa Monaco, during a press conference on Tuesday, emphasized the government’s determination to use all available means to prevent abuse and illicit activities on technological platforms, particularly in the realm of cryptocurrencies.

However, US officials recognize the need for new regulations in the rapidly evolving world of cryptocurrency. The call for “regulatory clarity” has been a recurring theme, and the introduction of new crypto regulations could benefit both investors and law enforcement. Clear regulations would make it easier to differentiate between legitimate crypto products and those serving as criminal facades.

The pathway to comprehensive crypto regulation remains uncertain. One possible route is through rulemaking at the agency level, either by the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). However, any new rules established by these agencies would be subject to judicial review if they were challenged in court. Alternatively, comprehensive regulation could come through legislative action by Congress.

CFTC Chair Rostin Benham, speaking on Tuesday, advocated for addressing regulatory gaps, particularly concerning commodity tokens. With Congress’s assistance, Benham believes that proactive measures can be taken to prevent illicit activities, rather than responding to them after the fact.