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Did Binance’s CZ predict his own downfall?

An exclusive interview with Cointelegraph in 2018 highlighted growing scrutiny of Binance's meteoric growth.

Fiv years ago, you couldn’t trade with fiat currency on Binance, yet the exchange was already garnering international attention with the highest trading volumes among its peers.

That's no mean feat in the cryptocurrency industry, even in 2018, with several well-established exchanges commanding established and loyal user bases. Critics questioned why the world needed another exchange, but Changpeng "CZ” Zhao would not be deterred.

In June 2018, I jumped onto a virtual call with ‘CZ’ for a one-on-one interview to discuss the meteoric growth of the global exchange. At the time, Binance only supported crypto-to-crypto trading, but a 50% fee discount facilitated by its native BNB token had been a major drawcard for savvy traders.

Things are drastically different half a decade later. Binance has agreed to a $4.3 settlement with the United States government over civil regulatory enforcement actions against the exchange. The U.S. civil case found that Binance’s policies allowed criminals involved in illicit activities to move “stolen funds” through its platform.

The judgment also led to Zhao’s resignation as CEO due to personal charges against the Binance founder for violating the Bank Secrecy Act. Zhao pleaded guilty and has been released on a $175M bail bond.

Reflecting on that conversation in 2018, Zhao seemed acutely aware of the growing target on Binance’s proverbial back as its trading volume outpaced competitors.

Related: Binance $3.9B USDT move gains community attention amid DOJ settlement claims

The exchange had been subject to scrutiny over the veracity of its trading volumes, a point which Zhao contended. He claimed that Binance accurately accounted for its trading volumes, while other exchanges “double-reported" on the buy and sell side of trades to give inflated figures to attract more users.

“Being number one creates other problems sometimes, especially with regulators. The regulators like to talk to the number one guy. We try very hard to not be number one all the time, but other people are trying very hard to boost their volumes to be number one.”

Scrutiny aside, Zhao’s burgeoning exchange was gaining a head of steam. A modest $15 million initial coin offering (ICO) provided the basis to get Binance off the ground.

Zhao spoke fervently about the role the ICO played in laying the foundation for the exchange’s growth.

“The ICO definitely helped us a lot. I cannot stress how much it has helped us. I think it’s probably helped us on the order of 10 to 200x .”

The founder suggested that had Binance raised funds through conventional venture capital rounds, it would have grown considerably slower. Some 25,000 users signed up at the ICO phase, becoming “investors, coin holders and users,” Zhao explained.

By the time Zhao was forced to hand over the reins to incoming CEO Richard Teng, Binance’s $15 million ICO had morphed into a company valued at $60 billion.

The outgoing CEO’s words some five years ago have proved to be prophetic. Binance has faced regulatory scrutiny in numerous jurisdictions due to its aggressive expansion efforts.

This has come to a head in the U.S. with its major enforcement action and subsequent settlement. Binance has also faced more localized challenges in different countries and has exited countries like the Netherlands after failing to meet jurisdictional compliance.

The exchange has simultaneously found greener pastures, with the UAE providing a new base to continue operations. CZ is domiciled in the country and is expected to head back there before returning to the U.S. for sentencing sometime in 2024.

Poignantly, Coinbase CEO Brian Armstrong took to X (formerly Twitter) to highlight that his own exhange's measured approach to meeting regulatory standards has avoided the current situation Binance finds itself in.

“This meant we couldn’t always move as quickly as others. It’s more difficult and expensive to take a compliant approach. You can’t launch every product that customers want when it’s illegal. But it’s the right approach because we believe in the rule of law.” 

Armstrong’s take is indicative of the cryptocurrency space in general. Some push the boundaries while others take more cautious steps. This does not necessarily exempt the latter from scrutiny, though - Coinbase itself is still embroiled in it’s own legal battle with the Securities and Exchange Commission over alleged securities violations.

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Decentralized finance yet to pose ‘meaningful risk’ to stability — EU regulator

The European Securities and Markets Authority argued that DeFi was still too small to pose any sizeable risks to overall financial stability, but should be monitored.

Decentralized finance (DeFi) is yet to pose a meaningful risk to overall financial stability but does require monitoring, according to the European Union’s financial markets and securities regulator.

On Oct. 11, the European Securities and Markets Authority (ESMA) released a report titled Decentralized Finance in the EU: Developments and Risks. Aside from discussing the nascent ecosystem's benefits and risks, the regulator concluded it is yet to pose a sizeable risk to financial stability.

“Crypto-assets markets, including DeFi, do not represent meaningful risks to financial stability at this point, mainly because of their relatively small size and limited contagion channels between crypto and traditional financial markets.”

The total crypto market capitalization is just over $1 trillion, and DeFi total value locked is a mere $40 billion, according to DefiLlama. Comparatively, the total assets of financial institutions in the EU amounted to around $90 trillion in 2021, according to the European Commission.

DeFi TVL by protocol type. Source: ESMA

The report said that the total crypto market is about the same size as the EU’s twelfth largest bank or 3.2% of the total assets held by EU banks.

The ESMA also looked into several crypto contagions of 2022, including the collapse of the Terra ecosystem and FTX, noting that this crypto “Lehman moment” still had “no meaningful impact on traditional markets.”

Nevertheless, the regulator observed that DeFi has similar traits and vulnerabilities to traditional finance, such as liquidity and maturity mismatches, leverage, and interconnectedness.

It also highlighted that although investors’ exposure to DeFi remains small, there are still serious risks to investor protection due to the "highly speculative nature of many DeFi arrangements, important operational and security vulnerabilities, and the lack of a clearly identified responsible party."

It cautioned that this could “translate into systemic risks if the phenomenon were to gain significant traction and/or if interconnections with traditional financial markets were to become material.”

Related: EU’s new crypto law: How MiCA can make Europe a digital asset hub

Furthermore, the report identified a “concentration risk” associated with DeFi activities.

“DeFi activities are concentrated in a small number of protocols,” it noted adding that the three largest ones represent 30% of the TVL.

Top ten DeFi protocols by TVL. Source: ESMA

“The failure of any of these large protocols or blockchains could reverberate across the whole system,” it said.

The regulator is paying much closer attention to DeFi and crypto markets following the publication of its second consultative paper on the Markets in Crypto Assets (MiCA) regulations earlier this month.

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Binance seeks protective order against SEC’s ‘fishing expedition’

The exchange claims the SEC's deposition and discovery requests are outside the scope of the regulators lawsuit it filed against Binance.

Binance has asked a court for a protective order against the Securities and Exchange Commission (SEC) over what the crypto exchange claims is a "fishing expedition" from the regulator.

In an Aug. 14 court filing, Binance put forward a motion for a protective order following deposition notices and discovery requests from the SEC.

"BAM has worked in good faith, but the SEC has been steadfast in its belief that the Consent Order gives it carte blanche to investigate every aspect of BAM’s asset custody practices without any discernible limitation whatsoever," the exchange wrote. 

Binance claimed the SEC is demanding it produce communications dating back to November 2022 for "dozens of topics — many of which have nothing to do with customer assets."

It also took issue with the SEC's request that the exchange make six of its employees and officers available for depositions including its CEO Changpeng "CZ" Zhao.

"Now, the SEC is also demanding depositions of BAM’s most senior executives despite that they do not have unique firsthand knowledge about the facts surrounding the security, custody, and transfer of customer assets, and the employees who do have been offered for depositions," it argued.

This is a developing story, and further information will be added as it becomes available.

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Prime Trust can’t honor customer withdrawals, says Nevada regulator

Nevada's business regulator issued a cease and desist order to the crypto custodian alleging it has a "shortfall of customer funds."

Prime Trust's financial condition is "critically deficient" and the crypto custodian has been unable to honor customer withdrawals since June 21, according to Nevada's business regulator.

In a June 21 cease and desist order, Nevada's Department of Business and Industry claimed Prime Trust's financial condition ha"considerably deteriorated" and the firm is now in an "unsafe or unsound condition" to continue business:

"On or about June 21, 2023, Respondent's [Prime Trust] was unable to honor customer withdrawals due to a shortfall of customer funds caused by a significant liability on the Respondent's balance sheet owed to customers."

The order added Prime Trust has "materially and willfully breached its fiduciary duties to its customers by failing to safeguard assets under its custody." The regulator again alleged the firm is "unable to meet all customer disbursement requests."

Statements made by the Nevada Department of Business and Industry against Prime Trust. Source: Nevada Government

Prime Trust has 30 days to respond to the cease and desist order and can request an administrative hearing to contest the order.

Related: TrueUSD assures users it has no exposure to troubled Prime Trust

If Prime Trust fails to contest, the cease and desist order will be considered final.

On June 13, the payments subsidiary of Prime Trust, Banq, filed for bankruptcy protection in the United States.

Since then, wallet infrastructure provider and digital asset custodian BitGo confirmed on June 22 that it decided to cancel its acquisition of Prime Trust.

Cointelegraph reached out to Prime Trust for comment but did not recieve an immediate response.

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Tax Authority Slated to Become Main Crypto Regulator in Russia

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Systemic Swiss Banks Not Ready for Crisis, Regulator Says

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Tron Founder Justin Sun, Soulja Boy, and Austin Mahone Summoned by SEC in Crypto Asset Case

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Crypto Ads in Belgium to Feature ‘Punchy Warning’ of Risks, New Rules Imply

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Dutch Financial Regulator Vows Strict Treatment of Crypto Business Under MiCA

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Switzerland preparing emergency measures for UBS’ takeover of Credit Suisse: Report

The emergency preparation will allow the takeover to proceed without the usual “six-week consultation period” with shareholders, according to people familiar with the situation.

The Swiss National Bank (SNB) and Switzerland’s financial regulator reportedly believe that the acquisition of investment bank Credit Suisse by UBS, Switzerland's largest bank, is the “only option” to prevent a “collapse in confidence” in Credit Suisse.

According to a March 18 Financial Times report citing three people familiar with the situation, Switzerland is preparing to use “emergency measures” to accelerate the takeover by UBS of Credit Suisse, in an effort to finalize the acquisition before "markets open on Monday."

It was noted that the emergency measures set in place would allow the deal to proceed without a shareholder vote, bypassing the usual Swiss regulations that require a “six-week” consultation period for shareholders “to consult on the acquisition.”

It was stated that the SNB and the Swiss Financial Market Supervisory Authority (FINMA) are working to “reach regulatory agreement” by Saturday night, having reportedly told international counterparts that “they regard a deal" with UBS as the "only option” to prevent a "collapse in confidence" in Credit Suisse.

This is a developing story, and further information will be added as it becomes available.

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