- Department of Justice prosecutors are split on whether there is enough evidence to bring charges against Binance CEO Changpeng Zhao.
- Binance’s dominant position in the industry makes any news about the company a major event.
- No matter the fees, Binance’s proof-of-reserves does not meet expected standards of transparency.
- The cryptocurrency world needs to change its entire philosophy, because customers currently must hope—often with blind faith—that everything is fine.
Here we go again. According to a Reuters report, Department of Justice prosecutors are divided over how to proceed with a long-running investigation into Binance.
The exchange has been under investigation since 2018 for alleged violations of anti-money laundering laws and sanctions.
The report says some federal prosecutors want to take an aggressive approach against the exchange, believing they have enough evidence to bring criminal charges against individual executives, including CEO Changpeng Zhao (CZ).
Binance responds
Unsurprisingly, Binance pushed back on the report.
“Reuters is wrong again. Now they are attacking our amazing law enforcement team,” the company tweeted.
So, is this the latest crypto meltdown? Is Binance in serious trouble?
It’s natural to jump to conclusions given the bad behavior we’ve seen elsewhere in the space. But this is different: it’s the continuation of an ongoing, multi-year investigation. Binance’s regulatory disputes are no secret. Brian Brooks, the former CEO of Binance.US, resigned just three months into the role amid regulatory scrutiny.
At the time, CZ said Binance intended to “pivot to become a fully regulated financial institution in the future” and that he would be “very open” to stepping down if a more regulation-savvy CEO was found.
So this development isn’t entirely unexpected; the public has long known there is an active investigation.
A new chapter for cryptocurrency
Even if this isn’t an immediate catastrophe, the situation highlights major problems in the crypto industry. There is wide uncertainty about what to make of this investigation—and that uncertainty is the point. Binance remains far from transparent, and that’s unhealthy for the entire sector.
Cryptocurrency now reaches a point where CZ and Binance matter profoundly to the ecosystem. A misstep by the exchange could have catastrophic consequences. That importance is clear when looking at the $1 billion fund CZ created to support struggling industry players—a move that, to some observers, recalls previous episodes in the space where large actors stepped in as de facto rescuers.
Given Binance’s market dominance and lack of clarity about its structure—it still appears to operate without a single official headquarters—it makes sense regulators would scrutinize the exchange.
Coinbase and Binance: two major players, different levels of transparency
Alongside Coinbase, Binance is likely one of the most consequential companies in crypto. But the two are very different. Coinbase is publicly listed and subject to a high level of disclosure and regulatory oversight. Those reporting requirements may be cumbersome, but they provide customers with greater confidence.
Binance, by contrast, has operated in ways that often sidestepped the regulatory frameworks that later developed. That’s not simply a criticism of Binance—when the industry began, regulation was mostly absent, and many companies evolved in a regulatory vacuum.
As the industry matured, however, Binance has remained opaque about its internal workings and financial health, despite repeated assurances to the contrary.
Their proof-of-reserves exercise was meant to address this transparency gap. But the implementation falls short. After spending several hours reviewing the materials, many observers come away more confused than enlightened.
Jesse Powell, CEO of Kraken, has been pointedly critical and raised valid concerns about the approach.
Another misleading “PoR” AUP (not an audit) released today. Apparently, there is no consistent process used across exchanges. Again, the process strays far from the original spec.🤦♂️
1. “interchangeable” assets
2. negative balances included
3. no signing
4. aggregation by “class” https://t.co/FGQ3Mn9kyo— Jesse Powell (@jespow) December 10, 2022
To be fair, CZ has said he plans improvements, and it is still early. But the information released so far reveals very little about Binance’s internal operations or financial condition.
Cryptocurrency at a crossroads
CZ has become the single most influential figure in crypto because of Binance’s massive market share.
These ongoing headlines damage cryptocurrency’s reputation, which is the sector’s biggest current problem. Institutions, mainstream media, and people unfamiliar with crypto will see these stories and be wary—many will be scared off entirely.
It would be beneficial to see Binance make a concerted effort to provide genuine transparency. Their actions to date have been underwhelming, and being better than some of the industry’s worst actors is not the same as being truly transparent.
Considering the turmoil across the industry this year—and especially after FTX—Binance is held to a higher standard, deserved or not. Events like certain on-chain transactions, even if legitimate, raise concerns about what they might imply for the exchange’s practices.
This is part of the Proof-of-Reserve Audit. The auditor require us to send a specific amount to ourselves to show we control the wallet. And the rest goes to a Change Address, which is a new address. In this case, the Input tx is big, and so is the Change. Ignore FUD! https://t.co/36wUPphIZk pic.twitter.com/2NkH5L5J9j
— CZ 🔶 BNB (@cz_binance) November 28, 2022
The crypto ethos is “don’t trust, verify.” Yet right now many users depend on tweets from a handful of CEOs to assure them funds are safe—and in some cases, those statements can be misleading.
CZ has been outspoken and critical of other players lately. I would prefer to see him step back from the public squabbles and focus on making Binance as transparent as possible.
It is reasonable—and appropriate—for regulators to target centralized crypto exchanges until the industry delivers real transparency.
Until that day comes, people must largely hope Binance acts in good faith and has its operations in order. To be clear, there is no direct evidence today that such hope is misplaced.
One of crypto’s core promises was to remove the need for blind faith in centralized financial institutions. It remains an open question whether the industry will fully live up to that ideal.