BackBinance Copped a $4 Billion Plea but Is Still Fighting the SEC
Prosecutors and the Treasury Department had more leverage to get a settlement with the cryptocurrency exchange.
PremiumWASHINGTON—When top Biden administration officials gathered last month at the Justice Department to announce a $4.3 billion legal resolution with Binance, one powerful regulator was absent.
Attorney General Merrick Garland was there. So was Treasury Secretary Janet Yellen. But Securities and Exchange Commission Chair Gary Gensler wasn’t, even though he has his own legal beef with Binance. The SEC sued the world’s largest cryptocurrency exchange in June and has been the regulatory scourge of the crypto world.
The SEC wasn’t involved in the monthslong settlement talks that led Binance and its founder, Changpeng Zhao, to plead guilty and settle Treasury’s civil charges, according to people familiar with the matter.
The SEC’s absence reflects the high cost of settling with a civil law enforcer that can’t put people in prison but can put American crypto companies out of business. Even before the SEC sued Zhao, Binance and its U.S. affiliate, the parties couldn’t come close to agreeing on settlement terms, people familiar with the matter said.
Settling on the SEC’s terms at the time may have required Binance to close most of its U.S. crypto-trading business and accept a claim that its affiliates engaged in manipulative trading, the people said.
“We remain confident in our case against the SEC and will continue to defend our platform vigorously," a Binance spokesman said Friday.
Before suing Binance, regulators wanted the company to accept an injunction that would stop Binance.US from offering trading in many of the crypto assets on its platform, people familiar with the matter said.
“That would sort of be the end of Binance.US," said Lee Reiners, a lecturing fellow in economics at Duke University.
Another hurdle: The SEC alleged that Binance violated investor-protection laws by selling BNB, its own crypto token, in 2017. Settling that claim would make it nearly impossible to trade BNB in the U.S. and could hurt its value around the world.
The SEC’s litigation has taken its own toll. At a court hearing last week, Binance.US attorneys said the venue has withered under the stress and cost of the SEC’s lawsuit. The average monthly value of Binance.US assets is down almost 90%, and Binance.US has lost almost half of its monthly users since the SEC filed its case, Binance.US attorney Matthew Laroche said.
Prosecutors and the Treasury Department had more leverage to get Binance to settle, the people said. The Justice Department said it would indict Binance and Zhao if they didn’t plead guilty. Binance feared an indictment might spur customers to withdraw their assets all at once, destroying the business.
The Treasury Department threatened to name Binance as a primary money-laundering concern, which would have effectively cut it off from the U.S. financial system and made it impossible for customers to exchange their crypto assets for dollars.
Binance and its affiliates probably felt more confident about fighting the SEC in court, Reiners said. The SEC’s claims all turn on its ability to show that cryptocurrencies are securities. If a court decides they aren’t, the rest of the SEC’s case collapses.
“They have more of a chance prevailing in court against the SEC than other agencies," Reiners said. “They also probably don’t want to settle because the industry is waging a holy battle against the SEC, and they want to do their part."
Binance’s guilty plea and Zhao’s agreement to step down as its chief executive leave the company with a path to continue doing business, even in the U.S.
Its guilty plea calls for Binance to implement effective anti-money-laundering and sanctions-compliance programs and requires a court-appointed monitor who will oversee its progress. As long as Binance can satisfy the monitor without losing too many lucrative customers, it might do well enough.
“It’s not a resolution that is guaranteed to kill," said Stuart Alderoty, chief legal officer of Ripple, a digital-asset company that partly prevailed this year in litigation with the securities regulator.
As part of the deal it reached last month, Binance did settle with a different market regulator—the Commodity Futures Trading Commission. The CFTC sued Binance earlier this year alleging that it offered risky crypto derivatives to American users without the proper licensing and protections.
The CFTC has played a junior role to the SEC in regulating crypto. But its chairman, Rostin Behnam, joined Garland and Yellen on stage Nov. 21 when they announced the $4.3 billion deal with Binance. The CFTC will get about $950 million of that.
The moment gave Behnam a turn in the spotlight without the SEC’s Gensler, whose agency has filed hundreds of crypto enforcement actions and has also sued major crypto exchanges Coinbase and Kraken.
“The resolution of the [CFTC’s lawsuit] against Binance and Zhao—within just eight months of its filing—solidifies the CFTC’s reputation as the proven leader in the civil enforcement space when it comes to digital assets," Behnam said.
Write to Dave Michaels at dave.michaels@wsj.com
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