Crypto is having another moment.

Binance, the largest exchange for trading the digital currency and its derivatives, is in distress. A dozen senior executives have left and the company fired some 1,500 staff members as trading volumes dropped almost vertiginously.

US government agencies, ranging from the Department of Justice to the Securities and Exchange Commission (SEC), started investigations into possible dealings between Binance and black-listed banks in Russia. The company is also being sued over operating an illegal exchange, compliance failures, money laundering, the misuse of customer funds, and the misleading of regulators.

Binance denies the allegations and vows to put up a vigorous defence in court. It did, however, acknowledge past ‘compliance missteps’ but said it had addressed the issues with a corporate restructuring aimed at giving regulators clarity about the organisation. The company doesn’t have a head office and is spread throughout the world, operating more than 300 firms where Binance founder Changpeng Zhao acts as majority shareholder, director, or officer.

In its mapping of Mr Zhao’s business vast empire, crypto analytics company Inca Digital found no boundaries or distinction between Binance, its multiple subsidiaries, and their founder who is famous for micromanaging all operations down to signing off on minor expenses for office supplies and chattel.

On the sidelines of the 2021 Bloomberg New Economy Forum in Singapore, Mr Zhao explained that when he founded Binance in 2017, the crypto universe was considered a marginal domain inhabited mostly by geeks and, as such, uninteresting to regulators.

However, as US customers flocked to Binance trading hubs in China and Japan, regulators began to take note whilst, almost in sync, prosecutors started preparing a crackdown on offshore crypto platforms operating outside their jurisdiction and beyond regulation.

Cunning Plan

To avoid lawsuits, Binance devised a cunning plan. The company set up Binance US, a bare-bones exchange that was granted nominal independence and a license to use the technology. US regulators have since concluded that Binance and Binance US were more intertwined than reported, sharing staff, funds, and a stake in an affiliated entity that trades crypto currencies.

That last issue in particular alarmed investigators. According to prosecutors, the collapse of the FTX crypto exchange, in November last year, was caused by the platform’s “improper relationship” with Alameda Research, an affiliated trading firm.

The attempt of Binance to keep US regulators off its back seems to have, well, backfired. If it can be shown – a vanishingly small ‘if’ – that the company indeed exercises control over Binance US, the SEC can, and undoubtedly will, claim the power to police the company’s entire business. That, in turn, would put founder Changpeng Zhao in its sights.

Before stepping down as Binance’s chief strategy officer in early July, Patrick Hillmann said he expected the company to settle regulatory and law-enforcement issues out of court with ‘monetary penalties’.

However, that ship seems to have sailed. Regulators further tightened the noose by tracing ownership of Binance US to Mr Zhao via multiple layers of entities incorporated in the Cayman Islands, the British Virgin Islands, and Delaware.

Investigators have also found Telegram chats of Binance.US CEO Catherine Coley in which she instructs senior staff members to forward her progress reports on “what we think CZ [Changpeng Zhao] and Wei Zhou [Binance CFO] should know so we can be in their good graces.” Ms Coley left the company in early 2021.

Comatose Exchange

Largely as a result of the ongoing investigations, lawsuits, and pending enforcement actions, trading at Binance US has mostly evaporated. Just before he left the company earlier this month, CEO Brian Shroeder reported that revenue at the exchange had fallen by seventy percent so far this year.

During an online staff meeting, Mr Shroeder told participants that Changpeng Zhao would need to sort out ‘his regulatory matters’ and either sell his shares or put them in a blind trust if Binance US is to ‘resume its growth trajectory’. He emphasised that otherwise the exchange will not be able to ‘get the licenses and banking relationships’ required for its survival.

In a message to staff sent last month, Binance co-founder Yi He wrote: “Every battle is a do-or-die situation, and the only thing that can defeat us is ourselves. We have won countless times, and we need to win this time as well.”

Meanwhile, Mr Zhao, hired a new legal team to handle the DoJ case against his company. He promised to wind down Binance’s indirect dealings with sanctioned entities in Russia. After the company downsized its business in that country, one its most lucrative markets, the exchange continued to handle considerable ruble trading volumes through layers of intermediaries.

This allows accountholders at sanctioned banks to turn their rubles into crypto currencies such as stable coins via peer-to-peer trades. These coins can then be easily swapped for hard currency at brokerages.

According to the Bank of Russia, the average monthly volume of peer-to-peer trades ascents to the equivalent of $428 million (£352 million) at the official exchange rate. The US Treasury Department considers these transactions as a potential means to evade sanctions. Though the deals take place outside the Binance exchange, they are facilitated by the platform which also charges a processing fee.

King Uncrowned

Perhaps feeling the increasing heat, Mr Zhao has kept an unusual low profile of late, apparently reluctant to leave the United Arab Emirates, where he lives. Observers of the crypto world noted that the UAE doesn’t have a mutual extradition treaty with the US.

The US investigations and lawsuits may have torpedoed Mr Zhao’s chance to be crowned the undisputed king of crypto after the sudden demise of rival exchange FTX to which he contributed his bit by declining its founder’s desperate pleas for help.

Although the prices of major cryptocurrencies stabilised after the collapse of FTX, Binance has struggled as its size and near-hegemony draws regulatory attention – and fire. Lawmakers in the US and Europe are also determined to get a grip on the industry and stop its volatility from contaminating broader financial markets.

Crypto devotees also worry that the sheer size and heft of Binance run counter to their philosophy of transparency and decentralised finance. In a meeting with employees, Mr Zhao described himself as “driven by freedom” and said that he did not like “a lot of rules,” setting an early stage for the regulatory scrutiny that was to follow – and may yet prove his undoing.

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