The Aftermath of the Battle Between Binance and the DOJ

In this blog, we explore the legal resolution between Binance and the U.S. Department of Justice (DOJ) and the response across the digital asset market. This includes examining fluctuations in the price of Binance's token (BNB), trading volumes and flows on the exchange, as well as wider implications for the digital asset industry and the regulatory landscape.

Two days ago, Binance founder and former CEO, Changpeng Zhao (CZ) was required to step down from his role as he pleaded guilty to breaking anti-money laundering laws in the US. This resolved a year-long investigation into Binance and CZ by the Commodity Futures Trading Commission (CFTC) and Department of Justice (DoJ).

Notably, the Securities Exchange Commission (SEC) has been absent from this resolution, displaying a potential rift within the US regulatory bodies, with the SEC remaining an outlier.

According to the court documents, CZ is required to personally pay a $50m fine as a result of this indictment, notwithstanding the penalties levied against the Binance exchange. CZ is also prohibited from any involvement in Binance for at least three years after he pleaded guilty to money laundering charges.

Binance Volume & Market Share Dominance

CZ founded Binance in July 2017, which has since become the largest centralised exchange within the crypto industry, sustaining this title from early on in its journey. By March of this year, Binance had amassed a market share of 57%, highlighting its domination of the industry, which has been in a steady uptrend since March 2020.

Binance has also been ordered to pay ~$4.3bn as a result of their settlement with the US; which encompasses:

• A criminal fine of $1.81bn
• Fees related to US customers of $1.61bn
• Fees generated from Iranian-based customers, in violation of IEEPA, of $900mn

New Requirements for Binance:

• As CZ has stepped down, Richard Teng has come in to replace him as CEO.
• Binance is required to appoint an independent compliance monitor for three years, reporting compliance efforts to the US.

The ramifications of CZ’s exit and Binance’s settlement are likely to be material for the industry. We are already noticing some structural shifts worth highlighting, one day on from the news breaking.

Impact on BNB Intraday Microstructure

Price & Volume

BNB has been whipsawing in price, as new details have emerged since the story was first reported by Bloomberg on Monday 20th November. It was unclear at the time whether CZ would be forced to step down, or what the settlement looked like beyond the reported $4bn figure.

As a result, the market interpreted the news positively; putting an end to the overhang associated with the case, and removing the uncertainty which surrounded the industry as the investigation persisted. This led to a rise in BNB’s price from ~$248 to ~$261, with $13.8m in volume recorded for CCCAGG pairs within an hour of the story breaking. This contrasts the previous hourly volume of $1.3m and demonstrates the intraday impact of the Bloomberg story.

Following this, the US announced its enforcement action, which included CZ pleading guilty and the requirements set out by the courts on Binance, such as independent monitoring and new leadership. As these requirements impact the future success of Binance, BNB quickly sold off, reaching a low of $225. At the time of writing, BNB sits around $231, lower than the quoted price of $247 before the Bloomberg story broke on Monday.

Open Interest

The speculation caused by pre-announcements created a significant spike in BNB’s open interest (OI) leading up to the event, with over $100m in OI added within a 1 day period. Interestingly, the current OI has remained close to its highs, indicating further speculation on BNB specifically.

Binance Net Flows

We have unsurprisingly seen outflows from Binance across major assets; BTC, ETH, USDT, USDC. Since the official DoJ announcement, which occurred at 7pm UTC on 21/11/23, we have observed an aggregated ~$800m of outflows across the specified assets. This can be interpreted in two ways.

First, it shows that Binance and CZ pleading guilty heightens the risk for some customers who may not want to hold their funds with Binance anymore. A clear reputational hit has been dealt, eroding the trust of some of its customer base due to being found guilty of violating anti-money laundering regulations. Investors may also have issues aligning with the exchange in light of due diligence and compliance concerns given the guilty plea.

However, in comparison to other liquidity crises, such as that of FTX, Binance net flows have remained much more resilient. In fact, within a 1 hour period on 11/11/23, during the FTX crisis, CCData observed a near ~$1bn outflow from Binance on BTC alone. This comparison demonstrates the large difference in perceived risk by the market, for both Binance and other centralised exchanges during this period. This could be partially explained by the new compliance requirements enacted on Binance by the US government, which may provide some security to investors holding funds on the exchange, reducing overall counterparty risk.

While many would have expected an exodus of funds, the flows data does not currently show this to be the case.

Binance Liquidity

Liquidity is vital to understand the impact of this event. By following the liquidity, the picture becomes more clear about where perceived risks lie following the DoJ events. As expected, when analysing 1% market depth across major BTC pairs, we observe liquidity being pulled in the hours leading up to the announcement, in anticipation of volatility. The largest observed drop in liquidity was seen at 3pm UTC, of around 30%, when the DoJ stated that enforcement action would be announced later that day.

Monitoring liquidity flows over the coming weeks will be vital to understand whether market participants continue to have faith in Binance with its new leadership and compliance requirements.

Looking Ahead

The resolution of this legal challenge by the US against Binance will have a profound impact on the Centralised Exchange landscape, as well as the market as a whole. By quantifying the settlement figure, the uncertainty which persisted for Binance, and the wider industry, is resolving itself now. The $4.3bn settlement is also not severe enough to impact the profitability of Binance, as a result, this could be viewed favourably as it allows for uncertainty to be minimised and prevents a systemic risk for the market.

The industry has been prone to uncertainty and overhang since the Luna crisis unfolded last June, with the effects on liquidity and sentiment still being felt somewhat today. If the enforcement action had been more severe, or uncovered issues related to liquidity, the industry might have faced another tail-risk event, exacerbated by the market share Binance currently possesses, and the level of integration it has with many of the largest on-chain ecosystems.

Due to the uncertainty persisting in the industry since the legal challenge began in March, many sophisticated players were likely sidelined, waiting for the situation to resolve. As resolutions take place, we can expect more confidence from players entering the market.

Consistent with the backdrop of a potential Spot BTC ETF approval, the industry is undergoing major structural changes, with the aim of further institutionalisation. By addressing these growing pains now, the industry is better prepared to meet the requirements of the SEC necessary to grant approvals. These noticeable improvements have been ongoing since the collapse of FTX and are evidenced in our flagship Exchange Benchmark, which saw exchanges taking responsibility for improving security and regulatory compliance, leading to average scores improving across the board.