This analysis was first published in SvD Näringsliv, in Swedish, on November 22nd, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
The world’s largest crypto exchange, Binance, has been fined 45 billion kronor after admitting that Hamas, ISIS, and al-Qaeda were on its customer list. CEO Changpeng Zhao becomes the next crypto figure forced to resign. Could this trigger another crisis?
When things were at their stormiest around crypto exchange FTX, its CEO Sam Bankman-Fried took to Twitter and wrote: “A competitor is trying to frame us with false rumours. FTX is fine. Assets are fine.”
It turned out that neither FTX nor its assets were fine.
There is therefore something of a sense of déjà vu in reading a statement from the aforementioned competitor that goes: “Funds are SAFU!” — assets are safe, in crypto-speak. The person in question is Changpeng Zhao, often known as CZ, and the public face of the crypto world.
On Wednesday he was forced to step down as CEO of the world’s largest crypto exchange, Binance, after a year of investigations by American authorities had concluded.
In the settlement, Binance admits that it allowed transactions with terror groups including al-Qaeda, Hamas, and ISIS. It also permitted more than nine billion kronor to be transferred to Iran, which is likewise illegal.
Binance thus acknowledges money laundering, unlicensed money transfers, and violations of US sanctions. For this it must pay fines of 4.3 billion dollars — around 45 billion kronor. It is one of the highest amounts any company has ever had to pay in American history.
CZ himself appears to be taking it in his stride. He writes that he plans to take a short holiday and is considering becoming an advisor to various startups instead. A fairly cool attitude, given that he himself must pay more than half a billion kronor in fines, and could face up to ten years in prison. The fine, however, amounts to a rounding error for CZ, who is said to be worth around 240 billion kronor. Since he has admitted wrongdoing, he may also receive a significantly lighter prison sentence.
That Binance is being punished in this way may be hard to grasp if you are not embedded in the crypto world. It is a giant of the industry. Around two-thirds of all transactions made with cryptocurrencies pass through the company.
If this had happened to an ordinary bank, the world would have been shocked. It is not, when it comes to Binance. The investigation has been underway for some time, but above all, trust in crypto institutions has been severely shaken since FTX collapsed roughly a year ago.
The underlying promise of cryptocurrencies is that they are decentralised — meaning no intermediaries should be needed when transactions take place. In practice, that is not how things have played out. On the contrary, the complexity of the market has given rise to large exchanges where cryptocurrencies change hands, providing a marketplace for trading and derivatives where buyers and sellers meet. Traders could theoretically manage this themselves — in a decentralised way — but it requires finding a counterparty. Into this gap, platforms such as the now-bankrupt FTX, Binance, and Coinbase have moved in. This has in turn led to assets being held with them, just as one keeps shares, funds, and liquid holdings with a bank.
Binance holds around 700 billion kronor in cryptocurrency. Ten billion kronor in outflows were registered in the first 24 hours after the ruling. Looking back a year, that is precisely how events unfolded with FTX — they experienced a bank run as anxious customers rushed to withdraw their money. It is unclear whether Binance has any liquidity or asset problems, but a mere perceived sense of insecurity among customers is enough to cause trouble.
In the crypto world, the expression “not your keys, not your coins” is often invoked. It essentially means that if you do not hold your own cryptocurrency yourself, it is not safe. Those who had assets with FTX found that out the hard way last year.
In many cases, convenience wins out. It is easier to keep money at a bank than in a virtual mattress. But unlike ordinary banks, crypto exchanges are largely unregulated, have a history of questionable dealings, and a generally low level of trustworthiness. That customers do not dare keep their assets there is not particularly surprising.
Are there bigger problems at Binance that we are not yet aware of? We do not know today. But confidence in the company is already low. If customers decide to play it safe, it could mark the start of a new crisis in the crypto world.
