What does the sentencing of Zhao mean for Binance and Crypto Exchanges?

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It isn’t a good time for a global cryptocurrency platform, Binance and its founder Changpeng Zhao as governments of some countries continue to clampdown on the platform.

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Binance founder Changpeng Zhao

After facing weeks of court trials on money laundering, unlicensed money transmitting and violations in Seattle, United States, Zhao was sentenced to four months in prison. He had pleaded guilty to U.S. charges on November 21, 2023.

The sentence came a week after The Philippines Securities and Exchange Commission (SEC) vowed to remove the Binance app from Google and Apple app marketplaces for Filipino users.

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The Binance founder was found guilty by the court to have put “Binance’s growth and profits over compliance with US laws and regulations”, the presiding judge Richard Jones ruled.

His platform was not only used as a medium to finance terrorism, the court also ruled that transactions on Binance were for illegal drug trade and child sex abuse.

Zhao was quoted as saying:

“I believe the first step of taking responsibility is to fully recognise the mistakes. Here I failed to implement an adequate anti-money-laundering programme.  I realize now the seriousness of that mistake.”

Its subsidiary in Africa and its senior executives Nadeem Anjarwalla and Tigran Gambarya are facing similar charges in Nigeria, Africa’s largest cryptocurrency market.

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What does the sentencing of Zhao and the violation of the country’s regulations by Binance portend for the crypto platform, especially after the richest crypto billionaire agreed that he failed to monitor transactions?

Regulatory Scrutiny

The jail sentence of Zhao could attract increased regulatory scrutiny towards Binance and other similar platforms. Regulators may impose stricter regulations or even shut down the platform if they find further violations.

For instance, Nigeria’s authorities are going after other crypto platforms after arresting Binance executives.

Management Issues

After pleading guilty to one count of failing to take required anti-money-laundering measures, he stepped down on November 21, 2023. So, might say the management of the platform is in charge of running the platform.

But we might see key decisions delayed or made without proper oversight, potentially harming the platform’s operations and reputation.I expect the platform to pay more attention to anti-money laundering to avoid being in troubled waters.

Financial Impact

In November, Binance agreed to pay a fine of $4.3 billion (€4 million) after its founder pleaded guilty. The fine represented approximately 35.8% of the company’s 2022  $12 billion revenue.

If Binance continues in this trajectory, it could lead to financial repercussions for the platform. The platform might face fines or legal fees associated with the regulatory violations, further straining its resources.

Loss of Trust

Zhao’s arrest might lead to a loss of trust among Binance users. They may question the platform’s legitimacy and security, which could result in a decline in user activity and investments.

At the moment, there are no reports of a decline in the user base of the platform. At the end of 2023, Binance boasted over 170 million registered users, according to its 2023 report (PDF format)

Competitive Disadvantage

Competitors in the crypto space might capitalize on Binance’s troubles by attracting its users or investors such as Coinbase, Bybit, OKX, Kraken, Upbit, Bitstamp, Kucoin, Uphold, and eToro among others. Binance could lose its competitive edge and struggle to regain market share.

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Loss of trust and reputation

Although one of the prosecutors said “We are not suggesting that Mr. Zhao is Sam Bankman-Fried or that he is a monster,” Zhao’s arrest still casts a shadow of doubt on the legitimacy and trustworthiness of Binance.

Sam Bankman-Fried was the founder of FTX, who was sentenced to 25 years imprisonment on March 28, 2024, for stealing over $10 billion from his customers and investors on its platform.

Some investors may not like to be associated with platforms whose founders failed to comply with regulatory guidelines.

Would Zhao come stronger from his travails? Would it be a new dawn for Binance and other cryptocurrency platforms to abide by regulatory guidelines?

The time will tell when he completes his four month jail term.

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