Podcast Discussion: Binance's Great Reconciliation - Will CZ Rule from Behind the Scenes? Is Binance's Biggest Problem Being "Too Successful"?

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Binance reached a monumental settlement of $4.3 billion with the DOJ, and CZ resigned quietly. Attorney Winter Soldier has deep insights and rich experience in the crypto industry. We discussed the origins of this incident, its subsequent effects (on other exchanges, DeFi), and the devilish details hidden within; the impact of U.S. politics on the crypto industry, and more.

Have you been paying attention to the settlement between Binance and the DOJ?

I have been paying attention, but in reality, a lot of the information should not be public; it has been leaked by the media, communicated to the outside world in a way that resembles a leak. Now that the whole matter is concluded, you can see roughly what happened. In fact, the specific details may not be made public later, as they chose to settle before the lawsuit.

I think this outcome is certainly not surprising. The DOJ's prosecution, I believe, is not just limited to the crypto space; in traditional industries, many cases are settled without reaching the point of sending responsible parties to prison. As long as the institution can afford to pay, they will generally choose to settle.

In the crypto space, we can mention Bitmex, which faced similar accusations from the DOJ and ultimately settled. Even the pending case with Tron is likely to end in a settlement, so the result is not unexpected.

Regarding the amount, I understand that it is indeed quite high, as the industry has not previously reached the level of billions or tens of billions. This level should be considered that of a large institution, like Citigroup's $7 billion, Morgan's $12 billion, or Boeing's $2.5 billion. So, this amount is indeed shocking, but compared to other DOJ cases in the past, I find the timing interesting. It feels more intriguing to me. If you think about it, Bitmex and others chose to fight the DOJ rather than settle right away.

Previously, when Wall Street institutions faced DOJ investigations, they often preferred to settle before any turmoil, opting for a settlement without admitting guilt, or pleading guilty with the understanding that they would not be prosecuted. This choice is quite common. Binance's decision this time is essentially a traditional large institution's route, settling before being sued.

I suspect there may be some concerns. One is that these institutions often do not want to disclose too much information once a lawsuit is filed, as this information could be further interpreted and analyzed by the outside world. They do not want to trigger too much speculation or a larger uproar, causing collateral damage, as they may not want to expose certain aspects, hoping that some clients remain undisclosed. Secondly, the spread of the incident could harm their reputation, so these institutions choose to settle early.

Additionally, I wonder if there is a factor of trading space for time, as timing is also crucial. For Binance, time is important because once litigation begins, it can last a long time, continuously damaging the company's reputation and creating uncertainty for the entire industry. For investors, this could be very negative. By resolving this matter in advance, especially in the face of a potentially favorable market, they might be dismantling all the ticking time bombs, trading space for time. I think this uncertainty risk consideration might also be part of their decision. This is my personal speculation, as interpretations of the market can vary; perhaps there won't be a bull market in the future.

The third point is that I personally feel that if I were CZ, I would find it very exhausting. Perhaps CZ enjoys it, but I think it would be tiring for me. Since Binance grew to become the world's largest exchange, it has constantly faced various investigations and legal actions. Since 2020, it has become particularly frequent. These investigations are relentless and exhausting. Moreover, each legal action cannot be simply dealt with, as a poor response could be fatal. Therefore, one’s nerves must always be on edge, which is indeed quite tiring. Binance has moved its headquarters several times, right? It has been in a state of upheaval, never having a fixed location, primarily due to the uncertainty of judicial sanctions.

If you can reach a settlement with the U.S. Department of Justice now, it means that the long-arm jurisdiction of the U.S. may not reach Binance for a considerable time. Binance can at least remain in Dubai for the long term, and CZ himself can stay there for a long time. I think spending money to buy peace of mind is not unreasonable, even though the amount is quite high.

However, it has resolved two disputes, effectively settling issues with both the DOJ and the CFTC. As for the SEC, it is certain that there will be no settlement, as it involves too many other companies in the industry and fundamental issues regarding the establishment of industry rules. I believe they will continue to fight. At least, through this fine, Binance should be safe. Spending money to buy peace is quite good.

Will the judgment against CZ be made by a jury?

I understand that if you do not settle, there will definitely be a jury judgment. However, if you choose to settle, I think you can refer to Arthur's previous judgment, which was probation. As for CZ himself, I feel that he will also have to pay a fine to resolve this, and it should not reach the point of imprisonment.

The strength of the evidence against him is actually uncertain, and there should still be some room for public defense in court. Since they did not choose to imprison him, from this perspective, you see that he paid bail to be released, right? So, the overall feeling is that although he faces a maximum sentence of 10 years, he is not considered a very dangerous person, and paying a bail allows him to go free. I think this case is likely to be more optimistic than Arthur's case. I do not think he will go to prison; if he does, it should be in a more lenient form, such as house arrest. I suspect he has other options that could be discussed.

Will CZ still be involved in the operation of Binance behind the scenes?

Definitely not, because he has appointed an independent investigator to monitor every move he makes. Do you think he will check if he has received any instructions? I think it is impossible. CZ should not dare to do so, as he understands U.S. law and would not easily violate such a prohibition. Like Arthur, I believe he did not continue to operate Bitmex.

So, I think CZ will not attempt to convey any instructions verbally. Because once discovered, it would cause even greater trouble for the company. In fact, he could achieve some intentions through other means.

What impact will CZ's absence have on Binance?

I have always felt that Binance's problem is not that it is unsuccessful, but rather that it is too successful. If it were not such a leading exchange, it might not be under such scrutiny. Therefore, I believe Binance should not be adding more; it should be doing some subtraction. Its market share is too large; from a decentralized perspective, there should not be one exchange with such a significant market influence, which is somewhat unsafe from a decentralization standpoint. Secondly, "the tall tree attracts the wind," meaning that once you grow so large, others will focus on you. Wherever you go, if someone asks who the largest institution is, everyone will say Binance, and others will definitely scrutinize every action you take, which adds considerable pressure. I think OKX is essentially hiding behind Binance to develop.

Will the settlement affect other exchanges?

The industry must consider compliance issues in the future; this is an inevitable trend. Back in 2016, when I first started getting involved in these matters, there was already a lot of caution regarding U.S. IPs. Basically, if you accessed domestic exchanges using a U.S. IP, they might not even allow you to access them. I feel they are quite cautious about U.S. IPs.

What do you think about the emphasis on anti-sanctions related to Iran in the settlement?

I have also paid attention to sanctions. Of course, the biggest concern is what to do if you become a target of sanctions. However, after thinking it through, it seems to be a dilemma. All sanctions are based on the so-called U.S. dollar hegemony and long-arm jurisdiction. If you want to use dollars and settle in dollars, you may face such sanctions. Therefore, people in those countries must be quite distressed, as many of their businesses cannot operate, and traditional banking services are unavailable, which is why they seek to use cryptocurrencies. So, in a way, the rise of cryptocurrencies can be said to benefit from such sanctions. However, it now seems that providing services to sanctioned countries and profiting from them may, from Binance's perspective, mean that it is not worth the risk.

Where will such business flow in the future? I think it may go to other platforms or even DeFi, which could be a potential development direction. However, I believe this cannot be eradicated. There will definitely be some exchanges that may choose to specialize in providing services to these countries.

The banking industry also has similar situations, where banks have established institutions tailored for these countries. In the future, exchanges may also emerge that provide services specifically for these countries. For instance, Binance previously divested its Russian business and handed it over to a local Russian exchange.

In the future, such businesses will definitely be handled this way. If you are a responsible exchange and want to have long-term development, you cannot mix such business on your platform; that would be very dangerous.

Does the settlement between Binance and the DOJ also mean the end of the paradigm of large offshore exchanges? Will there be licensed exchanges in every country in the future?

I believe so. I think traditional exchanges like Binance and similar ones that do not emphasize compliance will certainly exist, but there will also be compliant exchanges established in many places where trading is allowed, such as those in Hong Kong, the U.S., Japan, and South Korea. These exchanges will definitely operate strictly according to local regulations. Currently, the rules for accurate licensing are not clear. I understand that there are very few clear guidelines like Hong Kong's VASP; perhaps only Singapore and Dubai have them, and the U.S. seems to have borrowed them without a dedicated license for exchanges. So, previously, everyone was likely feeling their way across the river, but after Binance's fine, at least from this incident, everyone understands that there are certain things that absolutely cannot be touched; red-line businesses must not be engaged in. This will push some exchanges towards compliance.

Thus, some regions will have compliant exchanges, while others with insufficient strength may still choose to remain offshore and continue such businesses, but their scale may shrink. The market share of compliant exchanges will expand, leading to a regional or cross-regional exchange model, but they will likely have some licenses in each region. This way, the truly large exchanges will gradually align towards compliance.

This is a long-term trend. As the industry grows to a trillion-dollar scale, it is unlikely to continue in a wild growth state. In fact, once your scale increases, regulation will catch up, and you must align with regulatory requirements. From the perspective of exchanges, of course, if you look at it from a technological angle, I believe there will also be new directions for evolution, with DeFi potentially experiencing greater growth.

Will U.S. regulation of CEXs shift to DeFi in the future?

So, I have been thinking about this issue. I have always been particularly concerned about how DeFi will develop in the future, and I think a key point is account abstraction (AA). This technology is quite crucial; everyone believes that the interface operation is too unfriendly, right? We need an AA wallet, which would align with traditional interfaces.

However, the more critical issue I find is that AA addresses a KYC problem. When your account is abstracted, your private key can be separated from your identity. Then, how do you prove your identity? It becomes a traditional social identity verification method. You can do many things, such as providing your email and phone number to verify your identity. The next step could involve providing your ID card and video facial verification, and so on. Thus, the entire account abstraction wallet can effectively become a KYC-compliant wallet.

If all your interactions must be through an AA wallet, and if the only way to engage is through that method, then it aligns with DeFi, and KYC can also be completed, resolving the platform's compliance issues. Of course, you could argue that many people's identities would then be exposed, and perhaps people would not like cryptocurrencies anymore. This is a trade-off, but I believe if you want to continue growing your project and the U.S. has particularly strict KYC requirements, AA might be a viable option.

I think DeFi protocols are quite different from institutions. The legal challenges they face are significant, as DeFi is too unique; it does have a decentralized essence. You cannot demand compliance in the same way. I think at most, they might issue a cease-and-desist order against us. I do not believe it would extend to current platforms like UNI or similar customer service platforms. That seems a bit excessive. Moreover, if you were to pursue such a lawsuit, the impact would be significant, and the backlash would be considerable. I believe this matter could change, as there is a risk of stifling innovation. Political correctness could also come into play, as Binance, after all, carries a certain "red" gene and has a naturally politically incorrect aspect. If it were a project led by a team of Anglo-Americans, I think they would not be so easily targeted.

After the Binance settlement, will other exchanges be under scrutiny?

I think the DOJ has a bit of a performative nature; Binance is a relatively large target, and it can serve as a demonstration effect, garnering public attention.

You know, if they were to target smaller entities, like OKX, which may be well-known in the Chinese community but not globally, I think such cases would not have as significant an effect. Therefore, they may not have the same motivation to pursue smaller exchanges as they do with Binance. However, from the perspective of exchanges, you must prepare for the expectation that you will be targeted.

But I really want to say that Binance has likely been under investigation for a long time. The DOJ must have gathered a lot of evidence before making this final strike. I am not sure if other exchanges that are not on the DOJ's radar have had the same level of evidence collected against them.

If they had not done much work previously, collecting evidence now might be difficult, as everyone is already aware of the significant issues surrounding Binance. Even a few years ago, when news about Binance began to circulate, many started to become aware and began to moderate their behaviors. Therefore, I think replicating such a large-scale investigation against Binance might not be so easy. This situation may not be replicable. In my impression, targeting smaller exchanges might be possible, especially those in the second or third tier that are still operating quite freely. Of course, if the DOJ is willing to pursue them, they should be able to gather a lot of evidence. However, for larger exchanges, I think it is unlikely. The DOJ may not want to pursue smaller entities, as their scale is too small; that is my feeling.

Did Binance fail to recognize regulatory issues during its early innovation phase, leading to overly blatant evidence?

This is quite common, as many people may not be long-term residents of the law, especially those unfamiliar with the U.S. discovery process. In China, if you speak privately, it may not be an issue, but in the U.S., the credibility of witnesses is quite high. Moreover, U.S. investigations can be very thorough. Many people from Europe and America prefer to be informed about everything, and if there is any risk, they would rather not know. However, this awareness may not exist in China; if you tell someone, they will know, and once they know, regardless of the situation, they may act in ways that are detrimental to themselves.

I believe there is a difference in legal awareness between Chinese and Western individuals. Westerners tend to be more cautious. They may not express this openly or discuss it, nor would they reveal it in any public setting.

How do you view the regulatory impact on the crypto industry from both positive and negative perspectives? Will it stifle the industry's inherent drive? Will it prevent the development of a large black and gray market?

I still feel that this world is like an offshore cyber utopia. You need to understand this as a city; it resembles the memories we had growing up about places like Hong Kong and Kowloon Walled City.

I think the cryptocurrency world is similar to such a place. It has its advantages, but it also has its shortcomings. The bad aspects are inevitable, as it is a free city, and there will certainly be crime and illegal activities. However, it is also a relatively free place where many things can be realized and created. Therefore, I am not particularly pessimistic about this matter. I believe this is a long-term issue: the friction between innovation and business expansion and regulatory requirements will continue to occur. However, if one day there is no friction at all, it may mean that growth has stopped. As long as growth continues, I believe there will always be new frictions. I think these two aspects can coexist; it is not the case that increased regulatory pressure will completely stifle innovation.

As I mentioned before, there will always be some new technologies and structures emerging. Therefore, it will inevitably lead to new developments in response to regulation. The essence of finance is such that all innovations are often based on dynamic changes in regulation. Why do I say this? Because of my own experience; I have previously engaged in financial business and have been a lawyer. My experience is that every time, for instance, when the CSRC or CBIRC issues a document, it may completely shut down a certain way of writing agreements. But that’s okay; I will think of a new structure to organize it and create a new way of doing things.

This cat-and-mouse game is a long-term dynamic regulatory process. This time, regulation may have won, but next time, something new may emerge. This is the macro process I perceive.

How do you view the SEC's absence in this settlement?

Regarding the SEC case, I do not quite understand why they chose this approach. Previously, their case against Ripple seemed to be a carefully selected target; Ripple was a significant entity, and there was controversy in the industry about whether it was a security.

By choosing such a case, they aimed to set a benchmark and establish a rule, making it easier to manage other projects afterward.

However, the Ripple case has proven to be quite challenging for the SEC, and without a clear favorable conclusion, I do not understand why they would pursue such a large case. If they had initially targeted only Binance, given Binance's nature, it is uncertain whether they would settle.

If there is a possibility of a settlement and a guilty plea, the SEC would have a strong precedent, making it easier to demand similar outcomes from other projects.

However, the current result from the SEC is quite the opposite; it has pushed all project parties and major exchanges into opposition, uniting them against the SEC, which only increases the resistance they face.

In fact, I find their strategy puzzling. My only impression is that they are overly eager for quick results. They seem to want to assert their position in the industry, which is why they are making such a big fuss. Otherwise, if they simply wanted to establish rules gradually, their current approach may not be the best.

However, from the perspective of the crypto industry, I think their approach is quite beneficial. By doing this, they encourage unity rather than individual battles.

Binance has not settled alone; they have set this matter aside and are addressing it together with others in the industry.

If the Republican Party comes to power next time, will the regulatory environment for the crypto industry become much more lenient?

I believe the industry will become much more lenient. Therefore, I think the Republican Party coming to power will definitely be beneficial for cryptocurrencies. If the Democratic Party comes to power, they may continue the SEC's current lawsuits, which could persist, right? If the Communist Party comes to power, will these lawsuits continue? I think that is questionable.

This is a matter of ideology. You see, recently, some courts have been relatively conservative, upholding traditional American values, including personal freedoms and limiting government power. These traditional values are well-preserved in the courts.

Judges often base their decisions on these reasons to restrict government actions. The most obvious example is the recent case of Grayscale; the judge's ruling in the previous Grayscale vs. SEC case seemed to align perfectly with traditional American values, strongly criticizing government power abuse.

Thus, there is a natural image difference between the Democratic and Republican parties. The Democratic Party may lean towards a larger government, at least our current Democratic Party does, while the Republican Party leans towards a smaller government. Therefore, overall, I believe that the Republican Party's support for cryptocurrencies is ideologically aligned, while the Democratic Party's opposition may stem from the same reason. The differences between the two parties may not be very significant.

In the U.S., the situation is somewhat divided, and any issue can easily polarize. Originally, the differences between the two parties regarding cryptocurrencies were not substantial, but once they engage in a debate, the gap widens dramatically, with one supporting and the other opposing, leaving no room for cooperation between the two parties. Therefore, I believe political factors are not particularly significant in the long run.