The crypto industry took a bit of a black eye yesterday as Changpeng Zhao, the founder of the largest crypto exchange in the world, Binance, pleaded guilty to a slew of money laundering charges and the company agreed to pay the federal government $4.4 billion in penalties. The deal forces crypto to reckon with its biggest questions: How “law-abiding” can an industry really be when it’s inherently designed to evade surveillance and reporting? What should the industry’s relationship with the government be, and who should be responsible for supervising it? Are crypto markets really something new at all, or just speculative finance by another name? Binance’s downfall did not come as a surprise to most crypto-watchers. Federal agencies have been monitoring the company’s activities for years, as it was widely known for keeping to the crypto world’s original Wild West ethos in an effort to drive growth. “It’s not like everybody thought everything was all good at Binance,” Steven Lubka, a managing director at the Bitcoin firm Swan, told me. “It’s been an open secret that things are not okay.” Binance reached its agreement with the Department of Justice, Treasury, and the Commodity Futures Trading Commission over a heap of financial crimes including allegations that the company continually processed transactions for individuals and nations sanctioned by the U.S. government, including Hamas and ISIS. Zhao, the company’s founder and arguably the most influential person in crypto, stepped down as CEO and agreed to pay a $50 million fine and another $150 million penalty to the CFTC. He faces up to 18 months in prison, and the company will continue to operate under a Treasury-approved monitor. The structural decapitation and continual federal surveillance of the biggest crypto company in the world is not, obviously, immediately a good thing for the industry. But some think that it could clarify the differences between the field’s fraudsters and good-faith actors, clearing the lane for lucrative and lawful crypto businesses. “Some people thought the U.S. government was just going to completely ban and annihilate all of this… I think it's ridiculous to assume that's the outcome,” Lubka said. “Who has really done the most damage — the industry or the regulators?” Lubka was citing the high-profile collapses of FTX, Three Arrows Capital, and Celsius, all of which spectacularly flamed out amid their own financial mismanagement or outright fraud. The sense that the “adults” are missing when big decisions are made has been a major focus in the crypto industry recently: POLITICO’s Morning Money reported today on the herd of credibility-boosting law enforcement and security officials who have joined crypto’s ranks in recent months, from former defense secretary Mark Esper joining Coinbase’s “global advisory council” to a letter to Congress signed by 40 defense officials on behalf of the Blockchain Association trade group. “The signatories state clearly that no amount of money, whether it be gold, dollars, or digital assets should be used to fund illicit activity, but we must also be able have a reasonable conversation about the latter when it comes to proposed solutions to the problem,” Blockchain Association CEO Kristin Smith said in a statement. Crypto has also been trying to dispel its outlaw image through the use of super PACs, as POLITICO’s Jasper Goodman reported this week. A group called Fairshake, partially backed by Coinbase CEO Brian Armstrong, is supporting crypto-friendly members of Congress as a bipartisan bill seen as a victory by industry makes its way toward the House floor. Coinbase spokesperson Julia Krieger framed crypto regulation in a statement to POLITICO as drawing a line between the “sides candidates are on — for change or for the status quo.” In that light, some within the crypto community see the Binance deal not as a scarlet letter for the industry, but an overdue comeuppance for an acknowledged bad actor that clears the way for necessary change. “This has moved us from position one, which is that we have this large, potentially nefarious actor doing God knows what, to that this actor has now been reined in, which is actually an improvement,” Lubka said. “Binance no longer being the primary exchange where prices are being settled actually removes a number of objections that have hung over this whole dialogue.” With crypto foes in Washington like Sen. Elizabeth Warren (D-Mass.) proclaiming the bust “part of a larger trend of criminal activity in the crypto industry and sadly predictable,” Lubka’s optimism might still face an uphill battle among lawmakers. But with the titanic Binance brought to heel, the industry has more room to cultivate a reputation removed from the terrorist-aiding anarchists and scammers that crypto skeptics fear.
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