Will DOJ Successfully Reveal Skeletons in Binance’s Closet This Year?

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The collapse of crypto giant FTX had the world reeling in shock in 2022. And although it seemed to happen in slow motion, many were still unprepared for the layered fraud that was perpetrated, which ended with users and investors losing a total of $8 billion. What is more surprising is how crypto firm Binance CEO Changpeng ‘CZ’ Zhao contributed greatly to FTX’s downfall with his decision to liquidate the FTX’s native tokens (FTT) in his possession.

But CZ’s decision to withdraw from FTX may have more to do with lowering his regulatory profile than with the actual attempt to rescue its rival cryptocurrency exchange’s financial woes. Since FTX’s downfall, which began with a media leak of files revealing FTX’s poor financial state, Zhao and FTX’s Sam Bankman-Friedthe two CEOs have engaged in a highly public game of accusation tennis.

However, Binance’s withdrawal from FTX will not be enough to save Binance from FTX’s vortex, as it is already the focus of an ongoing United States Department of Justice’s (DOJ) investigation. According to Reuters, the department’s prosecutors are debating whether to charge Binance immediately or wait until they gather further evidence offor the exchange’s unlicensed money transfers, money laundering conspiracies, and criminal sanctions breaches.

Binance had a tight rein on FTX’s decisions

Binance was an early investor in FTX, and when it sold its investment in July 2021, it allegedly got $2.1 billion in tokens (FTT and Binance’s in-house stablecoin BUSD). The recent FTX financing round valued the exchange at roughly $18 billion at the time, implying that Binance’s relinquished stake represented a major percentage of its competitor.

That massive stake definitely gave CZ significant influence over FTX decision-making, which might be a reason for investigations into CZ’s role in some of FTX’s more hasty moves to begin this year. The legal idea of “piercing the corporate veil” extends a corporation’s duties to its individual owners, particularly where such liabilities include blatantly misleading behavior.

Prior to the “Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers” Senate hearing, CZ issued an internal memorandum that the Financial Times had reported on. CZ remarked that “we did not master plan this or anything related to it,” and cautioned that “FTX going down is not good for anyone in the industry. Do not view it as a ‘win for us.’”

Any link that U.S. authorities can establish between Binance/FTX and their respective local websites will spells disaster for CZ. Internal records show that CZ is very much in charge of the apparently arm’s-length Binance.US, which they used to distract attention away from the parent company’s shady operations.

CZ may feel untouchable because he refuses to set foot in the States, but Binance’s role in allowing Iranian individuals to avoid U.S. economic sanctions—the full extent of which was revealed in a recent Reuters report—means other countries may be more willing to comply with U.S. requests to detain individuals suspected of facilitating sanctions-dodging.

Will geographical restrictions save CZ from prosecution?

To say Binance has a delicate relationship with geographical restrictions is an understatement. Indeed, the Reuters report confirmed the obvious: CZ had done his best to conceal the location of Binance’s real operationoperating headquarters to evade regulatory scrutiny.

Such measures went as far as establishing a holding company in the Cayman Islands to provide an unrevealing address to their commercial partners. Internal communications among executives reveal anxiety over its multiple global subsidiaries being traced back to the parent exchange, with the Binance team even agreeing to discreetly remove elements in their terms of service that provide a paper trail.

Reuters detailed Binance’s local enterprises’ murky operations, with some operating out of unusual co-working spaces or residential buildings. Some of these local partners claimed to be unaware of how Binance.com operates. Even local officials are uncertain of how these regional offshoots are tied to the core Binance.com business.

John Reed Stark, Former Chief of the Securities and Exchange Commission’s (SEC) Office of Internet Enforcement, shared that Binance is “co-opting the nomenclature of regulation to create a veneer of legitimacy.” The exchange’s aim for anonymity encourages criminal activity within the system that wouldwill not have been possible on the original Bitcoin’s intrinsic balance of transaction traceability and privacy.

Binance has some explaining to do after blockchain data revealed it rescued its purportedly “independent” Binance.US division. With additional evidence that the alleged separation of Binance and Binance.US was always a sham, the DOJ can file charges against the company. And this will finally mark CZ and his peers’ fall from grace.

The big question now isis that, will 2023 be the year that the DOJ will finally reveal the skeletons that Binance has been hiding in its closet? The FTX collapse that spectacularly ended 2022 should be all the motivation that the DOJ needs in order to give closure to its four-year investigation into Binance. The world can only anticipate what happens next.