Global Crypto Regulation: Lessons from Binance's $4.3 Billion Settlement and Industry Analysis

On November 21, 2023, Binance, the world’s largest cryptocurrency exchange, announced that it had reached a $4.3 billion settlement agreement with the U.S. Department of Justice and the Securities and Exchange Commission (SEC). As part of the settlement, Binance founder Changpeng Zhao, also known as CZ, agreed to resign as Binance’s Chief Executive Officer and admitted to violating the U.S. Anti-money laundering (AML) regulations and Securities Act.

After this, the 2-year-long litigation dispute has finally come to an end. Looking back at the 14-year history of cryptocurrency, it has faced pressure and challenges from governments and regulatory agencies of various countries. In the past few years, many Web3 projects have been sued, fined, banned, or restricted for allegedly violating securities laws, money laundering laws, tax laws, and other regulations. These cases not only affected the operation and development of projects but also triggered dissatisfaction and protests from the community.

This article analyzes the reasons why the cryptocurrency industry is subject to regulation, sorts out the policies on cryptocurrency in various localizations, and explores how projects can achieve global growth while avoiding regulatory policy sanctions.

Why are regulators taking cryptocurrencies increasingly seriously?

Responsibility

The primary responsibility of regulatory authorities is to ensure market order and safeguard public interests. They are required to oversee various industries, including the cryptocurrency industry, to prevent misconduct and safeguard social stability.

Protect consumer rights and interests

Regulatory authorities need to protect consumer rights and prevent misconduct and fraud. In the cryptocurrency field, they focus on user information security, compliant transactions, and transaction transparency. In March 2021, the US-compliant cryptocurrency exchange giant Coinbase was accused by the U.S. Commodity Futures Trading Commission of improperly reporting trading volumes and self-trading.

Prevent crime and maintain social stability

The concepts native to the cryptocurrency industry are decentralization and censorship resistance, making it easy to become a breeding ground for crime. Failure to regulate may threaten social stability. One of the tasks of regulatory authorities is to prevent money laundering, illegal transactions, and other illegal activities to ensure the stability of the political and economic system. Referring to the table above, many projects have been accused of illegally issuing securities. The two cases with the highest settlement amounts were all prosecuted for violating anti-money laundering laws.

Tax compliance

Regulators need to ensure tax compliance in the cryptocurrency industry by taking effective measures to ensure that relevant taxes can be collected on time and in amount and to maintain fiscal order. In addition, regulatory agencies should also clearly regulate the financial compliance requirements of enterprises and individuals in this industry to avoid tax evasion.

International cooperation and legal framework

The cryptocurrency industry is cross-regional, and transactions and activities often involve multiple countries and regions. To ensure international cooperation, regulation is necessary to harmonize regulations and standards between different jurisdictions and prevent cross-border irregularities and money laundering.

Risk transmission and financial stability

The cryptocurrency market features 24/7 operation, cross-regional trading activities, huge transaction scale, large price fluctuations, and sensitive market sentiment, which make it highly unstable. Regulation can ensure a certain degree of isolation between the cryptocurrency industry and the traditional financial industry. By regulating the behavior of market participants and setting reasonable trading rules and standards, regulators can help prevent the cryptocurrency risks market from being transmitted to the traditional financial system.

Inflation control

The transfer of coinage and inflation control rights to algorithms and protocols makes it more difficult for the government to control inflation. Regulatory authorities need to monitor prudently to ensure the stability of the country's economy.

An open attitude under tighter regulations

Although regulations have become increasingly stringent, there are many reasons why most regulatory agencies have a positive attitude towards this industry rather than directly banning it. First, agencies support innovation and recognize that Web3 technology is expected to solve some of the legacy problems of Web2. Secondly, compared with the traditional financial industry, the Web3 industry is relatively small, and prohibition may hinder innovative development. Therefore, most countries around the world still hold a neutral or open attitude towards Web3, expecting it to bring new vitality to the financial system under compliance supervision. In a previous article, the author summarized the policies for the cryptocurrency industry in some regions:

Why pursue compliance: opportunities, challenges, and sustainable development

What does compliance mean in the cryptocurrency industry?

This is a complex issue because different countries and regions have different regulatory policies and attitudes towards the cryptocurrency industry. Generally speaking, compliance means complying with local laws and regulations, such as securities laws, money laundering laws, tax laws, privacy laws, etc., and accepting review and supervision by relevant regulatory agencies. Compliance also means bearing certain costs and risks, such as applying for a license, paying fines, providing user information, cooperating with investigations, etc.

Which projects in the cryptocurrency industry are more likely to be subject to strict regulation?

Different businesses in the cryptocurrency industry may face different levels of regulatory risks and challenges. Generally speaking, businesses involving financial services, user identities, cross-border flows, and market behavior, such as CEX, DEX, wallets, payment platforms, and RWA-related products, are more susceptible to regulatory attention and intervention. According to law enforcement activities in the United States, as shown in the figure above, projects involving assets, especially assets in the real financial system, are more likely to be subject to stringent regulatory issues. Correspondingly, these projects are more likely to spend several times more effort to obtain compliance licenses than other businesses.

What benefits does compliance bring to projects?

On the one hand, compliance can improve the credibility and legitimacy of projects, increase the confidence and participation of users and investors, and promote the healthy and sustainable development of the entire industry. On the other hand, compliance can also avoid or reduce conflicts and disputes with regulatory agencies, protect the rights and interests of projects and users, and prevent being banned or restricted. In addition, compliance can also promote integration and collaboration with the traditional financial industry and expand more markets and opportunities.

At present, comprehensive compliance in the cryptocurrency industry faces many difficulties and challenges. Projects also have their obstacles to achieving compliance operations, which is regulatory policies that vary from place to place. What measures can projects take to avoid regulatory risks?

Global Growth Strategies among Regulations

Adapt measures to local conditions

Projects in the cryptocurrency industry need to provide different services and products according to different markets and users or provide specialized platforms and versions for users in certain countries and regions to comply with local regulatory requirements and user needs. For example, BitMEX does not offer USD or related stablecoin trading pairs, such as USDT or USDC, to reduce the risk of being governed by U.S. law.

Establish a professional legal team

A professional legal team can study and analyze the regulatory environment and requirements of each market, provide consultation and guidance for project compliance, handle possible legal disputes and risks, and maintain good communication and cooperation with local regulatory agencies and law firms. For example, Richard Teng, who recently succeeded CZ as Binance CEO, is an expert with more than 20 years of experience in financial supervision.

Ensure the company is structured and operated in a regulatory-friendly region

Supervision varies from place to place. Projects can also consider moving their headquarters, servers, and operations to policy-friendly regions. For example, the cryptocurrency trading platform FTX once moved its headquarters from Hong Kong to the Bahamas because the Bahamas has a more friendly and relaxed policy towards cryptocurrency.

For the nascent industry of cryptocurrency, most projects have flat organizational structures, simple personnel, and limited team funds. It is difficult to carry out strategies such as adapting to local conditions and recruiting professional legal teams and senior executives. Moreover, even a professional legal team like Binance cannot completely avoid the risks caused by supervision. For start-up teams, complete avoidance is a fantasy and can only minimize the risks of supervision.

Avoid explicitly prohibited areas

Although most countries around the world have a vague attitude towards the cryptocurrency industry, some regions have explicitly banned the cryptocurrency industry, which is a legal red line that must not be touched. For small projects, instead of launching different services and products to meet regional needs, it is more cost-effective to directly ban IP access in this region.

The balance between globalization and localization

For projects that have just started without a mature legal team, the operational strategy is often extensive. It is impossible to achieve a refined operational strategy for each region. However, current regulations are becoming increasingly strict, and overly extensive operating strategies can easily lead to trouble.

When project personnel and funds are tight, and it is impossible to promote compliance in large-scale areas of the project, it is appropriate to choose operating areas: invest most of the energy and resources in countries with higher acceptance of cryptocurrency. According to The 2023 Geography of Cryptocurrency Report released by Chain Analysis in October this year, the current top 10 regions with user cryptocurrency acceptance include India, Nigeria, Vietnam, the United States, etc.

Carrying out refined regional operations and choosing regions with high user acceptance will allow your operational strategy to achieve better results. After the project has stabilized operations and sufficient funds are available, you can then turn to refined operations from extensive operations in other regions.

Localized operations

When you select an appropriate region and carry out localized operations, you need to consider not only the differences in culture and religion between regions but also the graphics and text of the project. You must also take into account the supervision of the region. For example, when Binance was operating in Pakistan, it added risk warnings to some sensitive promotional materials.

For a project with a limited budget, it is safest to avoid some regulatory disputes at the expense of the aesthetics of some posters. When promoting projects, this approach can effectively and effectively avoid some regulatory risks for the project.

With global growth, choosing the right region, taking into account regional religious and cultural differences, and taking into account different regional regulatory policies may be too much work for a just-started project. Appropriate use of tools can achieve twice the result with half the effort:

Make good use of tools and get twice the result with half the effort

The Web2 growth platform can greatly help project growth. The mutually beneficial model helps many projects achieve low-cost user growth. Gleam is the leading project among the many growth tools in the Web2 field.

There are similar platforms in Web3, such as Galxe, TaskOn, and Zealy.

These Web3 growth tools are also in the industry themselves, and some platforms have also issued their tokens, like Galxe’s GAL. There are a large number of projects publishing growth activities on these platforms every day. These platforms will naturally pay attention to regional compliance issues in the general direction, reducing the problems caused by supervision to a certain extent.

In addition to helping projects achieve high ROI user growth, these platforms also add a layer of compliance protection. Some growth platforms have added the function of user-defined restricted regions. When publishing activities, you can choose to restrict IP addresses in a certain region where users cannot or can participate.

• Restricting regional IP participation. It can effectively block some areas that explicitly prohibit cryptocurrency. At the same time, this can also temporarily curb risks in some areas where supervision has increased.
• Only IPs from certain regions are allowed to participate. You can publish some activities for the region to achieve more accurate customer acquisition and avoid regulatory risks that may exist in other regions. It also helps avoid misunderstandings due to cultural or religious differences.

The cryptocurrency industry will eventually usher in compliance, which is a consensus within the industry. However, the current regulatory policies in various regions are different, which means that projects in the industry continue to move forward in unknown playgrounds. For start-up projects at this stage, it is a time to show their magical powers. The future of their projects not only depends on the regional regulatory policies but also needs to make full use of tools, adapt to the changing trends in the cryptocurrency world, and accumulate users.