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Where crypto goes next after the humbling of Binance

The $4.3 billion pact Binance reached with US authorities this week creates new complications for the world’s largest cryptocurrency exchange. But crypto enthusiasts are breathing an audible sigh of relief, saying the deal lifts a lot of the uncertainty hanging over their industry.

"It's nice to wake up in crypto and not worry about what will happen with Binance," Matt Hougan, chief investment officer at crypto asset manager Bitwise, said on X, formerly known as Twitter. "2024-2025 is going to be so great."

The settlement, JPMorgan Chase analysts added in a note, ends "potential systemic risk emanating from a hypothetical Binance collapse."

Michael Safai, a partner with crypto trading firm Dexterity Capital, argued the Binance "resolution means a path forward for crypto and confidence that the asset class won’t be enforced out of existence."

The movement in cryptocurrencies and related stocks in the aftermath of the Binance announcement showed that investors largely shared that optimism.

Binance’s own crypto token BNB (BNB-USD) was down 13% in the hours after its settlement was announced — an illustration of its many remaining challenges now that it is under tighter government scrutiny — but then recovered on Wednesday as the prices of other currencies stabilized.

Bitcoin (BTC-USD), the world’s largest cryptocurrency, was up 1% in the 24 hours after the Binance announcement, while ether, the second-largest digital currency (ETH-USD), was up more than 4%.

The stock of another big crypto exchange, Coinbase (COIN), also rose more than 3% Wednesday on possible expectations that it may prove to be a beneficiary of Binance's troubles.

The bull case

The bull case for crypto is that the worst of its problems are now in the rearview mirror.

Bitcoin peaked at $68,789 in November 2021 but then crashed in 2022 as the Federal Reserve began raising interest rates and a series of firms imploded, including crypto exchange FTX in November 2022.

A widespread crackdown on the crypto industry followed. Regulators sued a number of big players, including Coinbase and Binance. Earlier this month a jury convicted FTX founder Sam Bankman-Fried of defrauding customers, lenders, and investors.

FTX founder Sam Bankman-Fried stands as the jury foreperson reads the verdict in his fraud trial over the collapse of the bankrupt cryptocurrency exchange at federal court in New York City, U.S., November 2, 2023, in this courtroom sketch. REUTERS/Jane Rosenberg
In this courtroom sketch, FTX founder Sam Bankman-Fried stands as the jury foreperson reads the verdict in his fraud trial that ended Nov. 2. (Jane Rosenberg/REUTERS) (JANE ROSENBERG / reuters)

Now investors are newly optimistic that the industry is poised for wider acceptance and regulatory clarity from Washington. They are hoping the Securities and Exchange Commission will soon grant approval for a spot bitcoin ETF, which would allow investors to get exposure to the cryptocurrency without having to own it.

BlackRock (BLK) is among the big-name money managers that have recently applied to launch such a product. Grayscale Investments is also pushing the SEC to sign off on the conversion of its bitcoin trust into a spot bitcoin exchange-traded fund following an August decision in its favor from a three-judge panel of the District of Columbia Court of Appeals.

The panel concluded the SEC had been "arbitrary and capricious" when it denied Grayscale's conversion application in 2022.

The next official milestone where the SEC must accept or reject approval for a spot bitcoin ETF is Jan. 10, although the SEC could approve applications sooner.

The 'end of an era'

There are some reasons for investors to be cautious, however. The SEC still has a series of lawsuits pending against some of the biggest names in the industry, including Binance and Coinbase, as it tries to force more players to register with the regulatory agency and classify digital assets as securities.

And the fact that Binance now has to operate with so much government scrutiny will certainly hamper what remains the industry’s largest crypto exchange.

WASHINGTON, DC - NOVEMBER 21: U.S. Attorney General Merrick Garland speaks at a news conference at the U.S. Department of Justice Building on November 21, 2023 in Washington, DC. Garland held the news conference to announce new cryptocurrency enforcement actions being taken against Binance who will plead guilty to U.S. money laundering. (Photo by Anna Moneymaker/Getty Images)
Attorney General Merrick Garland announced the pact with Binance at a news conference Tuesday. (Anna Moneymaker/Getty Images) (Anna Moneymaker via Getty Images)

It is "the end of an era," said Yiannis Giokas, senior director of digital assets at Moody’s Analytics. "With digital currencies becoming more mainstream and institutional players entering the space, regulations and enforcement will become stricter to ensure compliance and consumer protection."

The Binance pact with US authorities "marks the same inflection point that we saw earlier at the intersection of the dot-com and post-dot-com eras," Giokas added.

Binance pleaded guilty to criminal charges relating to money laundering, conducting an unlicensed money transmitting business, and sanctions violations. Its CEO Changpeng Zhao agreed to step down, plead guilty to violating anti-money laundering requirements, and pay a $50 million fine, while retaining majority control of the exchange.

SEATTLE, WASHINGTON - NOVEMBER 21: Binance CEO Changpeng Zhao leaves the U.S. District Court on November 21, 2023 in Seattle, Washington. Zhao pleaded guilty to a money-laundering charge. (Photo by David Ryder/Getty Images)
Former Binance CEO Changpeng Zhao leaves the US District Court in Seattle on Nov. 21. (David Ryder/Getty Images) (David Ryder via Getty Images)

Binance will also pay the largest fine any crypto firm has had to pay — $4.3 billion to various US government agencies — and operate with an independent compliance monitor for three years to ensure it meets its plea agreement terms.

While the full terms of its agreement with the US haven’t yet been unsealed, they are "likely onerous, robust and extraordinarily invasive," John Reed Stark, a legal consultant and former SEC enforcement attorney, said over X, formerly Twitter.

What is known is that Binance now must review and report on billions of dollars' worth of transactions it facilitated for suspicious activity, including $898 million in trades between US users and sanctioned users based in Iran.

The mandate also entails Binance’s full cooperation "in any and all matters" related to the agreement or "any other conduct under investigation by the government" during the agreement period.

Richard Teng, head of the Middle East and North Africa for crypto firm Binance gestures as he speaks during an interview with Reuters in Dubai, United Arab Emirates, March 30, 2022. Picture taken March 30, 2022. REUTERS/Abdel Hadi Ramahi
Richard Teng, the new CEO of Binance. (Abdel Hadi Ramahi/REUTERS) (Abdel Hadi Ramahi / reuters)

This will also likely become "increasingly burdensome, cumbersome and challenging" for the firm, according to Stark.

Its new CEO, Richard Teng, faces no small amount of challenges in charting a new direction for the company while correcting for past legal violations.

In the first 24 hours following the government's announcement, customers pulled a net $695 million from Binance, according to data compiled by 21Shares.

That was significantly higher than Binance’s average daily withdrawals yet far from the largest since the beginning of 2023.

Traders view the Binance deal as the "industry finally turning a corner" and putting "to rest one of the lingering questions for crypto in 2023," said Dexterity’s Safai.

As for the future, "be prepared for a slower, more sustained pace of growth in crypto," he added.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto and other areas in finance.

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