On November 21st, 2023, Binance, the world's largest crypto exchange, pled guilty to violations of the bank Secrecy act in Failure to register as a US money transmitting business. It agreed to pay a $4.3 billion fine and agreed to tighten its anti-money laundering protocols. In addition, Binance CEO Chong Pong, Zhao or CZ personally pled guilty to criminal violations. He will pay a $50 million fine and faces up to 18 months in prison.

While he usually likes to keep his location secret, he showed up in person to a federal courthouse in Seattle to enter into his guilty plea. This enforcement action should not have come as a huge surprise. If anything, it is long overdue. A couple weeks ago, we released a video talking about the numerous red flags surrounding Binance.

and CZ we looked at two areas of key concern. The first was money laundering. The second was a safety of user funds. Binance intentionally implemented almost zero anti-money laundering protocols, making it the financial institution of choice for drug dealers, terrorists, and cyber criminals around the world.

Our second concern was the commingling of user funds specifically around their lending platform called Binance Simple Earn. Binance admits that they commingle customer assets deposited into Simple Earn and use them for opaque corporate purposes. We have serious concerns about the safety of customer assets used in this manner. the recent criminal charges Focus exclusively on the money laundering angle and say nothing about the commingling of user funds, so there are still a lot of unanswered questions in separate news.

On November 20th, the CC filed charges against another crypto exchange. Kraken They claimed that Kraken comingled customer assets with its own and offers the sale of unregistered Securities In this video, we'll look at the cases against both Binance and Kraken and figure out what this means for the crypto industry going forward. Over the years, criminals of various types used Binance to transfer billions of dollars of ill gotten gains. For example, over $100 million from the Russian dark web Marketplace Hydra was laundered through Binance.

Almost $300 million were laundered from a platform called Best Mixer, which was used by cyber criminals to obscure the source of their crypto. CZ and other senior Binance Executives knew about this, but let it continue as they are generating tens of millions of dollars of transaction fees. Not once did they file a suspicious transaction report as they are required to do under Us law. The reason they had to comply with Us law is because about 16% of Binance.com users were Us residents, making it their single largest source of customers.

This was even as they launched Binance, Us and US residents were technically not allowed to trade on Binance.com Binance allowed and in some cases even encouraged Us residents to continue using Binance.com with VPN or offshore shell companies. They knew that what they were doing was illegal, but CZ reportedly told other Binance Executives that's better to ask for forgiveness than permission. With the recent guilty plea CZ stepped down from Binance and will likely serve prison time. Binance itself agreed to pay 4.3 billion in fines to the Department of Justice and Cftc.

Binance will still be allowed to operate, but but for the next 5 Years it'll be supervised by a third party monitor who will make sure they're complying with anti-money laundering laws. While this will hopefully solve the money laundering problem, there are still unanswered questions about the safety of user funds. Perhaps the biggest concern is that Binance may tap customer funds to pay this massive fine, which could put customers at even greater risk. This situation is reminiscent of the Blockfi case last year.

In February of 20122, the crypto lending platform settled allegations from the SEC that its lending product constituted an unreg reged security. They agreed to pay a $100 million fine and cease accepting new US customers. Blockfi went bankrupt in November of 2022, when Alam Research defaulted on hundreds of millions of dollars of loans. Following the bankruptcy, the SEC agreed to relinquish $30 million of the fine that had not yet been paid as returning money to customers was a higher priority.

The point is, despite the fact that Blockfi was in the government's crosshairs for almost a year prior to its collapse, it continued to operate recklessly and customer funds were not protected. The same could be true for Binance. Just because CZ has been forced to step down doesn't mean the platform is now safe. We know that Binance cingles billions of dollars of customer funds the SEC has alleged as much in a separate complaint they filed this: June There's not a sufficient separation between Binance's corporate cash and customer funds.

so could Binance use customer funds to pay the $4.3 billion fine? Maybe now that Binance will be indirectly monitored by the government for the next 5 years. Hopefully, they wouldn't allow this to happen. But based on the Doj's press conference, it appears that this monitoring will be primarily focused on moneya laundering, not safeguarding user funds. Given that Binance operates a lending platform similar in a lot of ways to what Blockfi offered, there's still a risk that it could go bankrupt in the same way.

Thus, despite the recent enforcement actions, I personally would not put one penny into Binance. The next crypto exchange under the regulatory heat lamp is Kraken. Created in 2013, Kraken is one of the largest crypto exchanges in the US with over 9 million customers and billions of dollars of customer assets. According to the recent civil complaints, Kraken is operating as an unregistered Securities Exchange and commingling customer funds with corporate funds.

Kraken maintains custodial bank accounts for the purposes of holding customer funds. They have separate corporate bank accounts meant for their day-to-day operating expenses. Despite the fact that they have separate accounts for these two purposes, they have at least in some cases, commingled customer funds with their corporate bank accounts. The SEC is not alleging that Crack has a shortfall in customer funds, but The fact that funds were allegedly commingled is a cause for concern.

The second piece of the complaint alleges that Kraken sells unregistered Securities. This is very similar to the litigation the SEC brought against Coinbase. Whether or not a cryptocurrency should be classified as a security may seem like an academic debate with little real world consequences, but unregistered Crypto Securities including the ones traded on Kraken have already cost investors billions of dollars of losses. On Kraken's website, they create blog posts about the various cryptocurrencies their customers can buy.

Because these cryptocurrencies are unregistered, there are no safeguards to make sure this information is complete and accurate. Thus, investors may make uninformed or ill-informed decisions when they buy these coins. Compare this to publicly traded companies which are required to file standardized reports with financial statements verified by independent Auditors In Which of these two cases will investors make a better decision? in Which of these two cases is fraud more likely? Let's take the example of Filecoin, which is one of the crypto asset Securities offered on Kraken. Filecoin was created in 2017 by a company called Protocol Labs Filecoin claims to be a decentralized storage Network where people can supply their computer storage to the network and receive file coins as compensation.

People who want to buy storage pay for it in file coins. It's kind of like Dropbox but instead of your data being stored on centralized servers, it's stored on the computers belonging to individuals around the world. To pay for the development of File Coin Protocol Labs Created file coins which they sold in an initial coin offering according to a blog post on Kraken's website. As more people use Filecoin for storage, the price of Filecoin should rise.

Investors in Filecoin are bidding on the success of the network. Filecoin claims that its decentralized storage is always cheaper when compared to other cloud storage providers. This is due to the fact that the Filecoin storage and retrieval markets are inherently competitive. This is the Crux of the bull.

Cas If Filecoin is always cheaper than any centralized storage solution, everybody should switch to using it. If this is the case, the opport Unity for Filecoin could be very big indeed, as Dropbox alone has over $2 billion of annual revenue. Filecoin storage solution is marketed on a website called Dor.com They do not publish prices. You have to contact a sales representative to get a quote, so it's difficult to verify their claim that it's cheaper than centralized storage providers like Dropbox Filecoin is managed by the Filecoin Foundation, which does not publish audited financial statements.

But thirdparty data providers use a variety of blockchain tools to estimate the protocol's revenue. A According to Masari, the protocol generated 22 million file coins of Revenue in the second quarter of 2023, which is equivalent to about $1 million. First of all, this number is Tiny For comparison, Dropbox generated over $600 million of Revenue in the same quarter. Remember that according to File Coin's website, it is always cheaper than centralized storage providers such as Dropbox.

So why are so many more people using Dropbox and Filecoin? Secondly, we don't know where this supposed revenue is coming from. Who are the C customers or any of them related parties? These are things a publicly traded company would have to disclose. But for Filecoin, we have no idea. Take the example of Tera Luna The founder do Quan created fake transactions on the Tera blockchain to make it look like Tera was being used by a South Korean payment app called Chai.

It was all a fraud meant to prop up his Ponzi scheme. People could see a large number of Tera transactions from Chai on a block Explorer so they assumed that they were legit, but it was all fake. Could something similar be happening with Filecoin? We don't know. We have no way of knowing whether or not there's manipulation going on behind the scenes for any of these coins.

These fears are not hypothetical. Kraken listed Luna and encouraged his customers to stake it to earn a 6% yield. This happened just months before the Ponzi scheme collapsed and investors lost everything unregistered. Securities Exchanges like Kraken are key enablers for frauders like Dwan and have already destroyed billions of dollars of value from unsuspecting victims.

The exchanges profit handsomely from transaction fees. They don't care if the coins are fraudulent, even after Tera Luna was exposed as a Ponzi scheme Kraken listed its successor coin Luna 2.0 in an effort to generate more fees. They don't care if they're selling their customers garbage so long as they can charge fees on it, These exchanges will not stop until they are forced to. That's why the Sec's enforcement actions are so important.

Following the lawsuit, Kraken's founder and chairman Jesse Powell conducted a temper tantrum on Twitter He called the SEC the USA's top desel desel is crypto. Sling for Deceleration is someone who wants to decelerate innovation in the crypto industry. The Crypt Bros always complain about regulations stifling Innovation But what has Kraken's Innovation accomplished? making it easier for customers to invest in Ponzi schemes? What is Binance's innovation accomplished? Making it easier for cyber criminals and terrorists to launder their funds. If this is innovation, then maybe we're better off going back to the stone ages.

All right guys, that wraps it up for this video. What do you think about Binance? And Kraken Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.