Why the U.S. Crackdown Could Delay the Next Crypto Bull Run

summary

• The DOJ’s crackdown revealed some of the shady activities Binance was allegedly involved in under the leadership of Changpeng Zhao.

• Some of these allegations, such as providing a channel for funds for child abuse and sanctioned regions, could dampen cryptocurrency activity and delay a new bull run.

• Investors may also consider cryptocurrencies to be too legally risky and choose to invest in highly regulated traditional financial instruments.

The recent U.S. Department of Justice crackdown on Binance and its former CEO Changpeng Zhao (CZ) has tarnished cryptocurrency’s reputation as a tool for money laundering and sexual abuse. However, will its alleged use in nefarious activities cause investors to sell off, delaying the next bull run?

Last week, the U.S. Department of Justice announced an enforcement action against former Binance CEO Changpeng Zhao, alleging that he allowed Binance to be used to transfer funds for sanctioned entities and child abusers. The former crypto industry boss has pleaded guilty and will pay a $50 million fine and receive sentencing in February.

Binance Volume Decline Could Delay Crypto Bull Run

Part of the agreement with the Justice Department includes increased monitoring of Binance operations over three years. An agreement with the U.S. Treasury Department requires five years of monitoring. John Reed Stark, former director of Internet enforcement at the U.S. Securities and Exchange Commission (SEC), said Binance’s alleged involvement in terrorist financing and child abuse is not a trivial matter. These types of violations have actually become a matter of life and death for people, not just a matter of theft or fraud.

CZ’s ouster led to $650 million in outflows from Binance, while the exchange’s BNB token fell 15%. Vanderbilt University professor Yesha Yadav said “Binance 2.0” may not be able to attract the same trading volume as before.

SEC overreach could put off cryptocurrency investors

Its dominance in the cryptocurrency market could lead to a decline in trading activity in the coming months. The allegations also raise ethical questions about the utility of cryptocurrencies, potentially delaying any expected market turnaround.

Investors are hoping that the so-called crypto winter caused by high-profile enforcement actions will soon give way to the next bull run. Bitcoin’s value has more than doubled to its level at the start of the year. Investors are optimistic after news that major investment firms have filed to launch cryptocurrency spot ETFs.

However, cryptocurrencies have taken a hit to their reputation over the past 18 months with the conviction of former FTX CEO Sam Bankman-Fried and the U.S. Justice Department’s crackdown on Terra Luna co-founder Do Kwon, former Celsius CEO Alex Mashinsky and Singapore-based Three Arrows Capital executive Su Zhu, in addition to several other cryptocurrency executives facing civil lawsuits.

The SEC sued TRON founder Justin Sun for offering unregistered securities, while the CFTC and FTC targeted Voyager Digital CEO Stephen Ehrlich. Barry Silbert of Digital Finance Group was charged by the New York Attorney General with intentionally defrauding investors and concealing losses of more than $1 billion.

All of these charges will increase scrutiny on exchanges that serve U.S. customers and increase the compliance burden. Exchanges may pass these costs on to customers, who may choose traditional investment paths to reduce legal risks. Successful enforcement actions may eventually lead to the regulatory elimination of cryptocurrencies.