By Tom Wilson and Elizabeth Howcroft
LONDON (Reuters) - Spiralling compliance costs, ongoing legal headaches and a shrinking share of the market: Binance's new chief Richard Teng faces daunting challenges in turning a new leaf for the world's biggest crypto exchange.
Teng was quickly appointed CEO this week after Binance's founder Changpeng Zhao pleaded guilty to breaking U.S. anti-money laundering laws, part of a $4.3 billion deal to resolve a years-long U.S. investigation.
Now Teng must deal with years of intrusive U.S. financial monitoring, an ongoing U.S. Securities and Exchange Commission (SEC) lawsuit and the potential loss of its dominance of the crypto sector, analysts, investors and former regulators said.
Teng faces an especially tough task in transforming the culture of Binance, four of the people said. U.S. Treasury Secretary Janet Yellen said on Tuesday that Binance "turned a blind eye to its legal obligations in the pursuit of profit" as it "allowed money to flow to terrorists, cybercriminals, and child abusers."
Teng, who before working for Binance was a financial regulator, said on social media that he would focus on reassuring users of Binance's "financial strength, security and safety" and collaborate with regulators "to uphold high standards globally."
"Teng is seen as steady hands," said Carol Alexander, professor of finance at the University of Sussex, who has tracked Binance for years. Still, leading a cultural shift at Binance - a firm shaped by Zhao in his own image - would be "hugely difficult," she said. Investors pulled almost $1 billion from Binance in the 24 hours after Zhao's demise, among its biggest daily outflows of the last year. The reaction is a sign of the challenges ahead for Teng, who previously ran Binance's regional markets.
While the U.S. settlement bars Zhao from future involvement in operating or managing Binance, he is still a major shareholder. Yi He, Binance's co-founder and the mother of Zhao's children, remains a top executive at the company. "New page," she posted on Tuesday.
Contacted by Reuters with a summary of this article, Binance did not make Teng available for an interview.
Binance spokesperson Simon Matthews told Reuters that Binance had lacked "compliance controls adequate for the company that it was quickly becoming" and made "misguided decisions" as it grew quickly.
"Richard was hired two years ago to help Binance mature and move past these historical issues," Matthews said, adding that Binance had "worked hard to restructure our organization and personnel and upgrade our systems." The firm has "new leadership" in place with experience in compliance, law enforcement and major corporations, he added.
Zhao's lawyers did not respond to a request for comment.
MONITORSHIP
As part of the resolution, the U.S. authorities will subject Binance to five years of "financial monitorship" overseen by the U.S. Treasury's Financial Crimes Enforcement Network (LON:NETW) (FinCEN).
FinCEN will keep access to Binance's books, records and systems, "oversee remedial undertakings" needed to address Binance's non-compliance with anti-money laundering and sanctions rules, the Treasury said on Tuesday.
Such steps are unusual, challenging and costly, even for mainstream financial companies with deep experience of dealing with regulators, said lawyers and former regulators.
"It's a real millstone - everything you are doing is subject to scrutiny," said John Reed Stark, a former chief of the SEC's Office of Internet Enforcement.
While the exchange has said it has ramped up compliance spending, Zhao for years sought to shield it from regulators, Reuters reported in a series of articles in 2022.
Still, Binance should be able to cover both additional compliance costs and the U.S. fines, investors have said.
"The fundamentals of our business are VERY strong," Teng posted on social media on Wednesday. "Our capital structure is debt-free, expenses are modest, and, despite the low fees we charge our users, we have robust revenues and profits."
HIRED BY ZHAO
Hired by Zhao as Binance's Singapore chief in 2021, Teng has been CEO of Abu Dhabi Global Market from 2015 to 2021. His previous roles included chief regulatory officer at Singapore Exchange (SGX).
He was promoted to head Binance's regional markets in May and was widely seen as a potential successor to Zhao.
His rise to the top job is for Binance "an opportunity to move past mounting enforcement actions and chart a path towards stability and a fresh beginning," said Rajeev Bamra, head of digital assets strategy at Moody's Investors Service.
Complicating prospects for a clean slate, however, are outstanding legal headaches.
Binance is facing an SEC lawsuit for allegedly operating a "web of deception," including artificially inflating its trading volumes and diverting customer funds. Binance has denied the allegations.
It is also under investigation in France for alleged aggravated money-laundering.
On the business front, too, Binance is under pressure.
For years it dominated the crypto market, but this year has rapidly lost market share. Last month it controlled 32% of crypto spot and 50% of derivatives trading, according to crypto firm CCData, down from 55% and 62% respectively in January.
Fuelling the decline has been an end to Binance's zero-fees transaction promotions, as well as its regulatory problems, analysts said.
Other exchanges, such as Seychelles-registered OKX, have gained market share this year, according to CCData. OKX is the second-largest exchange after Binance by market share.
In the longer term, the exchange may lose further market share because of reduced marketing and business development budgets following the U.S. fines, said Joseph Edwards, head of research at London crypto firm Enigma Securities.
"But that's talking quite far down the line - they are a very strong incumbent overall."