CZ takes risk with his biggest deal

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. It may be Thanksgiving week in the US but its financial regulators have been very busy

It’s Changpeng Zhao against the US government: who will win?

It seems a strange question only days after the US government’s pursuit of Binance over money laundering and breaching financial sanctions removed CZ from the position he loved.

“Admittedly, it was not easy to let go emotionally. But I know it is the right thing to do,” he wrote on social media site X.

But stepping down was not the only part of the bargain. Binance pleaded guilty to criminal charges relating to money laundering and breaching international financial sanctions, agreeing to pay $4.3bn in penalties. Zhao personally pleaded guilty to failing to protect against money laundering and also paid a $50mn fine.

For some this looked like a pretty good deal. A guilty plea could mean up to 18 months in prison, a far better outcome than his rival Sam Bankman-Fried.

(Incidentally, CZ’s sentencing is in February and SBF’s is in March. At the start of the year who would have guessed CZ might end up in prison before SBF?)

A $50mn fine is also not huge for a man who is supposedly a billionaire, especially while he still remains the biggest shareholder of the world’s largest cryptocurrency exchange. Binance also wasn’t shut down – a tacit admission by regulators of Binance’s systemic importance?

The pages of evidence compiled by authorities suggest Zhao has always been aware that he was choosing profit over compliance. All this could be seen as a just the cost of doing business on the way to becoming one of the world’s richest men.

Understandable then, the reaction of one Binance employee: “People are willing to pay a lot of money to potentially buy their freedom.”

But there are compelling reasons to think his eventual punishment will be far harsher.

It is important to remember that the sentencing guidelines prompting talk of an 18-month sentence are not binding. The offence Zhao pleaded guilty to carries a maximum sentence of 10 years.

The DoJ’s action against Zhao and Binance has laid bare — with great detail and scale — the industry’s significant ties to some of the most unpalatable markets, including ransomware, the narcotics trade and the sexual abuse of children. 

It has also confirmed how trading platforms are tied at the hip to the financing of terrorism and transactions that facilitate business with countries under sanctions, such as Iran, Cuba, Syria and North Korea. 

During Tuesday’s press conference, US attorney-general Merrick Garland laid all of these transgressions directly at Zhao’s feet, saying: “While this historic plea is an important measure of accountability, we know that corporations only act through the individuals who run them.” 

“The DoJ knows that everyone is going to be watching this massive enforcement case,” Jo Ritcey-Donohue, founder at JRD Law, told me over the phone. “I would be surprised about 18 months, it would appear to fly in the face about everything the DoJ has said about sending the message to individuals that they will be held personally accountable.”

Indeed, some of the US’s biggest powerhouses have pinned their names and reputations to Zhao’s prosecution, using it to flex American might against crypto’s illicit underbelly. Tuesday’s press conference also featured Treasury secretary Janet Yellen and Rostin Behnam, chair of the Commodity Futures Trading Commission.

The DoJ will also have to contend with a political backlash if Zhao — who we now know oversaw a huge vehicle for criminal activity — walks free after an 18-month prison sentence. 

“Zhao was instrumental in creating this terrorism financing and sanctions-evasion-fuelling enterprise”, said John Reed Stark, former chief of the Securities and Exchange Commission’s office of internet enforcement. “These types of violations literally become a matter of life and death for people, they’re not just a matter of theft or grift.” 

“Unless and until [the] DoJ starts meaningfully prosecuting individual executives and supervisors and imposing significant prison time and bankrupting personal fines, this practice just rewards past crimes and incentivises future crimes,” added Dennis Kelleher, chief executive at Better Markets. 

Illustrative of the US government’s attitude is its approach to letting CZ go home to Dubai. Late on Wednesday the government filed a request to keep the disgraced former executive within its reach, suggesting an “inadequate” bail package, “substantial connections” to the UAE — and the lack of extradition treaty between the US and UAE — as arguments to keep Zhao in the US. 

“There is a qualitative difference between appearing before the court to take responsibility for misconduct and appearing several months later to face punishment,” reads the court document. 

“The government has real reason to believe that Zhao would return home to his family and simply opt to stay rather than face the consequences.” 

What’s your take on CZ’s future? As always, email me at scott.chipolina@ft.com. 

Weekly highlights

• Binance wasn’t the only crypto exchange to get in trouble this week. Rival exchange Kraken was sued by the Securities and Exchange Commission for allegedly operating as an unregistered securities business. The regulator also said Kraken commingled customer funds with its own. The exchange has said it disagrees with the complaint and stands firm in its view it does not list securities. 

• My colleague Cynthia O’Murchu and I landed a scoop on Tether: the company behind the largest stablecoin on the market deposited $1bn with a subsidiary of Britannia Financial Group, a financial services group founded by a Tory party donor who last year was indicted on allegations of bribery by US authorities. The story reveals fresh details about how Tether’s assets are managed, something the company has consistently kept under wraps. 

Soundbite of the week: Anybody for cake? 

Binance’s internal electronic communications channels have been a gift to regulators looking for evidence that the company knew it was evading US laws.

The CFTC lawsuit in March had one Binance executive saying certain customers were “here for crime”, to which a colleague allegedly replied: “We see the bad, but we close two eyes.” 

The SEC charges in June had Binance’s chief compliance officer saying: “We are operating as a fking unlicensed securities exchange in the USA bro.” 

This week, the DoJ’s turn, revealing one compliance employee’s attitude to money laundering risks: 

“We need a banner: ‘is washing drug money too hard these days — come to binance [sic] we got cake for you’.” 

Data mining: Calling time on crypto optimism

A final note on the suggestion that the DoJ’s action against Binance will somehow benefit the exchange in the long term. 

Akash Mahendra, head of developer relations at blockchain firm Haven1, said: “The move will no doubt be a good one for the health of the world’s biggest cryptocurrency exchange by volume, and ultimately beneficial to its users.”

But the fact is Binance has been losing market share as the regulators close in. Now that the exchange has pleaded guilty to criminal charges, it will have to surrender the aggressive market behaviour that earned it top spot in the first place, and replace that with boring, compliant straight shooting.

Filing suspicious activity reports and allowing supervisors to review past transactions is a big job. And some of its customers won’t be chomping at the bit to open their own activity to prying eyes. 

As Alison Jimenez, president of Dynamic Securities Analytics, told me this week, the DoJ’s action could mean “customers shift business to other exchanges not under DoJ scrutiny”. 

This week’s FT Cryptofinance was edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.