Binance’s Changpeng Zhao sentenced to four months for breaking US banking law

Binance co-founder Changpeng Zhao, better known as “CZ,” was sentenced to four months in federal prison Tuesday for violating US banking laws.

Under Zhao, Binance failed to prevent criminals, sanctioned entities, and other bad actors from laundering billions of dollars in dirty money, according to court papers.

The sentence was a loss for prosecutors, who had requested a three-year sentence.

“Everything I see about your history and characteristics are of a mitigating nature and a positive nature,” US District Judge Richard Jones told Zhao at a federal courthouse in Seattle Tuesday morning, according to reporting from The Verge.

Zhao’s sentence comes one month after his former rival, FTX founder Sam Bankman-Fried, was sentenced to 25 years for a multibillion-dollar fraud.

Hoping to avoid decades in prison, Bankman-Fried fought his charges in court, only to lose after a six-week trial. At his sentencing, the former billionaire was defiant, attributing FTX’s failure and depositors’ losses to mistakes and a series of unfortunate events rather than to top-down fraud — a fact cited by Judge Lewis Kaplan when he imposed a 25 year sentence, half of what prosecutors in that case had sought.

In contrast, Zhao pled guilty and opened his own statement Tuesday by apologizing to the courtroom.

“I deeply regret my behavior and I’m sorry,” he reportedly told the judge. ‘I’ve had a lot of quiet time alone to think and reflect.’

But his sentence also marked a dramatic fall for a man who arrived late to the crypto scene but rapidly marshalled influence and liquidity in building a crypto exchange that still handles $14 billion in daily trading volume. He also made himself a billionaire.

Disregarding regulations

Zhao, 47, built the world’s largest crypto exchange in part by telling staff to disregard US regulations that would have damped its breakneck growth, prosecutors wrote in a memo ahead of Tuesday’s sentencing.

“Better to ask for forgiveness than permission,” Zhao told staff, according to prosecutors.

Jones said he was “deeply troubled” by that statement.

‘Everything I see about your history and characteristics are of a mitigating nature and a positive nature.’

—  US District Court Judge Richard Jones

While Binance, and Zhao, still face a lawsuit from the US Securities and Exchange Commission, the sentence does mark the end of an era.

Zhao, a China-born Canadian who earned a computer science degree at McGill University, founded the company in 2017.

He took pride in a business model that broke from the bricks-and-mortar approach of traditional financial institutions. Binance has no headquarters and maintains employees in work-share spaces around the world. Under Zhao, the company also eschewed the routine practice of obtaining operating licences in the markets where it operated.

That strategy is now backfiring and posing a serious challenge for Zhao’s successor, Richard Teng.

The byzantine, everywhere-but-nowhere business model drew the scrutiny of regulators. The SEC cited Binance’s “opaque web of corporate entities” in a separate lawsuit against the firm.

That suit, which is still pending, could upend Binance’s US operation if the exchange loses at trial.

In November, Zhao struck a deal with prosecutors. He agreed to step down from his position as CEO, plead guilty to violating the Bank Secrecy Act, and pay a $50 million fine.

‘I’ve had a lot of quiet time alone to think and reflect.’

—  Changpeng Zhao

Separately, Binance agreed to plead guilty and pay $4.3 billion in fines and restitution. It was one of the largest payments the Justice Department has ever received from a corporation, Attorney General Merrick Garland said at the time.

Garland and Treasury Secretary Janet Yellen appeared together to announce details of the settlement on November 21. The head of the Commodity Futures Trading Commission, Rostin Benham, was also present.

The exchange’s “willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform,” Yellen said.

Binance also agreed to share information about its anti-money-laundering efforts with a court-appointed compliance monitor for five years.

“When Binance first launched, it did not have compliance controls adequate for the company that it was quickly becoming, and it should have,” a Binance spokesperson told DL News in November.

“Binance made misguided decisions along the way. Binance takes responsibility for this past chapter.”

Control passed to Teng, the company’s former global head of regional markets.

Before joining Binance in 2021, Teng was CEO of the Financial Services Regulatory Authority at Abu Dhabi Global Market, chief regulatory officer of the Singapore Exchange (SGX), and director of corporate finance in the Monetary Authority of Singapore.

Teng was considered a steady hand who could help the company address a growing regulatory onslaught and one day succeed Zhao.

Binance’s domination of the market has increased since Zhao’s resignation. In November 2022, Binance accounted for about 40% of spot trading volume among centralised crypto exchanges, according to data from CoinGecko.

That figure has increased to 42% across spot and derivatives crypto markets, according to CCData.

Crises on two continents

Nevertheless, Teng is facing a series of crises at the company.

This year, a Nigerian investigation into market manipulation on the exchange spiraled into a standoff, with authorities arresting two executives who had come to the country to discuss officials’ concerns.

One executive, British national Nadeem Anjarwalla, made an audacious escape worthy of a Hollywood thriller when he slipped away from his guards and jetted out of the African nation using a second passport he had apparently concealed during his arrest.

The other, former Internal Revenue Service agent Tigran Gambaryan, remains in custody. His attorney in Nigeria has called his arrest “state-sanctioned hostage-taking.”

Another issue is brewing in the Philippines, where regulators have blocked access to the website. Apple and Google are working with regulators there to remove Binance from their mobile-phone app stores.

The exchange had drawn the ire of officials by failing to get an operating licence in the Asian nation.

Amid the turmoil, Teng relented, and announced he would seek to establish a global headquarters.

“We are speaking to a few jurisdictions, a few are under consideration,” Teng said during an on-stage interview at the Paris Blockchain Week conference.

A ‘regulatory oops’?

In court Tuesday, prosecutors argued a three-year sentence reflected the severity of Zhao’s crime.

“This wasn’t a mistake — it wasn’t a regulatory oops,” prosecutor Kevin Mosley, said, according to the New York Times.

“Breaking U.S. law was not incidental to his plan to make as much money as possible. Violating the law was integral to that endeavor.”

But the three-year recommendation was overboard, even going above the 12- to 18-month prison term recommended by federal sentencing guidelines, one of Zhao’s attorneys, William Burck, said.

Ultimately, the judge agreed.

With reporting by Osato Avan-Namayo, Joanna Wright, and Callan Quinn.

Aleks Gilbert is a DeFi correspondent based in New York. Have a tip? Email him at aleks@dlnews.com.