Changpeng Zhao, founder of the world’s largest cryptocurrency exchange, Binance, warned last year that it was difficult to prevent illegal activity in the industry that he dominated. “[If] somebody wants to violate the law, the law is not going to prevent that. The law can help to reduce that,” the company’s then chief executive said.
But the authorities can catch up with you, as the 46-year-old found out this week. Zhao quit as Binance’s chief executive on Tuesday after pleading guilty to breaking US anti-money-laundering legislation. He will pay a $50m fine and faces a possible prison term, while Binance has agreed to pay a $4.3bn settlement.
At the time of giving that quote, Zhao was answering a question about the collapse of FTX, a rival exchange that filed for bankruptcy in November last year. Its founder, Sam Bankman-Fried, was found guilty of defrauding his customers earlier this month – two of crypto’s figureheads brought down by criminal proceedings within three weeks of each other.
Zhao announced his resignation in a post on X, formerly Twitter, saying he had “made mistakes, and I must take responsibility”, and adding that Binance had not been accused of misappropriating any user funds. He said he would now “take a break” and did not see himself being a startup chief executive again.
The Canadian citizen, known by his initials CZ, was born in the Chinese coastal province of Jiangsu, north of Shanghai, and followed his academic father to Canada when he was 12. He graduated in computer science from Montreal’s McGill University and then worked in programming systems for the Tokyo Stock Exchange and Bloomberg.
Zhao moved to Shanghai in 2005, where he founded a high-frequency trading platform. It was, appropriately, his participation in a poker game in that city in 2013 that led to the creation of Binance. He was drawn into a conversation about bitcoin – the cornerstone currency of the crypto market – and Binance was founded four years later.
Binance rode the crypto boom in the ensuing years. At one point, Zhao’s wealth was estimated at just under $100bn, according to Bloomberg, although that has since fallen by three-quarters to a still sizeable $23bn.
The exchange continues to operate – under new chief executive Richard Teng, its former head of regional markets – and Zhao remains wealthy enough to, as he wrote on Tuesday, do “some passive investing” and be a “minority token/shareholder in startups”.
However, the US Department of Justice (DoJ), which negotiated the settlement alongside the Commodity Futures Trading Commission (CFTC) and US treasury, could be seeking a jail sentence for Zhao tougher than the 18-month term outlined in federal sentencing guidelines, according to the New York Times. Zhao will be sentenced in February.
His fortune is based on his controlling stake in Binance, which he retains. The structure of that empire has been the subject of unfavourable comment in actions brought against Binance by US authorities. Two legal complaints, from the Securities and Exchange Commission (SEC) and the CFTC, referred to Binance’s platforms being operated by an “opaque web of corporate entities”.
The SEC process is still active but the CFTC complaint was part of Tuesday’s settlement. It portrayed a business on a collision course with authorities as it pursued growth. Samuel Lim, Binance’s former chief compliance officer, was quoted in a 2020 messaging exchange, obtained by the CFTC, discussing certain Binance customers, including some from Russia. “Like come on. They are here for crime,” he wrote. In reply, Binance’s money laundering reporting officer agreed that “we see the bad, but we close 2 eyes”. The complaint also alleged that Binance received internal warnings “regarding HAMAS transactions”.
The DoJ said Binance had admitted engaging in “anti-money-laundering, unlicensed money transmitting, and sanctions violations”.
Speaking on Tuesday, the US attorney general, Merrick Garland, said Zhao had “wilfully violated federal law that guards against money laundering and terrorist financing”, adding: “From the very beginning, Zhao and other Binance executives had engaged in a deliberate and calculated effort to profit from the US market without implementing the controls that are required by US law.”
Garland cited millions in Binance transactions from the US to Iranian users and users in Syria and Russian-occupied Ukraine, as well as terrorist groups including Islamic State and al-Qaida.
According to one expert, the ruling is a severe blow to the reputation of Binance and crypto in general. “Binance is clearly not to be trusted,” said Carol Alexander, professor of finance at the University of Sussex Business School. “As long as ordinary investors continue to trade on these exchanges, professional traders will continue to make money from them and the volatility around cryptocurrency.”
Howard Fischer, a partner at New York law firm Moses & Singer, said the settlement was a warning for errant crypto firms. “The libertarian ideal that some crypto enthusiasts trumpet – that the industry is decentralised and beyond traditional legal norms and obligations – has no weight with regulators and criminal authorities,” he said.
Nonetheless, despite crypto’s expanding rogues’ gallery, the market remains resilient. Bitcoin has risen more than 125% over the past year to $36,500, although it remains far below its peak of $69,000 in 2021.
But Zhao must now be a more distant observer of a market he presided over for so long. Asked for an article on the Guardian website last year what words or phrases he overuses, Zhao said he was always asking: “Who is responsible for this? Who?”
This week the buck stopped with him.
