Binance CEO Changpeng Zhao is stepping down and pleading guilty to violating anti-money laundering requirements as part of a wide-ranging deal his company reached with US authorities—a dramatic fall for the leader of the world’s largest cryptocurrency exchange.
Binance, as part of the deal, will pay regulators and prosecutors penalties of $4.3 billion and also plead guilty to criminal charges relating to money laundering, conducting an unlicensed money transmitting business and sanctions violations.
Zhao also agreed to pay a $50 million fine, and is barred from involvement in Binance’s business until a period of three years after a monitor is appointed to ensure Binance complies with all laws and exits the US as a going concern.
The announcements on Tuesday represent the most high-profile crypto crackdown since former FTX founder Sam Bankman Fried was arrested and charged in 2022 with stealing from his own crypto exchange. Last month a jury convicted him of defrauding FTX customers, investors and lenders.
The message from these two cases, Attorney General Merrick Garland said at a press conference Tuesday, is that “using new technology to break the law doesn’t make you a disruptor, it makes you a criminal.”
Some crypto supporters hope the Binance settlement will allow the industry to move past some of its recent legal troubles—and regain the confidence of more investors following a dramatic fall in 2022 that wiped out several firms and attracted the scrutiny of regulators.
The deal lifts some legal headaches that had been hanging over the exchange for years, including a probe by the Justice Department and a civil lawsuit from the Commodity Futures Trading Commission (CFTC). The CFTC had accused Binance and Zhao of violating US law by allegedly breaching derivatives licensing rules.
The pact was also designed in such a way that allows Binance to keep operating. Binance’s Richard Teng said on X, formerly known as Twitter, that he had succeeded Zhao as the CEO and that “the foundation on which Binance stands today is stronger than ever.”
But these charges don’t end all of Binance’s legal troubles. The pact doesn’t address a civil lawsuit from the Securities and Exchange Commission (SEC), which sued Binance in June and alleged it violated securities laws, mishandled customer funds and misled investors.
The SEC has also brought enforcement actions against eight other crypto exchanges for unregistered securities offerings or operations, including Coinbase (COIN), Kraken and Gemini.
‘CZ’ and SBF
The deal completes a turnabout for the 46-year-old Zhao, a self-made crypto billionaire known across the crypto industry as “CZ.”
He was born in the Chinese province of Jiangsu, north of Shanghai, and moved to Canada with his father when he was 12.
After getting a computer science degree from Montreal’s McGill University, and working for the for the Tokyo Stock Exchange, he started Binance in July 2017 with co-founder and former partner Yi He. It didn’t take him long to gain a following.
The exchange launched in China by issuing its own token called BNB (BNB-USD). The coin, which customers used to pay for trading fees often at a discount, helped the crypto firm quickly gain market share.
By November 2021, BNB carried a market capitalization of over $100 billion and trading on Binance accounted for roughly half of the industry’s total volume.
Then the crypto industry crashed in 2022 as the Federal Reserve began raising interest rates and a series of firms imploded.
Zhao at that time played a starring role in the downfall of FTX, his rival exchange. As FTX experienced a liquidity crunch late in 2022, Zhao said publicly that his company was selling its holdings in FTX’s FTT token (FTT), which contributed to the sell off.
He announced his firm had reached a non binding deal to buy FTX’s non-US businesses in what appeared to be a bailout of his rival, but then backed out a day later after reviewing the conditions of FTX’s business.
After the collapse of FTX, Zhao came under more scrutiny around the world as government authorities tried to reign in Binance’s activities and bar it from operating within their borders.
US regulators turned up the heat in the spring and summer. The CFTC in its suit cited the company’s internal chat logs to show Binance’s chief compliance officer and colleagues were aware around 2019 that the exchange did not have adequate anti-money laundering controls.
The SEC in its suit cited a comment made by Binance’s chief compliance officer to another compliance officer in December 2018 that “we are operating as a fking unlicensed securities exchange in the USA bro.”
As the cases piled up, executives began leaving. The company also laid off more than 1,000 of its workers.
Insiders became increasingly concerned about the possibility of a criminal case and there were reports that some were frustrated with Zhao’s handling of the DOJ matter.
4. More FUD about some departures. Yes, there is turnover (at every company). But the reasons dreamed up by the “news” are completely wrong.
As an organization that has grown from 30 to 8000 people in 6 years, from 0 to the world’s largest crypto exchange in less than 5 months…
— CZ 🔶 Binance (@cz_binance) July 6, 2023
In July Zhao said over Twitter that “yes, there is turnover (at every company). But the reasons dreamed up by the “news” are completely wrong. We continue to BUILD, and continue to hire.”
The Justice Department said Tuesday that what its investigation found is that Binance and Zhao spent years profiting from the US market without putting proper controls in place, feeling that compliance with US laws would put profits at risk.
It “prioritized profits over the safety of the American people,” Garland said Tuesday.
Garland cited internal communications showing that compliance employees knew Binance’s procedures were inadequate.
One employee, he said, wrote “we need a banner ‘is washing drug money too hard these days – come to binance we got cake for you.’”
Zhao, according to prosecutors, knew that to comply with anti-money laundering controls might mean some customers would not use his exchange.
He told employees it was “better to ask for forgiveness than permission.”
Those lack of controls, according to the Treasury Department, meant Binance failed to prevent and report suspicious transactions with terrorists — including Hamas’ Al-Qassam Brigades, Palestinian Islamic Jihad (PIJ), Al Qaeda, and the Islamic State of Iraq and Syria.
“Binance turned a blind eye to its legal obligations in the pursuit of profit,” said Treasury Secretary Janet Yellen. “Its willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform.”