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Alien Mind 08 May 2024 ◦ 9 min read

CZ's trial overview: how it all went down

CZ's trial overview: how it all went down

Changpeng “CZ” Zhao, the founder of Binance, exemplifies the nuanced nature of the cryptocurrency industry. Once hailed as a visionary, CZ now grapples with legal challenges that have cast doubt on his reputation. Facing allegations of regulatory violations and financial improprieties, CZ's legal woes highlight the critical issues of governance, ethics, and adherence to regulations that are central to the cryptocurrency sector.

Overview of the events leading to CZ's trial and the charges

In 2023 the U.S. accused Binance, CZ, and other executives of knowingly operating as an unlicensed money services business (MSB) from August 2017 to October 2022. Allegedly, Binance failed to register with the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) to avoid regulatory scrutiny and attract more users.

The U.S. alleged that Binance facilitated billions of dollars in crypto transactions without implementing proper "know your customer" (KYC) checks. It processed transactions involving illicit activities, including dealings with sanctioned countries and terrorist organizations. The exchange failed to report suspicious transactions associated with terrorist groups like Hamas, ISIS, and al-Qaeda.

After pleading guilty in November 2023, according to court filings, Changpeng Zhao (CZ) secured his release by posting $15 million held in a trust account by Davis Wright Tremaine and providing two guarantors, who pledged $250,000 and $100,000 respectively. A sentencing hearing was scheduled for February 23, 2024, at 9 a.m. Pacific Time. CZ's release terms bar him from breaking the law, tampering with witnesses or victims, or consuming non-prescribed controlled substances.

Key moments and controversies

While waiting for the final court, Mr. Zhao turned his attention to future endeavors upon the announcement of the charge against him. During his plea hearing in November, held in federal court in Seattle, he expressed interest in investing in areas such as cryptocurrency, biotechnology, and AI. Additionally, he hinted at potentially mentoring emerging entrepreneurs.

Prosecutors revealed that Mr. Zhao extensively traveled throughout the United States, visiting cities like New York, Los Angeles, Telluride, and Moab. Despite his legal battles, Mr. Zhao found time for leisure activities like skiing and snowboarding, particularly in locations like Telluride and Moab.

During the sentencing proceedings, Judge Richard Jones criticized Mr. Zhao for prioritizing Binance's growth and profits over compliance with U.S. laws and regulations. Prosecutors sought a three-year prison sentence, double the sentencing guideline of 18 months, citing the massive scope and ramifications of Mr. Zhao's misconduct. They emphasized Binance's facilitation of sanctions violations and failure to comply with U.S. laws, resulting in billions of dollars being funneled into the dark web.

The memorandum highlighted that under Zhao's leadership, Binance adopted a "Wild West" approach, characterized by inadequate internal controls. It failed to report over 100,000 suspicious transactions, including trades involving designated terrorist groups such as Hamas, al-Qaida, and ISIS.

Judge Jones expressed both positive and negative sentiments towards Mr. Zhao during the proceedings, acknowledging his responsibility to comply with U.S. regulations while also highlighting his failure to do so. Mr. Zhao nodded in acknowledgment as the judge spoke, with family members, including his mother and sister, present in the courtroom.

Verdict and aftermath

Changpeng “CZ” Zhao has been sentenced to four months in federal prison following his involvement in illegal activities associated with the exchange. U.S. District Judge Richard Jones in Seattle acknowledged CZ's charitable contributions and his acceptance of responsibility, suggesting a limited role in the unlawful actions at Binance. CZ struck a deal with the U.S. government in November to settle a multiyear investigation into Binance, stepping down as CEO as part of the agreement. Despite relinquishing his leadership role, CZ retains a significant stake in the company.

Federal officials alleged that CZ instructed Binance to permit US customers to use the platform without conducting proper KYC or AML checks. The sentence imposed on CZ exceeded the expectations of his legal team, who had sought at most house arrest during negotiations. However, it fell short of both the official sentencing guidelines, which recommended around one year, and the prosecution's request for 36 months.

The exact reasoning behind CZ's sentencing remains undisclosed. Nonetheless, it is noteworthy that rather than contesting extradition, CZ voluntarily traveled to the U.S. to face trial. This outcome underscores a prevalent trend: cooperation with authorities when accused of wrongdoing. It serves as the latest indication that cooperation can significantly influence the judicial process when individuals are implicated in criminal activities.

In response to the allegations, Binance has undertaken substantial compliance enhancements, including bolstering AML measures and hiring key compliance personnel. 

Zhao consented to resign as Binance CEO following admissions of violating the Bank Secrecy Act, with both he and the company acknowledging the breach. He is also prohibited from being involved in running the company for three years. As part of the settlement, Binance agreed to a hefty financial penalty of $4.3 billion (£3.4 billion), while Zhao himself was fined $50 million. 

According to data from The Block, a prominent crypto news and data firm, Binance, while still holding its position as the global market leader, has experienced a decline in market share. In the spot trading market, where cryptocurrencies are exchanged, its share has decreased from 56.5% in March 2023 to 45.4% as of last month. Similarly, its share of the bitcoin futures market, where investors speculate on price movements, has dropped to 40% from over 50% a year ago.

Carol Alexander, a finance professor at the University of Sussex Business School, noted that legal challenges against Binance, including an ongoing lawsuit from the US Securities and Exchange Commission (SEC), have eroded trust among some investors, who no longer view Binance as a secure platform for their assets.

Despite these setbacks, Binance highlights significant inflows into the exchange, totaling over $11 billion this year. This surge coincides with a resurgence in the price of Bitcoin, which has surged by over 40% since January. A spokesperson for Binance emphasized the company's commitment to evolving its business beyond past compliance issues and continuing to serve its global user base.

However, despite the weight of the allegations and Binance's acknowledgment of wrongdoing, the platform remains robust, keeping its position as one of the main players in the crypto exchange landscape. Binance, renowned for its fee-based revenue model, proves to be particularly lucrative during cryptocurrency surges like the current one, spurred by Bitcoin's recent record highs and increased investor participation driven by the introduction of U.S. exchange-traded funds (ETFs) for Bitcoin.

While facing a slight decline in dominance, Binance sustains its leadership in combined spot and derivatives crypto markets. The company reports a substantial growth trajectory, with over 40 million new users added in 2023, marking a 30% increase from the previous year. Customer holdings on the exchange have surged past the $100 billion mark. Bloomberg estimates suggest that Binance may have accrued approximately $9.8 billion in annualized revenue over the 12 months leading to March.

Comparison with similar trials in the crypto world 

Zhao's lenient sentencing stands in stark contrast to that of his former crypto competitor, Sam Bankman-Fried, the founder and former CEO of FTX.

Bankman-Fried received a harsher penalty, being sentenced to 25 years in prison for crimes related to his crypto exchange's operation. Unlike Zhao and the charges leveled against Binance, Bankman-Fried's defunct exchange faced accusations of fraud and misappropriation of customer funds.

Braden Perry, a former senior trial lawyer for the CFTC, pointed out that Bankman-Fried's actions are typically perceived as more deceitful and financially damaging to a wider range of individuals compared to compliance failures.

"While CZ's case revolves around regulatory and compliance shortcomings, SBF's case centers on direct financial misconduct and deception," Perry elaborated. "Compliance failures, though serious, may be viewed as oversights rather than deliberate wrongdoing."

For years, Changpeng Zhao of Binance and Sam Bankman-Fried of FTX were promoting the potential of decentralized digital currencies, envisioning a future where borderless virtual coins would replace traditional financial systems and empower people globally. As billionaires in the bitcoin realm, they led global cryptocurrency exchanges, advocating for a tech-driven world order that minimized the role of intermediaries like banks and government oversight.

However, their lofty ambitions were met with skepticism as the crypto industry faced scrutiny from critics and regulators alike. Despite their efforts to promote innovation, both Zhao and Bankman-Fried inadvertently provided ammunition to those questioning the legitimacy of the industry, proving the presence of fraudsters using new technologies for well-known old crimes.

Conclusion

Zhao's journey, from founding Binance to facing legal troubles, serves as a reminder of the importance of staying true to principles even in the face of immense success. The notion of a "Wild West" environment on Binance reminds us of the risks associated with unchecked growth and the need for responsible leadership in the crypto space.

While Zhao's willingness to cooperate may have softened his sentence, the case puts the light on broader issues of regulation and accountability in the crypto realm. It's a reminder that innovation must always be tempered with a commitment to ethics and compliance.

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