Binance CEO Changpeng Zhao Pleads Guilty To Federal Charges, Company Faces $4.3 Billion Penalty

The other shoe of the crypto tycoon turned evangelizing rallying figure to federal financial criminal pipeline dropped Tuesday when Binance founder Changpeng Zhao, more popularly known as CZ, pled guilty to multiple money laundering violations.

An investigation by the U.S. Department of Justice found that CZ, who held the position of CEO for the widely popular cryptocurrency exchange, and other Binance executives circumvented U.S. law by allowing terrorist organizations, including Hamas and Al Qaeda, to execute financial transactions on its platform in direct violation of the Bank Secrecy Act’s restrictions on businesses’ ability to do business with criminals and figures under economic sanctions.

According to the DOJ, CZ had knowledge that Binance’s platform had insufficient measures in place to stop such transactions, with one Binance compliance employee stating “we need a banner ‘is washing drug money too hard these days – come to Binance we got cake for you.’” 

Court filings also showed that CZ authorized a plan internally within Binance to help valuable American users identified as “VIP users” continue to conduct business on the platform despite being allowed to do so under U.S. law. Binance would contact VIP users via phone and help them register new, separate accounts via offshore entities that would then receive their holdings on the platform and any added benefits provided by Binance itself. This practice helped American users circumvent U.S. financial regulation authorities while boosting Binance’s overall holdings, value and status. According to DOJ filings, CZ stated in 2019 that the U.S. market represented “20% to 30% of [Binance’s] potential revenue.”

“Binance turned a blind eye to its legal obligations in the pursuit of profit. Its willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform,” said Secretary of the Treasury Janet L. Yellen. “Today’s historic penalties and monitorship to ensure compliance with U.S. law and regulations mark a milestone for the virtual currency industry. Any institution, wherever located, that wants to reap the benefits of the U.S. financial system must also play by the rules that keep us all safe from terrorists, foreign adversaries, and crime or face the consequences.”

CZ’s guilty plea comes with stiff punishments, including a $150 million fine, up to 18 months in prison (though it is believed prosecutors will argue for a stronger sentence) and his ouster from his position as CEO of BInance. The company itself will pay $4.3 billion in fines and forfeitures and agreed to the appointment of an independent compliance monitor for three years. CZ is barred from all involvement with BInance until three years after the compliance monitor is installed.

The ruling resolves a year-long legal battle during which Binance found itself under investigation and/or facing lawsuits from the DOJ, the U.S. Securities and Exchanges Commission, the Commodity Futures Trading Commission, the Office of Foreign Assets Control and the Department of the Treasury. It also comes less than a month after former FTX CEO Sam Bankman-Fried was convicted on fraud charges related to the collapse of FTX, BInance largest competitor until it imploded last year.

The penalties levied against Bankman-Fried, CZ and Binance also represent a concerted effort by U.S. government agencies to challenge cryptocurrency exchanges and enforce regulations on markets notorious for their volatility, alleged pump-and-dump schemes and poor-to-insufficient financial guidance for users.

CZ’s legal team will now pivot to trying to guarantee his ability to return to the United Arab Emirates, where CZ and his family reside, until sentencing. Prosecutors challenged the initial ruling by U.S. Magistrate Judge Brian Tsuchida released CZ on $175 million bail and allowed him to return to the UAE, citing potential difficulties in guaranteeing the now former Binance CEO’s return to the U.S. for sentencing including the lack of an extradition treaty with the UAE.

Questions have also risen regarding Binance’s liquidity in the face of the multi-billion dollar penalties facing the company. Despite being recognized as the largest cryptocurrency exchange globally, the company is one of the few major crypto firms to not submit to an audit by a major accredited audit firm. That lack of transparency puts a huge dent in investor trust as the belief that the company may dip into customer funds held on the platform to cover their penalties begins to spread within crypto communities.

A rash of company executives and large layoffs in the months leading up to CZ’s guilty plea have also contributed to that uncertainty. Traders have already withdrawn $1 billion from the platform in the days following the case’s resolution.