Prism: Judging Zhao Changpeng

United States v. Changpeng Zhao: An American-style "Government vs. Citizen" Lawsuit

At 47 years old, Changpeng Zhao is the founder and former CEO of Binance.

He was born in Jiangsu, China, and is a citizen of Canada and the UAE. In 2021, Zhao became the richest Chinese person in the world with a fortune of $94.1 billion (approximately 681.3 billion RMB), surpassing many well-known veteran billionaires, just four years after founding Binance.

After experiencing the volatility of the cryptocurrency market and regulatory pressures, Zhao's current wealth stands at $39.7 billion—still making him the richest person in Canada and the 38th richest in the world. This level of wealth is comparable to that of senior Wall Street figures, such as Stephen A. Schwarzman, founder of Blackstone.

Binance is the largest cryptocurrency exchange in the world, with a market share that once exceeded two-thirds and currently remains above 50%. In the first quarter of 2024, the total trading volume of global cryptocurrency exchanges reached $4.29 trillion. In addition to trading services, Binance also issues its own cryptocurrency, BNB (Binance Coin), which currently fluctuates around a total market capitalization of $90 billion.

Countries like Singapore and the UAE maintain a relatively open and even welcoming attitude towards cryptocurrencies.

However, for the superpower United States, it is difficult to quickly provide a black-and-white decision. Whether due to the political traditions from Washington or the complex interests of Wall Street and Silicon Valley, the U.S. attitude towards cryptocurrencies remains contentious and ambiguous.

With Zhao's sentencing, the stance has become clearer: not prohibited, but subject to stricter regulation.

The U.S. is the most important market for cryptocurrencies, with a number of heavyweight players active domestically. As early as 2012, the U.S. saw the emergence of Coinbase, the world's second-largest cryptocurrency exchange. Its IPO in April 2021 on Nasdaq was seen as a milestone in the "legalization" of cryptocurrency trading in the U.S.

Initially, Binance provided services to U.S. users through its global platform. However, as U.S. regulations on cryptocurrencies tightened, Binance launched a separate platform, Binance.US, in 2019, specifically targeting American customers.

Binance.US attempted to seek compliant development within the U.S. regulatory framework. In May 2021, shortly after Coinbase's IPO, Binance invited Brian P. Brooks, the former acting Comptroller of the Currency, to become the CEO of Binance.US. However, Brooks left after just three months due to conflicts with Zhao.

The core issue lies in the decentralized nature of cryptocurrencies themselves.

For many of Binance's U.S. customers, anonymous trading and avoiding regulation were the very reasons they "believed in" and utilized cryptocurrencies. In March 2023, in response to an investigation by three U.S. senators, Binance officially acknowledged that "removing and restricting U.S. users was implemented gradually, and this initiative was not perfect in its initial years."

In fact, for a long time, Binance's U.S. users operated on two platforms: the surface-level Binance.US and the underground Binance— the latter operating outside the U.S. regulatory framework.

The prosecution in Zhao's criminal case is led by three divisions of the U.S. Department of Justice: the Criminal Division's Money Laundering and Asset Recovery Section (MLARS), the National Security Division's Counterintelligence and Export Control Section (CES), and the U.S. Attorney's Office for the Western District of Washington.

The U.S. Department of Justice alleges that Zhao was aware of and even encouraged the situation, stating that "Binance employees even called U.S. VIP customers, encouraging them to provide information that they were not in the U.S." During the April 30 trial, presiding African American federal judge Richard A. Jones also mentioned that the prosecution often cited Zhao's statement to Binance team members: "It's better to ask for forgiveness than permission."

It is worth noting that the Department of Justice holds significant weight in the U.S. political system. In the Cabinet, the Secretary of State, Secretary of Defense, Attorney General, and Secretary of the Treasury are collectively referred to as the "Big 4," executing the most core policies of the president and the ruling party.

One could argue that Zhao's trial is, in essence, a judgment by the U.S. on the decentralization of cryptocurrencies. After all, the most "terrifying" aspect of cryptocurrencies is their impact on the dollar system—many supporters of cryptocurrencies believe they are reshaping the world's monetary system and establishing a new decentralized world order.

All of this makes the case "United States v. Changpeng Zhao" even more significant.

According to the judgment, Zhao will serve four months in federal prison in SeaTac, Washington. Source: Court judgment document

Record Fine, Yet Still Facing Imprisonment

On November 21, 2023, Zhao signed a plea agreement with the U.S. Department of Justice. However, the "plea for leniency" approach and acceptance of a hefty fine did not completely exempt him from imprisonment.

The plea agreement obtained by Prism indicates that Zhao acknowledged a series of criminal charges brought by the U.S. Department of Justice for violating the Bank Secrecy Act's anti-money laundering regulations.

The plea agreement mentions that from June 2017 to 2022, Binance had over one million U.S. users. These U.S. users conducted over 20 million transactions, totaling $65 billion in deposits and withdrawals, and over 900 million transactions, totaling $550 billion in cryptocurrency spot trading, which helped Binance grow into the largest cryptocurrency exchange in the U.S. market.

The plea agreement emphasizes that as a money services business (MSB) operating in the U.S., Binance failed to obtain an MSB license from the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury.

As the CEO and daily manager of Binance, Zhao "willfully" failed to implement effective transaction monitoring for a considerable time, allowing Binance to neglect effective customer identification (KYC) and anti-money laundering (AML) measures.

"The defendant prioritized Binance's growth and profits over compliance and U.S. law," the plea agreement states, with Zhao believing that requiring customers to provide identification would drive them away.

As a result, Binance failed to effectively restrict U.S. users from trading with users in U.S.-sanctioned regions, such as $890 million in transactions with Iranian users, and millions of transactions with users from Cuba, Syria, and Ukraine's Crimea, Donetsk, and Luhansk, from which "Binance earned substantial fees."

As part of the plea and settlement agreement, Zhao must pay a $50 million fine personally and resign as CEO of Binance, and he is prohibited from participating in any Binance activities for three years. Everything was well-prepared; on the day he signed the plea agreement, Zhao announced his successor on social media—Richard Teng from Singapore.

In that social media post, he wrote: "Today, I resigned as CEO of Binance. Admittedly, it is not easy to let go emotionally. But I know this is the right thing to do. I made mistakes, and I must take responsibility. This is the best for our community, for Binance, and for myself."

Richard Teng joined Binance in 2021 to oversee its Singapore operations. In May 2023, he was "appointed in a time of crisis" as the head of all regions except the U.S. Before joining Binance, he held senior positions in financial regulatory agencies in Singapore and the UAE. During the COVID-19 pandemic, Zhao had resided in Singapore for an extended period.

On April 9, 2024, Binance's current CEO Richard Teng spoke at the Paris Blockchain Week Summit. Source: Visual China

As part of the overall plea agreement, Binance also admitted guilt at the corporate level. This involved multiple U.S. government and regulatory agencies:

The U.S. Department of the Treasury announced that on the same day Zhao signed the plea agreement, November 21, 2023, Binance reached settlements with FinCEN and the Office of Foreign Assets Control (OFAC) for "failure to comply with anti-money laundering and sanctions obligations."

The settlement fines were $3.4 billion and $968 million, respectively—setting records for both departments and becoming the largest settlement amount in the history of the U.S. Department of the Treasury.

The aforementioned settlement also requires the U.S. Department of the Treasury to retain access to Binance's accounts and systems for five years. During this period, Binance must enhance compliance (for which a $150 million pre-fine was also agreed upon, to be enforced if Binance fails to fulfill compliance commitments) and "completely exit" the U.S. within five years.

In March 2023, the U.S. Commodity Futures Trading Commission (CFTC) also initiated a civil lawsuit against Binance.

According to publicly available information from the CFTC, on November 21, 2023, the two parties reached a settlement agreement: a fine of $1.35 billion for "illegal income," along with an equal amount of $1.35 billion in penalties. Additionally, Zhao personally must pay a fine of $150 million to the CFTC.

This comprehensive settlement agreement does not include the 13 charges against Binance by the U.S. Securities and Exchange Commission (SEC) for violations of U.S. securities laws—the lawsuit is still ongoing.

For Zhao, while he certainly hopes to avoid disaster, the plea agreement mentions that the charges against him could carry a maximum sentence of 10 years in prison. However, as part of the exchange terms, the plea agreement also specifies that if the court's sentence does not exceed 18 months under the U.S. Sentencing Guidelines, Zhao will waive his right to appeal.

However, it is worth noting that the plea agreement indicates that the parties reached an understanding based on Rule 11(c)(1)(A) of the Federal Rules of Criminal Procedure, under which the defendant signs a guilty plea, and the prosecutor promises not to add new charges beyond the agreement, but "the court may accept, reject, or defer judgment on the agreement."

As the plea agreement states, "No one promises or guarantees what sentence the court will impose."

The signature page of the plea agreement reached by Zhao and the U.S. Department of Justice, including the signatures of Zhao and his top attorneys Benjamin Naftalis and William Burke. Source: Zhao's plea agreement

The Cat-and-Mouse Game Between Crypto Tycoons and Uncle Sam

Plea agreements are the norm in U.S. judicial practice. According to data from the American Bar Association, in recent years, 98% of federal criminal cases have concluded with plea agreements.

However, what sets this case "United States v. Changpeng Zhao" apart is that the defendant is a crypto tycoon who became wealthy riding the technological wave and leveraging human nature, while the plaintiff is the political and legal machinery of the world's strongest nation, making this cat-and-mouse game anything but simple.

In fact, in the months following the signing of the plea agreement, the back-and-forth between the prosecution and defense continued:

After signing the plea agreement, the first issue was bail. The initial bail terms obtained by Prism indicated that Zhao could gain temporary freedom at the cost of a $175 million personal bail and two guarantors, who made commitments of $250,000 and $100,000, respectively.

Additionally, Zhao was required to deposit $15 million into a designated trust account, which would be forfeited if he violated bail conditions. For Zhao, who is immensely wealthy, even with the previous fines totaling billions of dollars, this was merely a minor inconvenience—just a bit painful.

The initial bail terms did not restrict Zhao from leaving the U.S., but required him to report any changes in address and phone number and to ensure his return to the U.S. 14 days before the formal sentencing.

Zhao "voluntarily" flew to the U.S. to sign the plea agreement, intending to leave immediately afterward to return to his home in the UAE. Japanese judge Brian A. Tsuchida agreed to his request to leave the U.S., but the U.S. Department of Justice promptly requested African American federal judge Richard A. Jones to review this decision, insisting that Zhao remain in the U.S.

The core reason presented by the Department of Justice was that there is no extradition treaty between the U.S. and the UAE, and there have been no cases of the UAE extraditing its citizens to the U.S., and Zhao's assets are all located outside the U.S.

On November 24, 2023, Zhao's lawyer filed a motion with Judge Jones, arguing that he should be allowed to return to the UAE for four Sundays to care for a family member preparing for surgery. In exchange, Zhao offered to pledge all his shares in Binance.US, valued at approximately $4.5 billion. However, Judge Jones still did not agree.

On February 12, 2024, the court announced that the originally scheduled trial date of February 23 would be postponed to April 30.

On February 23, the prosecutors again requested the court to tighten the bail restrictions on Zhao: he was required to surrender his Canadian passport and could not change his residence in the U.S. without permission. Even when traveling within the U.S., he had to notify the prosecutors three days in advance. In fact, he did take advantage of this time to visit several places in the U.S., including the ski resort of Telluride, Colorado.

The bail terms were merely minor nudges; the more critical issue was the negotiation over the sentence. Zhao and his legal team had been trying to compress the sentence and obtain probation.

There are indeed precedents for probation: In May 2022, Arthur Hayes, the African American co-founder and former CEO of the cryptocurrency exchange BitMEX, was charged with violating anti-money laundering regulations and ultimately received only six months of home confinement and two years of probation.

However, the situation was not so simple. A recent case had Zhao worried.

Just over a month ago, on March 28, Sam Bankman-Fried, the "Jewish king of crypto," co-founder and CEO of the FTX exchange, was sentenced to 25 years in prison for large-scale fraud.

Prosecutors' Final Pressure, Leading to 161 Letters of Support

Just before the trial on April 23, the prosecutors submitted a sentencing memorandum to the court.

The memorandum obtained by Prism shows that the prosecutors used harsh language, directly pointing to Zhao's subjective intent: Binance grew in a "Wild West" manner, and "the business decisions made by Zhao were the best means of acquiring users, developing the company, and filling wallets in violation of U.S. law."

The prosecutors argued that an 18-month sentence "does not adequately reflect the seriousness of Zhao's crimes."

The memorandum emphasized that "Zhao gained enormous rewards by violating U.S. law, and the cost of this illegal behavior must be substantial," in order to "deter others who attempt to build wealth and business empires through violations of U.S. law."

As a national prosecution, the tone of the U.S. Department of Justice matched this sentiment: "The U.S. recommends that the court impose a 36-month prison sentence, which is above the Guidelines standard."

As the sentencing approached, the prosecution's demand for double the standard sentence appeared to be a final pressure tactic.

On April 23, 2024, U.S. Department of Justice prosecutors submitted a recommendation to the court, requesting a 36-month sentence for Zhao. Source: Sentencing memorandum

Zhao's side quickly retaliated. Shortly after the release of this memorandum, Zhao's apology letter to Judge Chad Jones and 161 letters of support began circulating online. These letters had actually been completed in February 2024, around the time when the prosecution was likely seeking a higher sentence.

In his letter, Zhao expressed his hope for probation, reiterated his apologies, and took full responsibility.

His regret was palpable: "Words cannot explain how much I regret my choices, which led me to appear in court." During the April 30 hearing, he said "I'm sorry," expressing his desire to take responsibility for his "mistakes," but noted that before stepping down as CEO, he had done everything possible to advance compliance and cooperate with the U.S. government.

He stated in court that he wanted to create an online education platform for underprivileged children. In previous letters of support, he also mentioned that after leaving the crypto industry, his next goal would be the blockchain and biopharmaceutical industry.

The 161 letters of support included family, friends, political and business leaders, colleagues, industry experts, angel investors in Binance, and Binance users. At the forefront were family members, with He Yi's name appearing second; the first was Zhao's sister, Jessica Zhao, a former managing director at Morgan Stanley.

In her letter, He Yi stated, "As CZ's partner, I am aware of his sense of mission and responsibility towards this industry"; "As CZ's life partner," having known him for ten years, she knows "he lives a simple life," and "makes an effort to spend quality time with our three young children despite his busy work schedule."

She believed Zhao's "greatest mistake was ignorance," rather than willful wrongdoing. He Yi also mentioned the "Wild West," stating, "If the cryptocurrency industry is likened to the Wild West, then CZ is the guardian of this wilderness."

Following He Yi were Zhao's other two children and three letters of support from their mother, Yang Weiqing, Zhao's wife.

In her letter, Yang Weiqing stated that she and Zhao "met in 1999 and married in 2003." After their marriage, she had been a full-time housewife, and Zhao took great care of the children and family, "rarely missing any opportunity to personally care for the children," including "changing diapers, feeding, and accompanying them on trips."

Moreover, "Zhao has always borne all the household expenses," "he helped my parents buy a house in Tokyo," and "also helped my nephew find a job."

In the conclusion of her letter, Yang Weiqing "pleaded with the honorable judge for leniency, giving Zhao a chance to continue caring for his loved ones."

Among the letters of support from political and business leaders were Max Baucus, the U.S. Ambassador to China during the Obama administration, members of ruling families from several emirates in the UAE, and Liang Xinjun, co-founder of Fosun Group.

Max Baucus stated in his letter that Zhao had invited him to be an advisor to Binance, saying, "A few months ago, my wife and I prepared dinner for CZ at our home in Montana." Baucus particularly emphasized that Zhao was different from Sam Bankman-Fried, who was recently sentenced to 25 years, stating, "He did not use other people's funds in his own accounts, which is in stark contrast to what Sam Bankman-Fried did."

Liang Xinjun wrote his letter as the CEO and founder of a Singapore family office, specifically mentioning that Zhao had blocked Russia from using cryptocurrency to finance, transfer assets, and make payments on the Binance platform at the onset of the Russia-Ukraine war.

Afterward, Liang Xinjun further stated, "I am even more convinced that he is not a profit-driven businessman; his business philosophy is to benefit humanity and the world."

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