Binance founder faces possible three-year jail term over ‘wild west’ business model

Changpeng Zhao, the founder of the world’s largest cryptocurrency exchange, will be sentenced on Tuesday after pleading guilty to money laundering charges, with US prosecutors seeking three years in prison for the tech tycoon.

Zhao, 47, stepped down as chief executive of Binance in November after admitting to breaking US anti-money laundering laws. Last month, another fallen cryptocurrency mogul, Sam Bankman-Fried, whose FTX exchange collapsed in 2022, received a 25-year sentence for committing fraud and conspiracy to launder money.

Prosecutors made the request for a 36-month sentence in a filing in Seattle federal court last week, arguing that sentencing Zhao to twice the maximum 18 months recommended under federal guidelines would reflect the gravity of his offences, and send a message that “the right choice, every time, is to comply with the law.”

The memorandum said Binance operated on a “wild west” model under Zhao’s leadership, failing to report more than 100,000 suspicious transactions due to poor internal controls. The suspect trades included transactions with designated terrorist groups Hamas, al-Qaida and Isis.

“Zhao’s willful violation of US law was no accident or oversight,” said the prosecutors. “He made a business decision that violating US law was the best way to attract users, build his company, and line his pockets.”

Zhao agreed to step down as Binance CEO after he and the company admitted breaching the Bank Secrecy Act. Binance agreed to pay a financial penalty of $4.3bn (£3.4bn) while Zhao was fined $50m.

Zhao’s fortune as the owner of a cornerstone of the $2.5tn cryptocurrency market remains intact despite the fine. According to the Bloomberg billionaires index, Zhao is worth $41.6bn and is the 29th richest person in the world.

Last week, Zhao, who since entering his guilty plea has been free in the US on a $175m bond, apologised for his actions in a letter to the judge overseeing the case.

Zhao said there was “no excuse” for his failure to implement effective compliance controls at Binance.

“I apologise for my poor decisions and accept full responsibility for my actions. In hindsight, I should have focused on implementing compliance changes at Binance from the get-go, and I did not,” he wrote. Zhao added that he intended to spend a “significant portion” of his time in the future helping young people in “as many places as possible”.

Zhao, a Canadian citizen, was born in the Chinese coastal province of Jiangsu, north of Shanghai, and followed his academic father to Canada in his early teens. A graduate in computer science from Montreal’s McGill University, he worked in programming systems for the Tokyo Stock Exchange and Bloomberg before establishing a high-frequency trading platform in Shanghai, where a discussion about bitcoin at a poker game ultimately led to the creation of Binance in 2017.

Seeking a lenient sentence, Zhao‘s lawyers have referenced the first-time offender’s “unflinching” acceptance of responsibility, his multimillion-dollar fine, and the lack of imprisonment as punishment in similar cases.

The new chief executive of Binance is Richard Teng, who has a regulatory background and was promoted from head of regional markets at the exchange. Teng has shed some light on Binance’s opaque structure by telling a conference this month that “a few jurisdictions” are under consideration as its global headquarters.

Binance says it has regional headquarters in France and Dubai but its complex structure has been highlighted by regulators, with the US Commodity Futures Trading Commission (CTFC) describing the business as an “opaque web of corporate entities”. A filing by the CFTC last year quoted Zhao explaining that Binance operates via entities in numerous jurisdictions in order to “keep countries clean [of violations of law] … This is the main reason .com does not land anywhere.”

Figures from The Block, a crypto news and data firm, show that while Binance remains the global market leader its market share has dropped. Its share of the spot trading market, where cryptocurrencies are bought and sold, has fallen from 56.5% in March 2023 to 45.4% last month. Its share of the futures market for bitcoin, where bets are placed on price movements in the cornerstone cryptocurrency, has declined to 40% from more than 50% a year ago.

Carol Alexander, a professor of finance at the University of Sussex business school, said lawsuits against Binance, including one still pending from the US Securities and Exchange Commission (SEC), has affected some investors who have “lost trust in Binance as a safe place for their assets”.

Binance, however, points to strong inflows into the exchange of more than $11bn so far this year, amid a resurgence in the bitcoin price, which has climbed more than 40% since January. A spokesperson added that the company is “proud of the continued evolution of our business as we move past historical compliance issues and continue to deliver for our users worldwide”.

The SEC case, however, still hangs over the company. In June last year, the regulator filed 13 charges against Binance entities and Zhao, accusing them of making billions of dollars while “placing investors’ assets at significant risk”.

At the time, Binance said it was “disappointed” by the charges but it means the company still faces legal issues.

“Binance’s problems are far from over,” says Howard Fischer, a partner at New York law firm Moses & Singer