Changpeng Zhao and the art of persuasion

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week we’re taking a look at the next executive to find out his prison sentence.

US prosecutors have portrayed Changpeng Zhao as taking a highly calculated approach to compliance with US law. After the former Binance chief executive is sentenced next week, that characterisation could apply to his punishment too.

Zhao will learn his fate on April 30 after pleading guilty last November to failure to protect against money laundering, but that’s only part of the story.

His exchange also agreed to pay $4.3bn in fines after pleading guilty to charges relating to money laundering and breaching sanctions, a record penalty handed out by the US Treasury. In addition to a $50mn personal fine, Zhao was forced to relinquish his role as chief executive.

The price for what the Department of Justice called “Zhao’s wilful violation of US law and its consequences” will be delivered in Seattle federal court.

This week, family and friends of Zhao have tried to portray him as a caring, loyal family man who should serve a minimal custodial sentence. No doubt his lawyers are hoping to blot out other factors, such as Zhao pleading guilty, as the pile of evidence — from some of his closest business lieutenants — grew and grew.

The DoJ’s case rests on ignoring compliance rules that allowed nearly $900mn of deals to bypass US sanctions on Iran; millions of dollars worth of crypto were also moved between the exchange and infamous Russian darknet marketplace Hydra. It also laid out crypto’s ties to more unpalatable crimes, such as the narcotics trade and the sexual abuse of children.

And when Binance got too big to be ignored, the exchange worked with customers to evade US laws so it could keep the trading revenue flowing, the DoJ said.

The US legal system is fast building up precedents of criminal case law specific to crypto but, inevitably, the comparison is with his great rival Sam Bankman-Fried, who last month started a 25-year stretch for fraud relating to the collapse of FTX.

US sentencing guidelines, which handily plot the severity of crime and previous history into one neat chart, suggest that Zhao would get only a 12- to 18-month prison sentence.

But in order to send a message, prosecutors are shooting for a 36-month sentence. That’s as tough as they could take it, especially when the $50mn personal fine is also taken into account. “Any custodial sentence of less than three years would fail to reflect the gravity of his offence,” the DoJ said in its filing.

For some, the disparity in cases is deeply frustrating. “It’s just not consistent. If you’re going to dole out a $4.3bn fine, together with the most rigorous monitoring framework in history for any financial institution, how can you reconcile giving the mastermind of it all just three years?” said John Reed Stark, former chief of the SEC’s office of internet enforcement.

“The bad thing Bankman-Fried did was very well recognised by our laws and our attitude towards crypto, and he was punished accordingly, but there are a lot of other bad things in crypto that are treated almost as par for the course,” said Hilary Allen, professor at American University Washington College of Law.

“Money laundering and compliance is supposed to be serious, is this really going to cause other bad actors to ask for permission instead of forgiveness?” she added.

The stark difference in treatment really comes down to two things. The first is that US prosecutors were able to portray Bankman-Fried’s crimes as a fraud against the American people. There were names and amounts lost, even if some people weren’t American, and some investors — who were supposed to sniff out dodgy companies — deserve only limited sympathy. Rightly or wrongly, compliance violations never raise the same emotions.

The second is that of the two men, Zhao was by far the more pragmatic about the world he lived in. He did not get involved in political contributions, nor was he seduced by a flawed philanthropy. As the denouement approached, he stepped away and did not feel the need to explain himself to anyone who would listen.

Nor did he fight the DoJ’s charges. Unlike Bankman-Fried, there are no pictures of him in handcuffs or staring wild-eyed in a scrum outside court. Bankman-Fried chose to contest allegations against him, with a hearing in New York, home of the US media. Zhao quietly gave himself up in Seattle, far from the madding crowd.

“The key difference here is that Zhao ultimately played ball, and Bankman-Fried never did,” Charley Cooper, former chief of staff at the Commodity Futures Trading Commission told me. “Rather than putting the judicial system under strain and spending government resources, if someone plays ball, you cut them a deal; that’s the game.”

The DoJ’s request this week started with an edict from Zhao to his compliance team: “Better to ask for forgiveness than permission.” That calculation may yet be the final chapter to this story.

What’s your take on CZ’s fate? As always, email me at scott.chipolina@ft.com.

Join me and my colleagues at the FT’s flagship Crypto and Digital Assets Summit on May 8-9 in London. Hear from some of the leading players in the industry including London Stock Exchange chief Julia Hoggett, economic secretary to the Treasury and City minister Bim Afolami, Grayscale Investments chief executive Michael Sonnenshein, and many more. Secure your seat now at crypto.live.ft.com.

Weekly highlights:

Zhao is not the only former high flyer battling US authorities. The Securities and Exchange Commission is seeking a $5bn fine against collapsed crypto firm Terraform Labs and its co-founder Do Kwon. You will remember that the collapse of Terraform Labs’s flagship stablecoin, TerraUSD, kick-started the broader market’s collapse in May 2022.

Soundbite of the week: Pride and prejudice

The flurry of correspondence to the Seattle court this week provided great colour into the life of Zhao, both from the perspective of his friends and the DoJ. But it was the US attorney who made the grandest pleas.

Zhao bet that he would not get caught, and that if he did, the consequences would not be as serious as the crime . . . The sentence in this case will not just send a message to Zhao but also to the world.

Data mining: Strong and stable

The total market cap for stablecoins hit $158bn this month, according to CCData. That’s not only the seventh consecutive monthly increase for the sector, but also the highest point since May 2022, when the crypto market fell into a crisis.