The Decibel - Money laundering, crypto trading and Canada’s richest man

Episode Date: November 30, 2023

Binance is the world’s largest crypto trading platform and its founder is the most recent crypto leader to be charged criminally in the U.S. That man – Changpeng Zhao – also happens to be Canada’s richest person.But despite his guilty plea to money-laundering charges, the reaction from the crypto industry has been much more muted than when FTX collapsed and its founder, Sam Bankman-Fried, was charged. Ethan Lou is an editor in The Globe’s Report on Business and explains what’s going on and why multiple crypto bosses have been charged recently.Questions? Comments? Ideas? Email us at [e-mail]

Chengpeng Zhao is Canada's richest man. His net worth is 23.5 billion U.S. dollars. That's according to the Bloomberg Billionaires Index. And he's also the latest crypto CEO to be criminally charged in the U.S. There have now been several chief executives from cryptocurrency companies that have faced legal repercussions. The most notorious being FTX's Sam Bankman-Fried, who was convicted of fraud this fall. But Zhao's story is different. And the reaction from many Bitcoin buyers has been much more muted.

Ethan Liu is on the show to explain why. He's an editor in the Globe's report on business section and also the author of a book about crypto called Once a Bitcoin Miner. I'm Mainika Raman-Wilms and this is The Decibel from the Globe and Mail. Ethan, thanks for being here today. Oh, thanks for having me. Always a pleasure. Let's just start by understanding Cheng Peng Zhao, who goes by CZ, so that's what we'll call him for this. How would you describe CZ?

Well, he is the owner and founder of the largest cryptocurrency exchange. It's called Binance. He's a guy who asks for forgiveness rather than permission. It's quite common for these tech founders. I feel they would move fast and break things and they will just make decisions instead of having meetings. I know you've talked to CZ before. What is he like? Yeah, so I last spoke to him because I had an assignment to write a profile on him. And he is, well, he's a rather nice guy and he's a fan of ultimate fighting championships. He has used martial arts analogies more than once. And he did tell me this, that a young pugilist will approach a fight with a plan, one move after another, but

an experienced fighter, true Kung Fu master, he has no plan. And having a plan is a bad thing. But when you have no plan, you can adapt on the fly, you can react quickly. And I think throughout his life, he has exemplified that and it has brought him evidently great success. But to take that martial arts analogy further, there is no such thing as an undefeated fighter. There are only fighters who retire and those who have yet to meet their match. And I think perhaps he went a little too bold into the US and he met his match there. And what do we know about his upbringing, his early life? He came to Canada when he was rather young. He was born in China and he was born during a rather turbulent time.

And his father faced persecution in China during what was called the Cultural Revolution. So his father eventually brought his whole family here and this is where he grew up. And when he was very young, his father bought him a computer and he says that was what got him into tech and everything. And he went to McGill and eventually he left Canada, I think more or less for good. So Binance, I think it's probably the most interesting company in the cryptocurrency sphere. It was founded in 2017. It grew really rapidly and it became the biggest exchange in the world in, I think, perhaps a matter of months. It was very quick. And for the longest time, that exchange has stayed a step ahead of lots of people.

And this is a sphere where regulation is constantly trying to catch up to what people are doing. So they were based in China for a while and China started cracking down. And so they moved to Japan and this constant migration, going somewhere, setting up shop, and then leaving when people start cracking down on them. This happened for Malta, for Singapore.

And eventually CZ was like, my company has no headquarters. And this became a point of contention in cryptocurrency media. Like, where's your legal office? Where are your people based? And he'd be like, my headquarters is wherever I am. Headquarters are outdated concepts. Wow. And then he did this expansion to the US and that's what got him into the current trouble he's in. So this is interesting. So the way him into the current trouble he's in. So this is interesting.

So the way you're talking about how he's kind of operating this company, he seems to have tried to stay one step ahead of regulations then with all that moving around. Yeah, yeah. And this is, it's not a black and white world sometimes. So which regulator has jurisdiction? And if I offer a service for someone to sell one unit of digital currency to another person, and if I don't require this one person to provide me identification, is that illegal? If it is, who is supposed to look into this? And obviously now it's been a couple of years since crypto came about. We have regulators are starting to assert their jurisdiction. But back then, it took a while for them to catch up. So how did Binance get so big?

Well, they basically offered the customers the ability to trade any coin. And in the beginning, and this is something that the Justice Department brought up, it allowed anyone to trade if you just sign up with an email address. Wow. So you don't need any documents. You just need an email address at first. Yes. And to give you some context, back in the day, 2017, it was known as the ICO boom. So that was when crypto companies, everyone came up with their own coin. And because in the beginning, there was just Bitcoin. Maybe there were a couple of other coins. That year, there was this big explosion, thousands of coins.

And most of them are worth nothing by now. But that was a crazy period. And Binance basically offered, at the time, what was considered the widest selection. And I just want to go back to this idea of like, you know, at the start, people only needed an email to sign up. So essentially, this is minimizing the hurdles, I guess, to sign up on this platform. Yes, it minimized the hurdles. But I guess the Justice Department would look at it in a completely different way. And not just the Justice Department, any regulator.

The finance world, it is all about hurdles. And you need to know your customer, you need their identification, you need to make sure you need to know the source of money. Are they funneling money from terrorism or whatever? And this is how Binance got into trouble. There's also another investigation involving the Securities and Exchange Commission in the US. Tell me about that one. So that was based largely around the idea of Binance selling its own coin to raise money and that it's an unregistered security. So we talked earlier about this concept called an ICO, which is kind of like an IPO when a company

sells shares to raise money for the company. So a crypto company will sell coins to raise money. And this was popular in 2017. So which was one reason all manner of different coins flooded the market. I should say the SEC is usually the regulator with fewer teeth because the Justice Department, they can put you in prison, but SEC most of the time, no. A lot of these investigations, they are resolved with settlements and Binance is under quite a lot of investigations by quite a lot of different government agencies. But I think all of those, I think I would consider them to be civil administrative proceedings. Usually, hey, you don't have this proper

paperwork for this thing. And if we can resolve that Justice Department thing, I think anything else is rather small potatoes. Okay, so now the company is in the news because the Department of Justice in the States has been investigating Binance. What did they find? I guess this is twofold. So one, they found rather lax anti-money laundering measures. And even though the company does state that, you know, we require your ID, we require these documents from you, but the Justice Department is saying that in practice, not so much. So initially, what Binance did was set up a separate US branch with stricter rules just for American residents. And then they barred American residents from the main international platform.

And the Justice Department is saying that Binance just went through the motions, but it actually onboarded American residents to its international platform. And it wasn't true to its word in barring Americans. Okay, so I guess this is why the Department of Justice could investigate this then, because they were onboarding Americans in this way, even though they said they were doing it kind of above board. So this is an important part of why they were investigated. I also want to go back to this idea, though, that, you know, without the hurdles, kind of anyone could sign up to this platform. So what are the results, the consequences of that, Ethan? So I should say that Binance did clean up its act after a while. So the days of signing up with a simple email address, they are long gone. But as a result of not having proper anti-money laundering measures, the Justice

Department says that, I guess, anything you can imagine, any crime that has something to do with money, the money has flowed through Binance. I think there was child exploitation, there was terrorism. And yeah, the Justice Department says the money from there flowed through the platform. And just to be clear here, Ethan, is this speculation or was there evidence that the worst possible things that you can imagine were happening here? So yes, the Justice Department does say it found evidence.

And if you look at the statement that the department put out, this bit about all this money coming from horrible sources flowing through Binance that was said by Janet Yellen, the treasury secretary. I mean, these are pretty serious charges, right? So what happened to CZ in all of this? He basically had to agree to step down from Binance. And he faces a prison term of up to 18 months. There was some sort of deal done with the prosecution and

Binance, the company, has to pay like a $4.3 billion fine. To put that into context, I think some people would say Binance's biggest competitor is this platform called Coinbase. It's in the US. It's publicly traded. And I think that is the biggest platform in the US. And $4.3 billion, it's more than all the profits made by Coinbase. What does the company have to do in the wake of these charges? Yeah, the company has to submit to third-party monitoring to make sure that it has proper compliance and anti-money laundering measures. And very importantly, CZ cannot have any involvement

in the company for at least three years. We'll be right back after this message. So, of course, CZ is not the first crypto CEO to face criminal charges. I guess, does this all feel familiar to you, Ethan? You cover this world. Is this kind of something we've seen before? Yeah, absolutely. I think for most of the listeners, what this brings to mind is probably Sam Bankman Freed, because we just saw him convicted in court not too long ago before this thing with ZZ blew up. Maybe from the outside, I think people would lump them together. But I should say Sam Bankman-Fried, he was a one-time prodigy of CZ. CZ considered himself a mentor to him. Oh, interesting. Yeah. But in the crypto world, what they did were very different. Sam Bankman-Fried and FTX, his exchange platform, it was accused of not having proper anti-money laundering measures as

well. But what he was convicted for and the chief sin that he did, he basically stole users' money and for his own personal purposes. That's fraud, essentially. Yeah, yeah. He did get convicted of that. But CZ, I think lots of crypto people will feel that he didn't do the proper paperwork. And maybe you can make the argument that, you know, what he did is more systemic because Binance is much bigger, it affected more people and all these illicit funds from all these dirty organizations flowed through and who knows what he might have enabled. But at the end of the day, he didn't follow the finance red tape rules that many people in crypto didn't believe should exist in the first place. And I think a closer analogy to CZ might be this man called Arthur Hayes. So

he's an American and he ran this exchange called BitMax. It was based in Hong Kong and very similar charges. BitMax also didn't have proper anti-money laundering measures. And they also enabled lots of money launderers. But in the end, all Arthur Hayes walked away with was six months of home confinement. And during his home confinement, they allowed him international travel. So it wasn't really home detention. It's not really home confinement. I know, but it was just one trip. But he applied, they granted him permission to fly. And after that, two years

of probation, and he doesn't actually live in the US, and they allow him to serve his probation wherever he lived in the world. Wow. And I think probably Binance is a much bigger company than BitMEX. So he might get something worse than Arthur Hayes, but probably not as much as what Sam Bankman-Fried will get. And when we're talking about Sam Bankman-Fried, what is he expected to get when he gets sentenced? If you look at the theoretical maximum, it's like 100 years or something. And I don't think you'll get 100 years. Not many people actually get the theoretical maximum.

But I think if you look at people convicted for fraud, it's basically, I think, at least five to 10 years. So in the aftermath of Sam Bankman Freed's arrest, FTX really just crumbled. So what has happened to Binance since CZ pleaded guilty? So nothing at all happened to Binance, which is why I think the crypto world perceives this development as positive. Binance still stands and none of its users lost any money and Binance is allowed to keep operating, albeit with a harsher eye on it, compliance measures forced upon it, but still standing. People all over the world, they are still using Binance, still the biggest exchange.

But I mean, if you had your money in Binance and you're hearing this news, you must get a little freaked out, right? Did that not have any effect on people who had their money wrapped up in this? It did. And I think Binance's position, it did fall a little, but I guess it was so far ahead of everyone. Despite how much it fell, it's still number one. And there was a period that there have been outflows and Coinbase, its competitor, it does appear that it had picked up a lot of ex-Binance users. Of course, CZ is no longer the CEO, though. So who's leading the company now? Oh, it's a man called Richard Tang. He's a former Singaporean compliance person. He worked on the government side of things. But he is, I would say, a bit of a dark horse. Even the crypto world hasn't heard that much about him until this moment.

He was hired some time ago, and Binance had been hiring a lot of former compliance people, former government people. And I would say this was one of those hires and he did rise through Binance rather quickly. And is this the fact that he is a more government regulation side of things? Is this, I guess, a signal that Binance is going to take those things more seriously? Yes. I think there is this certain ethos in the crypto world that it is a world apart from traditional regulators. But at the end of the day, when push comes to shove, when this thing happens, I don't think there's anything you can do but to bend the knee. What lies ahead for Binance, Ethan? And I guess for CZ as

well? Well, I think this is relatively positive for Binance. At least the chapter is closed, and it's closed without too much of a wound to Binance. Number one, it continues to operate, and 4.3 billion, it's a lot to pay, but it's better to pay this and continue operating and continue being the biggest, continue making money versus being shut down or not being able to serve the US market. So that's rather positive. And for CZ, it's quite interesting that this doesn't appear to be one of those full plea deal cases where the prosecution and the defense, they came to an agreement on the range for sentencing. And one thing that happened recently was that he tried to go home to the UAE because he has citizenship

there as well. And the judge at first granted this, but then the prosecution opposed this. And so he has to stay in the US until sentencing, which is in February. Where do you think crypto is going from here? So crypto is a big world and I think full of various factions that hate each other. So it's hard to generalize one industry as a whole. But I would say all this activity happening in crypto, it's not that unheard of. There are lots of rules and people run afoul of them every now and then. But if you look at the price, Bitcoin is probably one of the best investments of the year. It's up by a lot. And these market cycles for crypto,

they come and go. And the last time we saw it rise to 60,000, that was the third time that crypto boomed like that. And that won't be the last. Yeah, it's volatile, right? There was a massive drop last year, but it can come back. So it is volatile. But basically, what you're saying is, you know, despite all these people being charged with crimes, despite crypto being very volatile still, I mean, it's not going anywhere. This is sticking around. Yes. So much worse has happened in crypto before.

So in 2013, there was an exchange that went down. And back then, that exchange, because crypto was that much smaller of a world, that exchange had 90% of the volume of Bitcoin flowing through it. And when that went down, a lot of people said, hey, is this the end of Bitcoin? But no, it came back from that. And what we're seeing today is not nearly as bad as what happened back then. So if it can come back from that, it can certainly soldier on from this. Ethan, thank you so much for being here today. Oh, it's an absolute pleasure. Anytime.

That's it for today. I'm Mainika Raman-Wells. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.