The Journal. - The Fall of (Another) Crypto King

Episode Date: November 27, 2023

Changpeng Zhao built Binance into the world’s largest cryptocurrency exchange, and became one of the faces of crypto in the process. Last week, he appeared in federal court and pleaded guilty to violating U.S. anti-money-laundering laws and agreed to step down as CEO. WSJ’s Patricia Kowsmann explains what the deal means for Zhao, Binance, and the future of crypto itself.  Further Listening: - The Trial of Crypto’s Golden Boy  - A Crypto Exchange Crackdown  - The Rise of Binance - And The Effort to Reel It In  Further Reading: - Inside Binance’s Guilty Plea and the Biggest Fine in Crypto History  - The World’s Biggest Crypto Firm Is Melting Down  Learn more about your ad choices. Visit megaphone.fm/adchoices

Changpeng Zhao, also known as CZ, owns the world's biggest crypto exchange. It's called Binance. So CZ is the most important figure in crypto. He created this exchange in 2017 that became the largest exchange in the world for crypto trading. And people just, you know, see him as sort of a crypto god. That's our colleague Patricia Kaussmann, who's been writing about CZ for years. He's not known, super known outside crypto, but in the little big world of crypto, he's the king. In 2021, we traded 34 trillion US dollars equivalent of crypto, he's the king. In 2021, we traded $34 trillion US dollars equivalent of crypto.

Can you repeat? Yeah, so $34 trillion US dollars equivalent in crypto in 2021. But now, CZ and Binance have pleaded guilty to violating US anti-money laundering laws and admitted to compliance issues in the past. And CZ, the so-called king of crypto, is stepping down as CEO. The Wall Street Journal reporting that the CEO of Binance and its founder CZ plans to step down and plead guilty to violating U.S. anti-money laundering requirements. Welcome to The Journal, our show about money, business, and power.

I'm Ryan Knudsen. It's Monday, November 27th. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Monday, November 27th. Coming up on the show, the downfall of the crypto king. Seth and Riley's Garage Hard Lemonade. A delicious classic with a vibrant taste of fresh lemons. The perfect balance of sweet and sour with a crisp, zesty edge. Welcome to The Garage, the place of refreshing hard lemonade. Available at the LCBO. Must be legal drinking age. Please enjoy responsibly.

All right. All right. Thanks so much for taking the time to chat. Hope you had a great Thanksgiving weekend, by the way. It was Binance, Binance weekend. Yeah. So you have Binance to be thankful for, I guess. Can you tell me the origin story of Binance and its founder, Chengpeng Zhao? Chengpeng Zhao, or CZ as he's known, he is a guy who showed up in the world of crypto in 2017. He was born in China, but moved to Canada with his family when he was 12. And eventually went to college and studied computer science, kind of left and then started working on traditional financial service companies, including Bloomberg at some point.

And in 2017, he basically came across crypto. He basically came across crypto. And I think he got really interested in the mechanics of the whole thing and decided, hey, maybe it's time to create something, an exchange that is really good, like that users would like to come in, that is easy for people to understand, because crypto, particularly at the time, was something very geeky. Like, you know, not a lot of people understood how it worked. So he decided to create this exchange that was, like, easy to use, user-friendly, and became quite big quite fast. And there was something else that set Binance apart.

It operated all over the world. And the company said it didn't even have a headquarters. And at the time, there were exchanges that were offering services, but like they would on purpose stay away from certain places where maybe things are a bit more complicated or that let's not get in there because either it's sanctioned or it's more dangerous or risky for the business. But Binance kind of just offered itself to anyone in the world who wanted to use it. What was Binance like at its peak? And what was CZ like at his peak?

Yeah, the peak of Binance and CZ came in 2021 when crypto in general was doing very well. Binance at that point had almost like 70% of the market share for crypto trading. Anyone who basically traded crypto probably touched the website one way or another. And CZ became this guy who would say things. He was quite active on Twitter. He would tweet a lot about the future of crypto and how important crypto was to this idea that you would give people independence from having to deal with money that came from central banks and governments. When we first wrote a story about Binance in 2021, he had like 3 million, 4 million followers. And today he has 8 million followers.

Why do people like him so much? It's interesting because he's not a splashy guy. He's actually very rational when he speaks, calm. He doesn't seem like a crazy person trying to tell you to get into something that you probably shouldn't. He's very logical. And I think he brought this rational behavior to a market that a lot of times is just not rational. He's known for showing up at events wearing this Binance logo, polo shirt, and like all black, super simple, no fancy watches. He likes to say, you know, he drives a van. That's the persona that he creates. And of someone who

is extremely mild-tempered, again, very rational. But inside Binance, CZ was very focused on growing the company as fast as possible. According to Patricia's reporting, CZ wanted users to be able to start trading crypto within 10 minutes of signing up, without any identity checks. Our reporting shows that he, in fact, is extremely tough when it comes to targets that he wants Binance to achieve. So, you know, the whole idea of let's make people have to sign up and show their passports or IDs so we can control who they are and where the money is coming from. To him, that was all like noise that just complicated a business that should be very simple, which is people come in, trade, make money, lose money, whatever. But because Binance didn't ask its users to prove their identity back then,

prosecutors say it was easy for criminals and terrorists to use the platform to move money around. The Department of Justice started looking into Binance in 2019. What rules did investigators think the company was breaking? Basically, the idea that this company is like a bank or should behave like a bank, but in fact has no controls in place to make sure that the company is not being misused by criminals, right? So basically what they said is that Binance for a long time pretended to comply with the rules.

It actually didn't. It was processing a lot of transactions that actually came from criminal activity. And it is this idea that it was using new technology to break the law. How did CZ respond to these investigations? So there was a lot of, you know, well, yes, we started this company in a way that wasn't following the rules, but nobody was. And ever since 2021, this speech has

been, we are taking this seriously. We will put controls in place. We are hiring a lot of people in compliance to make sure that everything, all the rules are being followed. What we found in our report is that for a long time, they kept saying that. And in fact, you know, they weren't doing exactly that. There are a lot of internal messages that came out through these investigations where you saw people inside Binance literally saying, it would be nice that we had X and Y and Z control in place, but if we do, we're going to lose customers and CZ doesn't want that, so let's not do it.

So what impact was this investigation having inside of Binance? I mean, so for the whole industry, it's no secret whatsoever that the DOJ was looking at Binance and that something was going to happen. And a lot of people started to feel and see about the future of Binance. We reported, you know, a lot of that something was coming and that they were going to probably have a much smaller future and started laying off a lot of employees. You know, this company started the year with 8,000 people and now they have roughly 5,000 people. It's just a lot of layoffs going on, a lot of uncertainty, a lot of important executives that left. That was making everybody very nervous

and of course making CZ and the leadership at Binance quite nervous. The DOJ's investigation went on for years. For a while, CZ told colleagues he didn't plan to give in to prosecutors and that he wanted to put up a fight. He relocated to the United Arab Emirates, which doesn't have an extradition treaty with the United States. For a long time, we've been writing that Sisi told people inside Binance that he would never turn himself in and that he refused to face jail time.

It's one of the reasons why these discussions with the DOJ dragged for such a long time, because he's resisted this idea of actually potentially landing in jail. So it was surprising, very surprising to us and surely to the whole crypto industry and the world that this guy shows up in Seattle and actually admits, you know, to breaking their law. CZ's court appearance. That's next. Travel better with Air Canada. You can enjoy free beer, wine, and premium snacks in economy class. Now extended to flights within Canada and the U.S.

Cheers to taking off this summer. More details at AirCanada.com. At AirMiles, we help you collect more moments. So instead of scrolling through photos of friends on social media, you can spend more time dinnering with them. Mmm, how's that spicy enchilada? Oh, very flavorful. Y dinnering with them. How's that spicy enchilada? Very flavorful. Yodeling with them.

Ooh, must be mating season. And hiking with them. Is that a squirrel? Bear! Run! Collect more moments with more ways to earn. Air Mile. Last Tuesday, after years of investigations,

CZ entered a courtroom in Seattle and pleaded guilty to violating U.S. anti-money laundering requirements. Your Honor, I just want to say one thing. I want to close the issue. So I want to take responsibility and close this chapter in my life. So it's a very simple mindset for me. I've not caused problems before. I've never been a criminal.

I've not been into a courthouse before. So all this is new to me. So all this is new to me. So he shows up and says basically that he admits guilt on the charge about not having the money laundering controls in place. And he says, I am here in front of you, judge, because I am assuming responsibility for this. You could tell he was a bit nervous, right? He came in from the UAE. He mentioned something in an internal message that we saw that he was severely jet-lagged,

I think slightly confused, and he himself said a bit scared. CZ faces up to 18 months in prison. And on Monday, a judge temporarily blocked him from leaving the U.S. Binance, the company, also pleaded guilty and agreed to pay fines totaling $4.3 billion. CZ agreed to pay a fine of $50 million. In a statement on X, formerly known as Twitter,

CZ said, quote, This is best for our community, for Binance, and for myself. Binance said the settlement acknowledges the company's responsibility for criminal compliance violations. It also said it's pouring resources into compliance. What's the immediate impact that this will have on Binance?

What's happening right now inside the company is that it has a new CEO, which CZ put in place. It's this guy called Richard Tang. He's actually a former regulator. So he brings those credentials of being a guy who takes regulation and rules seriously. But, you know, this is a company that has, for six years, basically broken a lot of rules. So what they're going to have to do now is make this company 100% compliant.

They're going to have to accept a monitor that is approved by the government. So someone who looks through the books, the operations, who basically has a green pass to be inside the company and look at everything they want, they're going to have to accept this person in, doing all sorts of audits and looking under the carpet for a lot of things that we don't even know what's in there. Is this the end of Binance's troubles with U.S. regulators? No, it's not the end. The SEC or the Securities and Exchange Commission has a case pending against

Binance. And in fact, the case that SEC brought is worse than the DOJ because it's accusing Binance of other things and among them having not great controls around customer funds. That's of course a big issue. That's one that would really make users worry about Binance is if they found out that Binance was misusing their funds. But it could be that if the SEC can prove some of these issues, Binance will come back to be in trouble again. Binance says that all user assets are safe and secure, and that, quote, we will vigorously defend against any allegations to the contrary. The misuse of customer funds is what brought down FTX, Binance's biggest rival, in 2022. FTX CEO Sam Begman-Fried was found guilty of fraud after his crypto exchange collapsed and billions of dollars in customer funds were missing.

If you look at what happened with FTX, setting aside the idea that the FTX case was much worse, I mean, after all, the company was accused of mishandling customer funds. The ultimate fate of FTX was collapse. And CZ didn't want and doesn't want Binance to collapse. So an issue that drags for such a long time and the risk that the DOJ will actually come out and accuse the company of much larger issues, made him decide, let's just try to close this and negotiate and, you know, make sure that Binance comes out of it as an existing company. And if you look at how customers behaved after this settlement came out last week, it's quite interesting. What we saw since last week was that

Binance actually didn't get a massive hit from this. Like the regular, you know, let's say retail traders, they kind of honestly seem not to have care less if Binance has been told, you know, if the DOJ said Binance was this like institution that had no rules for money laundering and sanctions, they really don't care. What does this say about where the crypto industry is right now? It's very interesting because if you talk to people outside crypto who just, you know, heard about this case and the DOJ bringing this, they would say this is massive. It's a massive setback for the industry. It's yet another example of how, you know, this heads of exchanges like CZ or SAM allowed all this criminal activity to go on. So it's very negative for the people outside.

If you ask people inside the crypto industry, what they will tell you is it's actually a great thing for the industry because it's cleaning itself up. You know, these exchanges that for a long time

were breaking rules and this head of exchanges that were controlling and kind of making that happen are now outside and like off the game. And what is being left is increasingly legit exchanges and players that will bring crypto industry to the next level, which is closer to, you know, proper industry rather than

the wild, wild west that we've seen up to now. That's all for today. Monday, November 27th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Angus Berwick, Dave Michaels, and Caitlin Ostroff. Thanks for listening. See you tomorrow.