The king of crypto’s largest outlaw empire told employees for years that he would never turn himself in. But on Tuesday, a jittery Changpeng Zhao showed up in a Seattle federal court to plead guilty to violating U.S. money-laundering rules.
“I’ve not caused problems before, I’ve never been a criminal. And I’ve never been into a courthouse before. So this is new to me,” Zhao told a judge.
Hours earlier, Zhao and his company, Binance, agreed to plead guilty to resolve a Justice Department criminal investigation that has dogged the world’s largest cryptocurrency exchange almost since its launch. As part of its plea, Binance will pay a $4.3 billion fine, and Zhao stepped down as CEO. He faces a prison sentence as long as 18 months.
It was a massive twist in the life of the crypto industry’s most influential figurehead, who launched the online exchange in 2017 and developed it into a money-spinning trading machine.
He became a multibillionaire along the way. The Justice Department said Zhao’s refusal to abide by financial-crime laws, in pursuit of unfettered trading profits, turned his exchange into a colossal money-laundering hub for terrorists, cybercriminals and customers in sanctioned countries such as Iran and Russia.
His decision to come to terms with the government’s charges reflected a sense of pragmatism. The deal allows Binance to continue to operate. Zhao, 46 years old, will move to the sidelines, but retains his ownership. An internal monitor prescribed by the deal could constrain or even choke off the company’s business, but might also give reassurance to Binance customers that the regulatory troubles are behind it.
Binance’s ability to withstand such a large penalty—the largest levied against a crypto firm—reflected the huge war chest the company has amassed. Company insiders have said it had set aside $8 billion for a settlement. The fine was double what U.K. banking giant HSBC had to pay in 2012 for similar violations. Late last year, Denmark’s largest bank paid $2 billion to resolve one of the biggest money-laundering scandals of all time.
“These resolutions acknowledge our company’s responsibility for historical, criminal compliance violations, and allow our company to turn the page,” Binance said, adding it has poured resources into compliance.
The DOJ had its own reasons to resolve the case. A trial comes with risks and would have taken years to resolve. Binance mostly operates outside the U.S., limiting the ability to disrupt its operations. Zhao is based in the United Arab Emirates, which doesn’t have an extradition treaty with the U.S., though last year it signed a law-enforcement cooperation treaty with Washington.
By late 2022, some of the DOJ prosecutors believed the evidence they had accumulated justified charging Binance and Zhao, according to several people familiar with the case. Among the charges under investigation then was money-laundering conspiracy, a more severe charge than what Zhao and Binance ultimately pleaded guilty to.
Zhao, then ensconced in Dubai, instructed Binance’s lawyers to engage with the Justice Department to search for a deal. Binance’s defense attorneys at law firm Gibson Dunn & Crutcher met with DOJ officials through the year and argued that the exchange’s compliance program was much improved and that a criminal prosecution would hammer the crypto market, just as it was in meltdown.
Zhao offered an alternative to prison time: house arrest in New York, according to a person familiar with the negotiations. Zhao resisted giving up control of the company or stepping aside, too. During the back-and-forth, his general counsel quit this July over disagreements on the legal strategy.
But as the DOJ talks pressed on this fall, Zhao started floating his resignation to his lieutenants at Binance. An earlier plan to hand Binance’s reins to the chief customer service officer, Yi He, with whom Zhao has children, was scrapped. Instead, the exchange’s head of regional markets, Richard Teng, a former Singaporean regulator, emerged as Zhao’s top choice.
Zhao also bowed to pressure in September from the DOJ to sell Binance’s Russia business, after The Wall Street Journal revealed customers there were using sanctioned Russian banks.
Over a five-year investigation, U.S. authorities tracked Zhao while he hopped from country to country in an effort to keep Binance beyond their reach. First it was China, then Japan and Singapore, next a stint pretending to operate Binance from Malta, until finally he ended up in the U.A.E.
Once the unquestionable go-to place for trading crypto, Binance lost market share in recent months as customers grew wary. Several top executives left in recent months, many fearful that the exchange could be shut down under DOJ charges.
Late this summer, Zhao rejected a deal proposed by the DOJ that involved a $6 billion company fine and a recommended prison sentence of 18 months, according to people familiar with the negotiations.
Tuesday’s guilty plea came only weeks after FTX founder Sam Bankman-Fried was convicted of stealing billions of dollars from customers of his crypto exchange, in what prosecutors called one of the biggest financial frauds in U.S. history.
Binance sought to use the case to distinguish its crimes from those that brought down FTX. In a press release, Binance said it hasn’t been accused of misappropriating any user funds.
“I made mistakes, and I must take responsibility,” Zhao wrote on X, formerly Twitter. “This is best for our community, for Binance, and for myself.”
Born in China, Zhao moved to Canada when he was 12 with his parents and sister. He later learned the ropes of building exchange infrastructure as a software developer at Bloomberg in New York.
In 2017, he and a small team launched Binance in Shanghai, and within six months it was already the largest crypto exchange in the world. Zhao attributed the success to hard work. Binance touted stories about how employees would take their laptops to hikes and midnight movies, in case work called.
But Binance’s main edge was that it had no authority to answer to. The company claimed it was based nowhere, while it serviced customers anywhere in the world through its platform, Binance.com. That included countries facing Western sanctions, such as Iran and later Russia.
Zhao was obsessed with expanding Binance at any cost, according to internal messages and people close to him. Early on, a Binance compliance employee told a colleague that Zhao wanted “users to be able to trade within 10 minutes,” without any identity checks meant to prevent the use of the exchange by criminals.
In keeping with Binance’s refusal to disclose its platform’s location, Zhao also encouraged a culture of secrecy, ordering employees not to reveal whom they worked for and to erase internal communications.
During a company retreat at a South Korean ski resort in 2020, a note circulated among staff telling them to “avoid speaking of the company, especially when in groups, out loud. Inebriated or not.”
The company appeared to recognize its risks early on. Samuel Lim, Binance’s compliance chief, told Zhao in October 2018 that it had users from sanctioned countries, according to text messages obtained by the DOJ.
Lim suggested Binance should block those customers, adding U.S. authorities could try to investigate if they knew what Binance was up to.
Lim wasn’t wrong. That year, U.S. authorities began looking into whether Binance and other crypto exchanges were soliciting American customers without following anti-money-laundering laws and sanctions restrictions.
As early as 2019, law-enforcement officials were gathering information on Zhao.
Lim didn’t respond to requests for comment.
Zhao sought to insulate Binance from the growing scrutiny. He launched a U.S. arm, called Binance. US, that year which claimed to operate independently. In reality, Binance was fully behind it, and Zhao was its largest shareholder, the Journal previously reported.
While Binance officially blocked U.S. customers from its main website, it offered technological workarounds so Americans could use the larger exchange. The goal was “to reduce the losses to ourselves, and at the same time to make the U.S. regulatory authorities not trouble us,” Zhao said at the time, according to a separate civil complaint by the Securities and Exchange Commission.
Zhao’s reluctance to require users to provide any identifying information opened the door to criminals and users seeking to skirt U.S. sanctions. The exchange allowed customers in Iran to move at least $899 million, and it received over $100 million from a Russian online drug marketplace called Hydra, according to the DOJ.
“We need a banner ‘is washing drug money too hard these days—come to Binance we got cake for you,’” a Binance compliance employee wrote in a 2019 chat, according to the DOJ.
Federal prosecutors sent a letter to Binance in December 2020 seeking records on Binance’s compliance policies. The request caused concern internally because under Zhao’s direction much of the documentation had been erased, according to a person familiar with the letter.
A crypto boom during the pandemic turbocharged Zhao’s fortunes. While he preached frugality, he splashed $11 million on a yacht that year, according to the SEC. The 100-foot, Italian-made vessel was named Da Moon, according to a former Binance executive, a play on the phrase “to the moon” beloved by crypto traders hopeful for ever-rising prices.
U.S. regulators, meanwhile, received help from several former top executives at Binance. US. Brian Brooks, who had a brief three-month spell there as chief executive, told SEC officials during a meeting in December 2021 that it became clear to him during his tenure that Zhao was in charge of the American business, not him.
“As soon as I realized that, I left,” Brooks said.
At the Seattle courthouse Tuesday, prosecutors sought to prevent Zhao from leaving the country until his sentencing. They argued that Zhao’s wealth and citizenship in the U.A.E. might lead him to skip sentencing, currently scheduled for February.
Magistrate Judge Brian A. Tsuchida sided with Zhao, releasing him on a $175 million bond. Zhao’s sister also put up her $5 million California home as collateral to ensure her brother shows up for his sentencing.
“I have full intention to come back here and close this issue,” Zhao told Judge Tsuchida. “Otherwise, I wouldn’t be here today.”
—Vicky Ge Huang contributed to this article.
Write to Patricia Kowsmann at patricia.kowsmann@wsj.com, Angus Berwick at angus.berwick@wsj.com, Caitlin Ostroff at caitlin.ostroff@wsj.com and Dave Michaels at dave.michaels@wsj.com