On Friday, a Coinbase executive declared the “war against crypto” over—”at least as it applies to Coinbase.”
According to Coinbase Chief Legal Officer Paul Grewal, the US Securities and Exchange Commission (SEC) plans to drop its lawsuit against the largest US cryptocurrency exchange as the agency shifts to embrace Donald Trump’s new approach to regulating cryptocurrency in the US.
The SEC sued Coinbase in 2023, accusing Coinbase of “operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency” and “failing to register the offer and sale of its crypto asset staking-as-a-service program.”
“Since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities,” the SEC alleged.
At that time, the SEC claimed that Coinbase’s supposedly dodgy operations were depriving investors of “significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.” The litigation was intended to protect Coinbase customers, the SEC said, by holding Coinbase to the same standards as any service acting as an exchange, broker, or clearing agency.
Former SEC Chair Gary Gensler, long considered an adversary in the crypto industry, had warned that Coinbase “deliberately” flouted rules to cheat investors out of protections for financial gain. That left customers exposed to risks, Gensler claimed, and allowed for insider trading that resulted in a settlement.
“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great,” Gensler said.
Enlarge/ FTX founder Sam Bankman-Fried (R) departs Manhattan Federal Court after an arraignment hearing on March 30, 2023, in New York City.
The CEO of FTX Trading, John Ray, sent a letter to Judge Lewis Kaplan Wednesday to correct what he called “callously” and “demonstrably false” claims that disgraced FTX founder Sam Bankman-Fried made in hopes of receiving a lighter sentence for crimes including defrauding FTX customers.
In a sentencing memo, Bankman-Fried asked the court to drastically slash his prison sentence from what he considered a “grotesque” 110-year maximum to five to six years. Prosecutors have suggested the sentence should be between 40 and 50 years, but Bankman-Fried claimed such a sentence painted him as a “depraved supervillain,” Bloomberg reported.
The lightest sentence was appropriate, Bankman-Fried claimed, because the “most reasonable estimate of loss” and “harm” to customers, lenders, and investors is “zero.”
According to Ray, “Bankman-Fried continues to live a life of delusion.” While Ray’s team continues to work to recover funds lost, which has been estimated around $10 billion, the total amount of stakeholder claims filed is $23.6 quintillion dollars.
“One quintillion is one billion billions,” Ray told Kaplan. “It is the number 1 followed by 18 zeros. The task of addressing filed claims and reducing them to their proper and ‘allowed’ amount is monumental. Mr. Bankman-Fried assumes this is a breeze. He is wrong, very wrong.”
In one of the letter’s most heated moments, Ray explained why Bankman-Fried is also wrong to claim that FTX is “solvent and safe”:
Vast sums of money were stolen by Mr. Bankman-Fried, and he was rightly convicted by a jury of his peers. That things that he stole, things he converted into other things, whether they were investments in Bahamas real estate, cryptocurrencies or speculative ventures, were successfully recovered through the enormous efforts of a dedicated group of professionals (a group unfairly maligned by Mr. Bankman-Fried and his supporters) does not mean that things were not stolen. What it means is that we got some of them back. And there are plenty of things we did not get back, like the bribes to Chinese officials or the hundreds of millions of dollars he spent to buy access to or time with celebrities or politicians or investments for which he grossly overpaid having done zero diligence. The harm was vast. The remorse is nonexistent.
Ray appears to be frustrated that Bankman-Fried chose to blame his team currently leading FTX and managing bankruptcy claims, as well as lawyers—labeling them as “enemies”—to dodge responsibility for FTX crimes.
Those crimes include: wire fraud on customers of FTX, conspiracy to commit wire fraud on customers of FTX, wire fraud on lenders to Alameda Research, conspiracy to commit wire fraud on lenders to Alameda Research, conspiracy to commit securities fraud on investors in FTX, conspiracy to commit commodities fraud on customers of FTX in connection with purchases and sales of cryptocurrency and swaps, and conspiracy to commit money laundering.
“Bankman-Fried was willing to consider any narrative, including wildly conflicting narratives, that could potentially save him from this day of reckoning,” Ray told Kaplan.
Conflicting narratives Bankman-Fried considered were either focusing “exclusively on the fact” that he “could give value back to customers,” and “the Chapter 11 team is destroying it” or “go strong with the message” that “I’m really glad the Chapter 11 team has stepped in, they’re great, and even better I have funding that can help make customers more whole while the Chapter 11 team does what is needed to clean things up.”
Instead of being “enemies” stopping FTX customers from clawing back all the funds stolen, Ray told Kaplan that his team “worked tirelessly in the months following the collapse to institute governance, controls, and to preserve and protect assets.”
“The value we hope to return to creditors would not exist without the tens of thousands of hours that dedicated professionals have spent digging through the rubble of Mr. Bankman-Fried’s sprawling criminal enterprise to unearth every possible dollar, token, or other asset that was spent on luxury homes, private jets, overpriced speculative ventures, and otherwise lost to the four winds,” Ray told Kaplan, adding that “achieving anticipated recovery levels” that Bankman-Fried suggested all FTX victims are expecting is actually “by no means assured.”
“I am quite confident that but for the work of a very large team of dedicated individuals, billions of dollars would have been lost or stolen and the recoveries to customers would be a fraction of their expected recovery,” Ray told Kaplan. “I make this statement not to curry sympathy or thanks, but to accurately report on the reasons why the FTX debtors may soon be in a position to compensate victims for some of the losses caused by Mr. Bankman-Fried.”
Looking back, 2023 will likely be remembered as the year of the fallen crypto bro.
While celebrities like Kim Kardashian and Matt Damon last year faced public backlash after shilling for cryptocurrency, this year’s top headlines traced the downfalls of two of the most successful and influential crypto bros of all time: FTX co-founder Sam Bankman-Fried (often referred to as SBF) and Binance founder Changpeng Zhao (commonly known as CZ).
At 28 years old, Bankman-Fried made Forbes’ 30 Under 30 list in 2021, but within two short years, his recently updated Forbes profile notes that the man who was once “one of the richest people in crypto” in “a stunning fall from grace” now has a real-time net worth of $0.
Ultimately, Bankman-Fried’s former FTX/Alameda Research partners, including his ex-girlfriend Caroline Ellison, testified against him. Ellison’s testimony led to even weirder revelations about SBF, like Bankman-Fried’s aspirations to become US president and his professed rejection of moral ideals like “don’t steal.” By the end of the trial, it seemed like very few felt any sympathy for the once-FTX kingpin.
Bankman-Fried now faces a maximum sentence of 110 years. His exact sentence is scheduled to be determined by a US district judge in March 2024, Reuters reported.
While FTX had been considered a giant force in the cryptocurrency world, Binance is still the world’s biggest cryptocurrency exchange—and considered more “systemically important” to crypto enthusiasts, Bloomberg reported. That’s why it was a huge deal when Binance was rocked by its own scandal in 2023 that ended in its founder and CEO, Zhao, admitting to money laundering and resigning.
Arguably Zhao’s fall from grace may have been more shocking to cryptocurrency fans than Bankman-Fried’s. Just one month prior to Zhao’s resignation, after FTX collapsed, The Economist had dubbed CZ as “crypto’s last man standing.”
Zhao launched Binance in 2017 and the next year was featured on the cover of Forbes’ first list of the wealthiest people in crypto. Peering out from under a hoodie, Zhao was considered by Forbes to be a “crypto overlord,” going from “zero to billionaire in six months,” where other crypto bros had only managed to become millionaires.
But 2023 put an abrupt end to Zhao’s reign at Binance. In March, the Commodity Futures Trading Commission (CFTC) sued Binance and Zhao over suspected money laundering and sanctions violations, triggering a Securities and Exchange Commission lawsuit in June and a Department of Justice (DOJ) probe. In the end, Binance owed billions in fines to the DOJ and the CFTC, which Secretary of the Treasury Janet Yellen called “historic penalties.” For personally directing Binance employees to skirt US regulatory compliance—and hide more than 100,000 suspicious transactions linked to terrorism, child sexual abuse materials, and ransomware attacks—Zhao now personally owes the CFTC $150 million.
On the social media platform X (formerly Twitter), Zhao wrote that after stepping down as Binance’s CEO, he will be taking a break and likely never helming a startup ever again.
“I am content being [a] one-shot (lucky) entrepreneur,” Zhao wrote.
Enlarge/ Founder and CEO of Binance Changpeng Zhao, commonly known as “CZ,” in May 10, 2022, in Rome, Italy.
Now that a federal court has approved a settlement with Binance, the world largest cryptocurrency exchange is hoping to move past a money-laundering scandal that forced its founder and CEO, Changpeng Zhao, to resign and overnight drained more than $1 billion in assets from its platform.
Under the settlement, Binance will “disgorge $1.35 billion of ill-gotten transaction fees and pay a $1.35 billion penalty” to the Commodity Futures Trading Commission (CFTC), the federal agency announced in a press release.
Additionally, Zhao will personally pay a $150 million civil monetary penalty. According to a plea agreement with the US Department of Justice—which ordered Binance to pay a “historic” penalty of $4.3 billion—Zhao’s previously ordered $50 million fine can be credited under certain terms against the amount that Zhao owes the CFTC.
The CFTC found that Zhao directed Binance to dodge US regulatory requirements and violate Binance’s own terms of use to hide unauthorized US trading on the exchange. Binance did this by soliciting US customers to trade on the platform without being subjected to Binance’s know-your-customer (KYC) procedures.
“Zhao and Binance were aware of US regulatory requirements, but chose to ignore them and knowingly concealed the presence of US customers on the platform,” the CFTC’s press release said. “The order also finds Zhao and other members of Binance’s senior management actively facilitated violations of US law, including instructing US customers to evade compliance controls.”
Among those “aiding and abetting Binance’s violations,” the CFTC said, was Binance’s former compliance-control officer, Samuel Lin. Under a separate order, Lin must pay a $1.5 million civil monetary penalty, the CFTC noted.
As part of the settlement, Binance will no longer allow customers to use sub-accounts to skirt KYC procedures and has agreed to remove all non-compliant accounts from the platform. Moving forward, Binance has agreed to “no longer allow existing sub-accounts, including those opened by prime brokers, to bypass the platform’s compliance controls,” the CFTC said.
Binance must also implement a new corporate governance structure, adding a board of directors with independent members and compliance and audit committees. This structure is intended to prevent Binance from approving suspicious transactions linked to terrorism, child sexual abuse, and ransomware attacks, as well as from violating anti-money laundering and sanctions laws.
In November, when Zhao resigned, Binance said that settling these lawsuits would help the crypto exchange “turn the page,” Reuters reported.
Zhao’s plea agreement prevents him from making any public statements contradicting his acceptance of responsibility for Binance’s schemes, and he has kept his word on that front. Shortly after resigning, Zhao wrote on the social media platform X (formerly Twitter) that he had made mistakes and must take responsibility “for our community, for Binance, and for myself.”
Within one day after Zhao resigned, though, some Binance users immediately did not appear confident in the platform, withdrawing more than $1 billion from the exchange, CNBC reported. A market analyst told CNBC that Binance’s token suffered most from the CEO stepping down.
However, the majority of Binance’s assets—more than $65 billion—remained on the platform, CNBC reported, indicating that Binance is likely big enough to survive this year’s legal storms.
Zhao said he was “proud to point out” that the plea deals “do not allege that Binance misappropriated any user funds” or “that Binance engaged in any market manipulation.” Naming his successor as CEO—Binance’s former global head of regional markets, Richard Teng—Zhao expressed confidence that Teng would “ensure Binance delivers on our next phase of security, transparency, compliance, and growth.”
