Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
The fates of Sam Bankman-Fried and Changpeng "CZ" Zhao always seemed interwoven. CZ helped facilitate Bankman-Fried's rise, with the ever-ruthless American founder returning the favor by creating a whisper network in D.C. to take down his competitor. CZ then played his part in Bankman-Fried's downfall, turning his investment in FTX into a death blow by selling his equity—the native FTT token that clogged the FTX empire's balance sheets.
It's only fitting that CZ's coda at Binance would come less than three weeks after Bankman-Fried's conviction, the two crypto magnates' arcs dovetailing in an ending so neat that it would feel contrived in a movie. Still, it's hard not to feel like CZ emerged the victor.
Binance's long-awaited settlement with the Department of Justice—which reached a joint agreement with the Treasury Department and Commodity Futures Trading Commission—is certainly not a light sentence. The exchange will have to pay $4.3 billion, which it has yet to prove it actually has. CZ, whose name was synonymous with Binance, will have to step down for at least three years and will likely face some prison time, along with paying a hefty fine to the CFTC and Justice Department. And, perhaps worst of all, Binance will have to completely open its books and practices to the U.S. federal government by appointing a monitor for both the Justice Department and FinCEN.
"They weren't given a death sentence here," said one crypto executive, who spoke with me on the condition of anonymity. "It may not have been the guillotine, but it sure could end up being a slow bleed."
The monitorship will fundamentally change how Binance operates. As the Justice Department complaint noted, the exchange had never submitted a suspicious activity report to FinCEN, and had only implemented a wide know-your-customer system in 2022. In the press conference yesterday, Attorney General Merrick Garland claimed that Binance became the largest crypto exchange in the world in part because of the crimes it committed. By effectively having the U.S. government as a backseat driver, Binance's biggest question will be whether it can retain its market share.
And yet, Binance did not become FTX. There were no fraud charges in the Justice Department's case, and no accusations of commingling or misappropriating customer funds—the worst offenses in Bankman-Fried's collection of crimes. Those allegations littered a June lawsuit from the SEC against Binance, which accused CZ of operating a complicated web of entities that diverted customer funds to his own coffers, similar to Bankman-Fried. But the SEC's claims did not appear in the Justice Department's complaint, nor did Gary Gensler join in on the joint settlement agreement with the other agencies.
To be fair, by bringing a criminal case, the Justice Department must meet a higher burden of proof than the SEC's civil case. But still, it seems telling that prosecutors could not nail CZ on those more serious charges, as they seemed to easily levy against Bankman-Fried just last month. The SEC will still have its day in court, although it seems hard to believe the agency will be able to deal any more damage to Binance.
As one last footnote, the irony in this case is the tricky accounting employed by the agencies in trumpeting their massive and historic penalties with Binance. If you count up all the fines the Justice Department, Treasury Department, and CFTC claim to be collecting, it would add up to over $11 billion, not $4.3 billion, and it's still not entirely clear how the final figure will be divvied up. Maybe the government could learn from the public transparency of the blockchain after all.
In honor of the Thanksgiving holiday in the U.S., Fortune Crypto is off until Monday. We are thankful for your readership.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
