Binance sees $1.3 billion in outflows after Zhao steps down to settle US probe

Bengaluru – Investors pulled about US$956 million (S$1.3 billion) from crypto exchange Binance over the past 24 hours, market data showed, after its founder and chief executive Zhao Changpeng stepped down and pleaded guilty on Nov 21 to settle a years-long US illicit finance probe.

The deal, in which Binance will pay US$4.3 billion to the US authorities, raises questions over the future of the world’s largest crypto exchange and marks another blow for an industry beset by scandals. Zhao has been replaced by

Mr Richard Teng, a Singaporean and former executive

at the Monetary Authority of Singapore and the Singapore Exchange.

It remained unclear on Nov 22 how much jail time, if any, Zhao would ultimately serve and how much influence he – as Binance’s founder and major shareholder – could continue to exert on the company under the terms of the settlement.

Some analysts also noted that the deal was unlikely to end the exchange’s US legal woes, with charges from the Securities and Exchange Commission (SEC) alleging that Binance broke US securities laws still unresolved.

“Binance is not entirely out of the woods. The ongoing civil lawsuit with the SEC remains a concern for the exchange, which (is) likely to result in further fines,” Mr Robert Le, a crypto analyst at data firm PitchBook, wrote in a note.

Data from crypto analytics platform Nansen, which does not include Bitcoin flows, signalled that some investors had been rattled by the news, pulling US$956 million from the exchange. Still, the outflows were small relative to the more than US$65 billion of assets that remain on Binance, Nansen said.

As it strived for market dominance, Binance shunned key checks that Zhao believed would turn off customers, the authorities said.

It failed to report more than 100,000 suspicious transactions, including with organisations the United States described as terrorist groups such as Palestinian militant group Hamas, and never reported transactions with websites dedicated to selling child sexual abuse materials.

Binance did not immediately respond to a request for comment, but said on Nov 21 that it had worked hard to make Binance “safer and even more secure”. Lawyers for Zhao did not respond to requests for comment on Nov 22. On Nov 21, he had conceded: “I made mistakes, and I must take responsibility.”

While the authorities have probed Zhao and Binance since at least 2018, Zhao’s exit marks a dramatic development for one of the most powerful figures in the crypto industry. Zhao, who resides in the United Arab Emirates, entered his plea in a Seattle court on Nov 21.

He faces a maximum prison sentence of 18 months under US guidelines and has agreed not to appeal against any sentence up to that length. Prosecutors will take a position on how much jail time to seek closer to Zhao’s Feb 23 sentencing in Seattle, a Justice Department spokesperson said on Nov 22.

“But we do reserve the right to seek a sentence above the guidelines,” said the spokesperson.

Zhao paid a US$175 million bail bond, with another US$15 million held in a trust account, a court filing showed. He has agreed to return to the US 14 days before sentencing.

Later on Nov 22, US prosecutors urged a judge to block Zhao from leaving the continental US prior to his February sentencing, saying in a court filing that he posed a serious flight risk despite his bail conditions.

Some legal experts said they did not expect Zhao to spend more than a year in prison, and maybe less, citing former chief of crypto exchange BitMEX Arthur Hayes, who likewise pleaded guilty to anti-money laundering violations.

Hayes was ultimately sentenced to six months of house arrest in 2022, even though the government sought prison time. Other senior BitMEX executives charged did not serve time.

However, FTX founder Sam Bankman-Fried could spend decades in prison after being

found guilty in November of defrauding customers of his now-bankrupt crypto exchange.

Based on the alleged facts, prosecutors likely could have charged Zhao with more serious crimes carrying heavier sentences, but had to weigh that against the probability that he would have stayed abroad to avoid capture, legal experts said.

The settlement also bars Zhao from “any present or future involvement in operating or managing” Binance, which he founded in 2017 and had maintained a tight grip on since. He remains a major shareholder and said on Nov 21 that he will be “available to the team to consult as needed”, consistent with the deal.

“This could give him a hook on which to exercise control – through the usual corporate governance channels (for example, shareholder voting),” Professor Yesha Yadav of Vanderbilt University’s law school wrote in an e-mail to Reuters.

“At the same time, I imagine that Binance will be looking to be very careful.” REUTERS