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Former Binance CEO Changpeng Zhao has been sentenced to four months in prison for failing to implement an effective anti-money laundering program. Meanwhile, Terraform Labs and its co-founder Do Kwon could be facing huge billion-dollar penalties after being found liable for fraud. Additionally, early Bitcoin investor Roger Ver has been arrested in Spain on charges including tax evasion and mail fraud. Even regulators are not safe from the legal storm in the crypto space. SEC Chair Gary Gensler has been accused by U.S. House Financial Services Committee Chair Patrick McHenry of misleading Congress regarding the regulatory status of Ether.
Changpeng Zhao Sentenced
Former Binance CEO Changpeng “CZ” Zhao has been sentenced to four months in prison by a federal judge for violating U.S. anti-money laundering (AML) laws. The sentence was handed down by Judge Richard Jones of the U.S. District Court for the Western District of Washington during a hearing on Apr. 30. Prosecutors originally fought for a three-year prison term, but the judge decided on a shorter sentence after acknowledging there was no evidence that Zhao was directly informed about illegal activities at Binance.
During the proceedings, the prosecution argued that Zhao's approach was more about asking for forgiveness than permission, and he should not be allowed to profit from his actions. The prosecution also stressed that a probationary sentence will set a very dangerous precedent by incentivizing others to break the law on a large scale. On the other hand, Zhao's legal team argued for probation, and specifically mentioned his vulnerability due to his wealth as a factor against a longer prison term.
Before being sentenced, Zhao apologized for his actions and took responsibility for the deficiencies in Binance's AML program. A date has not yet been set for when Zhao will have to report to prison.
CZ’s sentencing was initially postponed to come after that of Sam Bankman-Fried, the former CEO of FTX, who received a 25-year prison sentence. Interestingly, many people who attended the hearing shared that Zhao’s sentencing was much less intense compared to Bankman-Fried’s highly publicized trial.
What Happened with CZ and Binance?
CZ has faced serious legal challenges for failing to implement an effective AML program at Binance, which led to his resignation and a guilty plea to a felony charge. The U.S. Department of Justice charged Zhao under the Bank Secrecy Act, because before August of 2021, Binance allowed users to trade without robust Know Your Customer (KYC) systems. This policy was part of a strategy to avoid losing market share but resulted in the platform being used for transactions linked to criminal activities, including child sexual abuse, illegal narcotics, and terrorism.
The absence of strict KYC measures also made it possible for U.S. users to interact with sanctioned entities and criminal networks. Eventually, more than 100,000 suspicious transactions were processed without proper reporting. In response to these violations, Binance agreed to pay a huge $4.3 billion settlement for civil regulatory enforcement actions. Additionally, Binance is now under a mandatory five-year oversight by a third-party monitor to ensure compliance with AML regulations and proper reporting of suspicious activities.
Binance's regulatory issues in the U.S. started as early as 2018, leading to an investigation by the Justice Department. To comply with U.S. regulations, Binance stopped direct services to American customers and instead operated through Binance.US, set up under BAM Trading.
This pattern of regulatory scrutiny is not unique to Binance. Other crypto exchanges like Coinbase, Bittrex, and Kraken have also faced legal actions from the U.S. Securities and Exchange Commission (SEC) for similar compliance failures.
Terraform Labs Faces Billion-Dollar Penalties
Another crypto big-name in legal hot water at the moment is Do Kwon. Terraform Labs and its co-founder were found liable for fraud by a jury in a lawsuit brought by the SEC. After the verdict, a federal judge ordered both parties to discuss potential financial penalties, which could range from millions to billions of dollars. The hearing, set by Judge Jed Rakoff of the U.S. District Court for the Southern District of New York, is scheduled for May 22, where arguments about the proposed remedies will be presented.
The SEC proposed that Kwon and Terraform pay approximately $4.7 billion in disgorgement and prejudgment interest, in addition to $520 million in civil penalties. Terraform's legal team is not very happy with this and suggested a far lesser penalty of $1 million, with no requirement for disgorgement or injunctive relief. The parties are required to submit additional documents to support their proposals by early May.
The case against Terraform and Kwon stemmed from accusations about defrauding investors, which culminated in a jury verdict on Apr. 5 after a two-week trial. Kwon could not actually attend the trial in person as he was arrested in Montenegro in 2023 for using falsified travel documents. He is currently still in Montenegro, pending extradition decisions by local courts to either the U.S. or South Korea.
Terraform Labs has also been navigating bankruptcy proceedings after filing for Chapter 11 protection in January. This means the upcoming court appearance in May will be a pivotal moment for Kwon and Terraform as they face massive financial penalties.
Roger Ver Arrested on Tax Evasion Charges
Roger Ver, an early Bitcoin investor who is often referred to as 'Bitcoin Jesus,' has been arrested in Spain on criminal charges including mail fraud, tax evasion and filing false tax returns. The U.S. authorities allege that Ver defrauded the Internal Revenue Service (IRS) of around $48 million by failing to report capital gains from his sale of Bitcoin and other assets.
The indictment was filed on Feb. 15 but was only unsealed on Apr. 29, and claims that Ver took control of about 70,000 BTC in June of 2017, right before the cryptocurrency's bull run, and sold them for around $240 million. The U.S. government now wants to extradite Ver from Spain to face trial.
Reactions to Ver’s arrest have been very different across social media. Bitcoiner Dan Held, the former growth lead at Kraken, has been very vocal about his opinion on the matter, and stated that Ver “deserves everything that he’s about to get” after actions that Held claims almost jeopardized Bitcoin itself. Held accused Ver of personal attacks and of creating discord in the Bitcoin community, contributing to what he described as a "civil war."
In addition to his involvement with Bitcoin, Ver has been a strong supporter of Bitcoin Cash and was involved in a 2022 scandal with crypto investment platform CoinFlex, which claimed he owed them $47 million. Ver has not publicly responded to the charges leveled against him by the Justice Department just yet.
SEC's Gensler Under Fire
Meanwhile, United States House Financial Services Committee Chair Patrick McHenry accused the SEC Chair Gary Gensler of misleading Congress about the regulator's handling of Ether as a security. This claim surfaced after a court filing by software development firm Consensys, which sued the SEC on Apr. 25 for inconsistencies in their regulatory approach to digital assets.
The lawsuit specifically refers to the SEC's investigation into Ether, which was launched in March of 2023, as a potential security, which was publicly hinted at when unredacted sections of the filing appeared in court documents on Apr. 29.
During an April 2023 hearing before the House Financial Services Committee, McHenry questioned Gensler on whether Ether should be regulated by the SEC or the Commodity Futures Trading Commission (CFTC), but Gensler avoided a direct answer. This raised a lot of suspicions that the SEC might already classify Ether as a security, despite previously approved investment vehicles tied to ETH futures and ongoing speculation about a potential spot Ether ETF.
McHenry's criticism paints an accurate picture of the broader confusion and regulatory overlap between the SEC and CFTC when it comes to digital assets. He used this issue to promote the Financial Innovation and Technology for the 21st Century Act (FIT21), which aims to clarify regulatory responsibilities.
