Will Changpeng Zhao go to jail?

On Tuesday, Binance, the world's largest cryptocurrency exchange, pleaded guilty to charges of money laundering and paid a $50 million fine. Zhao Changpeng agreed to resign and will face sentencing at a later date.

According to media reports, Zhao Changpeng appeared in a federal court in Seattle on Tuesday and entered a plea. Prosecutors accused Binance of facilitating transactions for sanctioned organizations and encouraging U.S. users to hide their locations to avoid money laundering charges.

Binance pleaded guilty and agreed to pay a total of $4.3 billion in fines , including the amount of a civil settlement with the U.S. Commodity Futures Trading Commission (CFTC). However, as of now, Binance has not yet reached a settlement with the U.S. Securities and Exchange Commission (SEC).

Court records also show that Zhao Changpeng agreed to pay a $50 million criminal fine, although that amount could be reduced based on separate civil penalties he agrees to pay. Zhao Changpeng’s plea agreement has not been made public.

“I made a mistake and I must take responsibility,” Zhao wrote on the social media platform X, formerly Twitter. “This is what’s best for our community, Binance, and myself.”

Under federal sentencing guidelines, Zhao Changpeng faces a maximum of 18 months and a minimum of 10-12 months in prison, and he will be sentenced at a later date.

A few weeks ago, a jury found FTX founder Sam Bankman-Fried (SBF) guilty of seven counts of fraud and conspiracy, meaning that the Silicon Valley darling will face life in prison. Will his old rival Zhao Changpeng also end up in prison? Will the two richest people in the history of cryptocurrency become close friends in prison?

Binance’s native token, Binance Coin, fell 5.3% from the previous day to $242, according to CoinDesk. Bitcoin, the largest cryptocurrency, fell 1.5% over the same period.

Binance acknowledged in a statement that it lacked necessary compliance controls in the past, but the settlement marked its acceptance of responsibility after it laid off a large number of employees and saw executives flee this year amid the legal battle.

Knowingly breaking the law, intentionally breaking the law

Prosecutors accused Binance of facilitating transactions for sanctioned organizations and encouraging U.S. users to hide their locations to avoid money laundering charges.

Prosecutors said Binance knew it had millions of U.S. users in 2018 but had no program in place to detect money laundering or violations of sanctions laws. Prosecutors said Binance processed $899 million worth of transactions between Americans and users believed to be in Iran between January 2018 and May 2022.

Prosecutors said Zhao knew he had many American customers and wrote in a September 2019 chat that he had amassed so many American users despite the law seemingly prohibiting it that "it is better to ask for forgiveness than to get permission."

“Using new technology to break the law doesn’t make you a disruptor. It makes you a criminal,” said Attorney General Merrick Garland.

The deal allows Zhao to retain his majority stake in Binance, although he will not be able to hold an executive position at the company. Justice Department officials said he is ineligible to return to the company.

Binance has not yet reached an agreement with the SEC, and Zhao Changpeng faces potential threats

The Justice Department and Binance have been trying to reach a deal for months, according to people familiar with the matter. Zhao Changpeng recently hired a new lead lawyer, William A. Burck of Quinn Emanuel LLP, to represent him at the Justice Department, and Gibson Dunn & Crutcher to represent Binance.

According to people familiar with the matter, Binance and Zhao Changpeng have not yet reached a settlement agreement with the U.S. Securities and Exchange Commission (SEC) . The SEC sued Binance and Zhao Changpeng in June and accused them of violating the U.S. Investor Protection Act. Binance and other leading cryptocurrency exchanges have decided to file a lawsuit against the SEC, believing that they can prove that cryptocurrencies do not belong to the types of investments regulated by the SEC.

According to previous media reports, the Justice Department's investigation focuses on Binance's program for detecting and preventing money laundering, and whether the program allows individuals from sanctioned countries such as Iran and Russia to trade with Americans on the exchange.

A separate agreement resolves a civil lawsuit filed earlier this year by the U.S. Commodity Futures Trading Commission (CFTC) against Binance and Zhao, the people said. The $4.3 billion Binance must pay includes amounts to settle both the CFTC claim and claims filed by Treasury agencies.

Will Changpeng Zhao go to jail?

In theory, violating the Bank Secrecy Act — which requires financial institutions to take steps to prevent and suppress money laundering — carries a maximum sentence of five years in prison. Zhao Changpeng, who pleaded guilty to violating the law, could also face five years in prison — but there are several signs that he won’t receive the maximum penalty.

First, as a condition of the agreement, Zhao Changpeng is now prohibited from holding an executive position at Binance, but will also be allowed to retain his majority stake in Binance.

The media believes that the Justice Department's concession shows that the authorities are willing to cater to Zhao Changpeng to some extent in order to reach a historic settlement with Binance. Although federal prosecutors will not decide how long Zhao Changpeng will spend in prison, they do have the ability to lobby the judge on sentencing.

While sources at the Justice Department told the media on Tuesday that they plan to impose an 18-month sentence on Zhao Changpeng, this does not guarantee that he will go to prison. In similar criminal cases involving cryptocurrency and money laundering in the past, prosecutors have requested heavy sentences, but those requests have been rejected.

In addition, Zhao Changpeng’s next plans apparently do not include serving time in prison, at least publicly. Zhao Changpeng said on X on Tuesday that he plans to enjoy some vacation in the coming months, "do some passive investing" in blockchain, DeFi, artificial intelligence and biotech startups, and possibly become a mentor to some entrepreneurs.

Even if Zhao Changpeng is somehow sentenced to prison, people hoping that he would reunite with his old nemesis SBF in prison may be disappointed.

According to legal counsel Christopher Zoukis, criminals sentenced to 10 years or less in federal prison are placed in minimum-security federal prisons, which provide dormitory-style housing for nonviolent offenders and offer a relatively good quality of life. Even if Zhao Changpeng received the worst sentence, he would be sent to such a place. SBF could serve decades in a medium-security federal prison.