Binance sees $956 million in outflows after Zhao steps down to settle US probe

FILE PHOTO: Representations of cryptocurrencies are seen in front of displayed Binance logo in this illustration taken November 10, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Lisa Pauline Mattackal, Chris Prentice and Jonathan Stempel

(Reuters) -Investors pulled about $956 million from crypto exchange Binance over the past 24 hours, market data showed, after its chief, Changpeng Zhao, stepped down and faced prison time after pleading guilty on Tuesday to settle a years-long U.S. illicit finance probe.

FILE PHOTO: Smartphone with displayed Binance logo and representation of cryptocurrencies are placed on a keyboard in this illustration taken, June 8, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

The deal, in which Binance will pay $4.3 billion to U.S. 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 Zhao has been replaced by Richard Teng, a senior Binance executive who joined in 2021, the company said.

It remained unclear on Wednesday 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 Binance under the terms of the settlement.

Some analysts also noted that the deal was unlikely to end the exchange’s U.S. legal woes, with Securities and Exchange Commission charges alleging Binance broke U.S. 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,” wrote Robert Le, a crypto analyst at data firm PitchBook.

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

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

It failed to report more than 100,000 suspicious transactions, including with organizations the U.S. 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 Tuesday it had worked hard to make Binance “safer and even more secure.” Lawyers for Zhao did not respond to requests for comment on Wednesday. On Tuesday, he conceded “I made mistakes, and I must take responsibility.”

PRISON TIME

While 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 (UAE), entered his plea in a Seattle court on Tuesday.

He faces a maximum prison sentence of 18 months under federal guidelines and has agreed not to appeal 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 hearing in Seattle, a Justice Department spokesperson said on Wednesday.

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

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

Reuters could not immediately ascertain his whereabouts on Wednesday. At Tuesday’s hearing, Zhao’s lawyers said he would remain in the Seattle area through Monday evening, and would be able to then return to the UAE, provided the district judge did not object to his agreement with the government, another DOJ spokesperson said.

Later on Wednesday, federal prosecutors urged a federal judge to block Zhao from leaving the continental United States prior to his February sentencing, saying in a court filing that Zhao posed a serious flight risk despite his bail conditions.

“There is no combination of conditions sufficient to protect against the risk of flight and ensure Zhao’s return” for sentencing, the prosecutors said.

Some legal experts said they did not expect Zhao to spend more than a year in prison, maybe less, citing Arthur Hayes, former chief of crypto exchange BitMEX, 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 this month 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.

“To get the CEO to plead guilty should not be scoffed at,” said Daniel Silva, a partner at law firm Buchalter and former federal prosecutor.

The settlement also bars Zhao from “any present or future involvement in operating or managing” Binance, which he founded in 2017 and has maintained a tight grip on since. He remains a major shareholder and said on Tuesday 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 (e.g., shareholder voting,” Yesha Yadav, a law professor at Vanderbilt University, wrote in an email to Reuters.

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

(Additional reporting by Luc Cohen; Editing by Michelle Price, Richard Chang and Jamie Freed)