U.S. prosecutors don’t want Binance founder Changpeng ‘CZ’ Zhao to leave the country before his February sentencing date, while CZ’s former BFF Justin Sun appears well aware that his neck could be next on the legal chopping block.
On Wednesday, federal prosecutors filed a motion with the U.S. District Court for the Western District of Washington, arguing that CZ “should not be permitted to return” to his residence in Dubai before his sentencing on February 23, 2024. CZ pleaded guilty on Tuesday to violating the Bank Secrecy Act through his role as CEO of the compliance-challenged Binance digital asset exchange.
Prosecutors aren’t asking for CZ to stay in a U.S. prison cell until February, merely that he not be permitted to leave the country. They argue that CZ poses a major flight risk “given his significant assets, his strong ties to the UAE, and the government’s inability to extradite him from the UAE.”
During his court appearance on Tuesday, CZ posted a $175 million appearance bond secured by $15 million in cash and additional funds/property put up by a few guarantors. But prosecutors are arguing that the bulk of CZ’s vast fortune is located outside the U.S. and would be difficult to seize should CZ do a runner.
CZ is expected to face a prison sentence of at least 18 months, and most observers believe CZ is getting off extremely lightly, given the extent of Binance’s criminality. As such, it’s hard to see why CZ would want to jeopardize a good thing.
But prosecutors argue that, with CZ having a partner and three kids in Dubai, he could have a change of heart as that sentencing date draws closer. Prosecutors also noted that America has no formal extradition treaty with the United Arab Emirates.
CZ’s legal team has yet to file its response but was likely furiously preparing one in-between bites of turkey over the Thanksgiving holiday. On Thursday, CZ tweeted that he was “still trying to get used to” his current situation, but he was “‘enjoying’ all the free time I suddenly have now.”
Binance has suffered well over $1 billion in outflows since the plea agreement was made public as nervous customers ran for the exits. Richard Teng, who assumed the CEO mantle following CZ’s plea deal, sought to calm this panic by tweeting reassurances to exchange customers that the “fundamentals of our business are VERY strong” with “robust revenues and profits.”
For now, maybe. But given the wholesale toleration of criminality that Binance and CZ copped to in their plea deals, the customers yanking their cash off Binance likely include a significant number of thugs who have good reason to fear what Binance’s new government-appointed transaction monitors will uncover.
U.S. federal watchdogs have been given five years in which to monitor Binance’s ongoing transactions as well as sift through all transactions dating back to 2018. This unprecedented access, with stiff penalties for Binance and CZ should they attempt to obstruct this oversight, has federal prosecutors salivating at the treasure trove of incriminating data now at their disposal.
Sun on the run
Among those offering public homages to CZ following his plea deal was Justin Sun, founder of the Tron blockchain, the TrueUSD (TUSD) stablecoin, and the power behind the HTX (formerly Huobi) and Poloniex exchanges. In a Tuesday tweet, Sun recalled having met CZ “nearly ten years” ago, during which time CZ “consistently played a leadership role for the community, the industry, and for me.” Sun added that “the cryptocurrency industry wouldn’t have reached the heights it has today” without CZ’s influence.
Sun also offered congratulations to Teng on succeeding CZ as CEO, pledging to “continue strengthening our collaboration with Binance, driving development and innovation together.” Notably, while Teng has responded warmly to messages of this sort from other people, Sun’s posterior-puckering has so far gone unacknowledged.
Small wonder. There’s no question that Sun learned a lot about crime from CZ. Befitting his perennially pubescent appearance, Sun served as a sort of mini-me to CZ’s Dr. Evil. From printing around $3 billion in unbacked TUSD—most of which (wash) trades on Binance—since the year began to quietly replace HTX users’ USDT (Tether) stablecoins with his unbacked ‘staked USDT,’ Sun and controversy are rarely separated.
On occasion, Sun’s antics were too much for even CZ to handle. This spring, Sun tried to game a planned airdrop for SUI—a token for a new delegated proof-of-stake (DPoS) blockchain founded by Mysten Labs—via the Binance LaunchPool by transferring $56 million worth of TUSD to the campaign.
When blockchain observers pointed out this transfer, CZ himself tweeted that the airdrop was intended to benefit “retail users” and warned Sun that Binance would “take action” should Sun try to manipulate the process. Sun promptly issued a groveling apology to CZ while attempting to pin the blame on unspecified Tron staffers.
Sun’s proximity to CZ over such an extended period will have ramifications that no apology will remedy. In addition to giving U.S. authorities unprecedented insight into all Binance transactions, part of CZ’s plea deal requires him and other Binance executives to cooperate fully with all investigations that arise after perusing these transactions. This may explain why Sun appears to be moving heaven and earth to get every single dollar out of his corrupt networks before the hammer comes down.
The old loot & line
Sun’s projects—be they exchanges, DeFi smart contracts, cross-chain bridges, whatever—seem especially vulnerable to being compromised by bad actors. On November 10, a ‘hack’ resulted in over $125 million in assets vanishing from Poloniex. On November 22, Sun’s Heco Chain bridge was exploited for over $86 million, while HTX took an estimated $30 million hit. These incidents were in addition to the $8 million ‘hack’ that HTX suffered in September.
Sun’s response to all these incidents was the same: he assured everyone that he was so well-capitalized that he could make impacted customers whole. He made offers to the hackers to encourage the return of the stolen assets and threatened to go to the authorities if said offer wasn’t accepted. And then nothing happens. At least until it happens again.
The widespread presumption is that all these episodes are simply Sun looting his own projects to line his pocket. Sun appears to be betting that if he claims to have made good on the losses from his own reserves, then not every customer will feel compelled to withdraw their remaining assets off his platforms, and thus the immediate threat of a ‘bank run’ will pass.
Another sign of Sun’s desperate need for customers to keep providing him with their liquidity is the increasingly nutty interest rates HTX is offering its customers. But in the process, these platforms’ customers are being slowly but surely hollowed out from within.
In September, Bloomberg reported that assets on HTX under Sun’s direct control—those ‘staked Tether’ (stUSDT) and Tron’s native token TRX—had risen 22 points to over 36% of the total in just the previous 2.5 months. When it comes to those sketchy AF tokens, there is no ‘bank’ on which to run.
End game
Lately, Sun has been posting short videos on all manner of subjects not related to his seeming inability to implement basic security in his blockchain projects. He’s also utilizing AI to dub the audio of these clips into some truly incongruous English accents, which is probably good practice for masking his whereabouts when he’s forced to go on the lam due to CZ sharing Sun’s secrets with federal prosecutors.
Like many scammers convinced of their ability to talk a good game—we’re looking at you, Richard Heart—Sun appears not to know when to keep his foolish mouth shut. The day after CZ’s plea, Sun celebrated the minting of yet another billion USDT on his Tron blockchain. With USDT on Tron having been singled out as the preferred token of terror groups and D.C. politicians now looking to add Tether’s scalp to their lodgepole alongside CZ’s, one can only marvel at Sun’s tone-deaf hubris.
The fact that Richard Teng was being touted as CZ’s heir apparent as far back as June indicates that CZ was negotiating with U.S. authorities long before the plea deals were made public. Given CZ’s history with Sun, it’s not inconceivable that Sun was well aware that CZ was preparing to walk the plank. CZ may have even advised Sun to put his own house in order, just in case.
Instead, Sun appears to have decided to go out in a blaze of glory, with a sizable financial safety net comprising his customers’ cash for when he’s eventually released from prison. Like the old story of the scorpion and the frog, he simply can’t help himself. It’s his nature to lie, cheat and steal. You frogs can either sink with him or swim like hell for shore.
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