Heroes to zeroes in 12 months: How the two biggest crypto billionaire CEOs proved the critics right

After
a
brutal
18
months
of
bankruptcies,
company
failures
and
criminal
trials,
the
crypto
market
is
starting
to
claw
back
some
of
its
former
standing.

Bitcoin
is
up
more
than
150%
this
year.
Meanwhile,


Solana
is
nearly
10x
higher
in
the
last
12
months,
and
bitcoin
miner Marathon
Digital has
also
skyrocketed.
Crypto-pegged
stocks
like


Coinbase, MicroStrategy and
the Grayscale
Bitcoin
Trust

rose
more
than
300%
in
value
year-to-date.

But
even
as
prices
swell,
the
sector’s
reputation
has
struggled
to
regain
ground
after
names
virtually
synonymous
with
bitcoin
have
both
been
found
guilty
of
crimes
directly
related
to
their
multibillion-dollar
crypto
empires.

For
years,
Binance’s
Changpeng
Zhao
and
FTX’s
Sam
Bankman-Fried
preached
the
power
of
decentralized,
digital
currencies
to
the
masses.
Both
were


bitcoin
billionaires
who
ran
their
own
global
cryptocurrency
exchanges
and
spent
much
of
their
professional
career
selling
the
public
on
a
new,
tech-powered
world
order;
one
where
an
alternative
financial
system
comprised
of
borderless
virtual
coins
would
liberate
the
oppressed
by
eliminating
middlemen
like
banks
and
the
over-reach
of
the
government.

Yet
they
both,
in
the
end,
helped
crypto
critics
and
regulators
make
the
case
that
some
of
them
had
been
right
all
along;
that
the
industry
was
rife
with
grifters
and
fraudsters
intent
on
using
new
tech
to
carry
out
age-old
crimes.

Even
when
the
crypto
market
was
at
its
hottest,
as
token
prices
hit
all-time
highs
in
Oct.
2021,
some
of
the
biggest
names
in
business
and
politics
shared
their
doubts.

JPMorgan
Chase
CEO
Jamie
Dimon
said
in
2021
at
peak
crypto
valuations
that

bitcoin
was
“worthless,”
and
he
doubled
down
on
that
sentiment
earlier
this
year
when
he
said
that
the
digital
currency
was
a

“hyped-up
fraud.”
Microsoft
co-founder
Bill
Gates

said
in
2018
that
he
would
short
bitcoin
if
he
could,
adding
that
cryptocurrencies
are
“kind
of
a
pure
‘greater
fool
theory’
type
of
investment.”
Legendary
investor
Warren
Buffett

said
he
wouldn’t
buy
all
of
the
bitcoin
in
the
world
for
$25,
because
“it
doesn’t
produce
anything,”
and
Senator Elizabeth
Warren (D-Mass.)
has
long
been
one
of
crypto’s
greatest
naysayers
on
Capitol
Hill.

Rather
than
ushering
in
a
new
era
of
financial
freedom,
Zhao
and
Bankman-Fried
were
found
guilty
on
a
mix
of
charges
including
fraud
and
money
laundering.
Once
the
two
biggest
names
in
crypto,
the
sector’s
greatest
proponents
now
face
jail
time.

Bankman-Fried,
31,

could
be
sentenced
to
life
in
prison
after
being

convicted
of
seven
criminal
counts
in
early
November,
including
charges
related
to
stealing
billions
of
dollars
from
FTX’s
customers.
Less
than
three
weeks
after
Bankman-Fried’s
conviction,

Zhao
pleaded
guilty
to
criminal
charges
and
stepped
down
as
Binance’s
CEO
as
part
of
a
$4.3
billion
settlement
with
the
Department
of
Justice.

Their
crimes
varied,
but
ultimately,
both
crypto
execs
went
from
industry
titans
to
convicted
frauds
in
the
span
of
12
months,
and
it
was,
in
part,
the
bitter
feud
between
them
that
landed
them
there.

“They
were
both
responsible
for
behavior
that
has
kept
a
black
eye
on
crypto
and
its
association
with
criminal
behavior,”
said
Renato
Mariotti,
a
former
prosecutor
in
the
U.S.
Justice
Department’s
Securities
and
Commodities
Fraud
Section.

Zhao
and
Bankman-Fried
were
friends
at
first,
before
they
became
one
another’s
chief
rival.

CZ,
as
Zhao
is
also
known,
had
been
first
to
the
space.
After
a
stint
as
the
chief
technology
officer
of
a
centralized
crypto
exchange
called
OKCoin,
he
launched
a
spot
exchange
of
his
own
in
2017
called
Binance,
which
has
since
become
the
largest
cryptocurrency
trading
platform
in
the
world,
by
volume.

That
same
year,
Bankman-Fried
earned
street
cred
in
crypto
circles
for
his
bitcoin
arbitrage
trading
strategy,
dubbed
the
Kimchi
swap.

While
the
price
of
bitcoin
today
is
relatively
standard
across
the
world’s
exchanges,
six
years
ago,
the
price
differential
would
sometimes
vary
by
more
than
50%.
This
kind
of
arbitrage-based
strategy,
though
relatively
straightforward,
wasn’t
the
easiest
thing
to
execute
on
crypto
rails
back
then,
since
it
involved
setting
up
connections
to
each
one
of
the
trading
platforms.

To
scale
the
operation,
Bankman-Fried
launched
his
own
quantitative
crypto
hedge
fund,
Alameda
Research.
But
what
really
put
him
on
the
map,
according
to
Bankman-Fried,
was
CZ
himself.

Just
after
Bankman-Fried
moved
his
business
to
Hong
Kong
at
the
end
of
2018,
he
met
CZ
for
the
first
time
after
contributing
$150,000
to
co-sponsor
a
Binance
conference
in
Singapore.
One
of
the
perks
of
that
donation
was
a
slot
onstage
with
the
Binance
chief.

According
to
author
Michael
Lewis,
whose
book
profiling
Bankman-Fried
was
published
the
day
the
former
FTX
CEO’s
criminal
trial
began
in
October,
Bankman-Fried
said
this
appearance
is
what
gave
him
“legitimacy
in
crypto.”

The
pair,
according
to
Lewis’s
reporting,
were
nothing
alike
in
business
or
in
personal
dealings.

“Sam
was
gunning
to
build
an
exchange
for
big
institutional
crypto
traders;
CZ
was
all
about
pitching
to
retail
and
the
little
guy,”
Lewis
wrote,
adding,
“Sam
hated
conflict
and
so
was
almost
weirdly
quick
to
forget
grievances;
CZ
thrived
on
conflict
and
nurtured
the
emotions
that
led
to
it.”

The
relationship
between
Zhao
and
Bankman-Fried
began
to
sour
a
few
months
after
they
met.

In
March
2019,
CZ
passed
on
paying
Bankman-Fried
$40
million
to
buy
the
futures
crypto
exchange
that
SBF
had
designed
with
his
team,
instead
building
a
version
of
the
same
platform
in-house.
A
month
later,
Bankman-Fried
and
a
few
others
founded
FTX.com,
a
first-of-its-kind
futures
trading
exchange
with
a
flashy
new
liquidation
engine
and
features
which
catered
to
large-scale
institutional
clients.

Binance
was
the
first
outside
investor
in
FTX,
funding
a
Series
A
round
in
2019.
As
part
of
that
arrangement,
Binance
took
on
a
long-term
position
in
FTX’s
native
token,
FTT,
which
was
created
to
give
perks
to
customers.

FTX’s
success
begat
a $2
billion
venture
fund that
seeded
other
crypto
firms.
Bankman-Fried’s
personal
wealth
grew
to
around $26
billion
at
its
peak,
and
FTX
reached
a
valuation
of
$32
billion
before
it
all
came
crashing
down.

As
crypto
prices
ran
up
in
2021,
Bankman-Fried’s
reputation
did
the
same.
Suddenly,
the
wunderkind
was
praised
by
the
press
as
the
poster
boy
for
crypto
everywhere.

The
FTX
logo
adorned
everything
from
Formula
One
race
cars
to
a
Miami
basketball
arena.
Bankman-Fried
went
on
an
endless
press
tour,
bragged
about
having
a
balance
sheet
that could
one
day
buy
Goldman
Sachs,
and
became
a
fixture
in
Washington,
where
he
was
one
of
the
Democratic
Party’s
top
donors, promising
to
sink
$1
billion into
U.S.
political
races before
later
backtracking.
Bankman-Fried
wielded
some
of
that
political
influence
to
cast
shade
on
Zhao
and
Binance’s
dealing.

At
the
same
time,
CZ’s
influence
continued
to
grow,
as
did
Binance’s
market
dominance.
With
assets
of
more
than
$65
billion
on
the
platform,
it
processed
billions
of
dollars
in
trading
volume
every
year.

As
the
two
grew
to
be
formidable
opponents,

FTX
opted
to
buy
out
Binance
in
2021
with
a
combination
of
FTT
and
other
coins,
according
to
Zhao.

But
much
of
Bankman-Fried’s
empire
was
a
mirage,
while
Zhao’s
operation
was
laced
with
questionable
business
tactics
under
the
hood.
What
ultimately
exposed
the
grift
at
the
two
exchanges
was
the
rivalry
between
the
crypto
bosses.

As
crypto
prices
tanked
in
2022
and
a
cascade
of
bankruptcies
rocked
confidence
in
the
sector,
Bankman-Fried
boasted
that
he
and
his
enterprise
were
immune.
But
in
fact,
the
industry-wide
wipeout
hit
his
operation
quite
hard.

Alameda
borrowed
money
to
invest
in
failing
digital
asset
firms
in
the
spring
and
summer
of
2022
to
keep
the
industry
afloat,
then
reportedly
siphoned
off
FTX
customers’
deposits
to
stave
off
margin
calls
and
meet
immediate
debt
obligations.

In
Nov.
2022,
a
fight
between
Bankman-Fried
and
CZ
on
Twitter,
now
known
as
X,
pulled
the
mask
off
the
scheme.

Zhao
dropped
the
hammer
with
a tweet saying
that
because
of
“recent
revelations
that
have
came
[sic]
to
light,
we
have
decided
to
liquidate
any
remaining
FTT
on
our
books.”

The
threat
led
to
a
panic-led
sell-off
of
the
FTT
token.
As
the
price
of
the
coin
plummeted
by
over
75%,
so
too
did
confidence
in
the
platform.
FTX
executives
scrambled
to
contain
the
damage, but
customers
proceeded
to
pull
billions
of
dollars
off
the
exchange.
Zhao,
who
swooped
in
and
agreed
to
buy
FTX
in
a
fire
sale,
backed
out
of
the
deal
after
one
day’s
worth
of
due
diligence,
and
the
company
spiraled
into
bankruptcy.

As
outsiders
got
a
look
at
FTX’s
actual
books
for
the
first
time,
the
fraud
became
clear:
Bankman-Fried
and
other
leaders
at
FTX
had
taken
billions
of
dollars
in
customer
money.

In
fact,
during
the
criminal
trial
of
Bankman-Fried,
both
the
prosecution
and
defense
agreed
that
$10
billion
in
customer
money
that
was
sitting
in
FTX’s
crypto
exchange
went
missing,
with
some
of
it
going
toward
payments
for real
estate,
recalled
loans,
venture
investments
and
political
donations.
They
also
agreed
that
Bankman-Fried
was
the
one
calling
the
shots.

The
key
question
for
jurors
was
one
of
intent:
Did
Bankman-Fried
knowingly
commit
fraud
in
directing
those
payouts
with
FTX
customer
cash,
or
did
he
simply
make
some
mistakes
along
the
way?
Jurors
decided
within
a
few
hours
of
deliberation
that
he
had
knowingly
committed
fraud
on
a
mass
scale.

The
government’s
beef
with
Zhao
and
Binance
was
different.

Three
criminal
charges
were
brought
against
the
exchange,
including
conducting
an
unlicensed
money-transmitting
business,
violating
the
International
Emergency
Economic
Powers
Act,
and
conspiracy.
Binance
has
agreed
to
forfeit
$2.5
billion
to
the
government,
as
well
as
to
pay
a
fine
of
$1.8
billion,
for
crimes
which
included
allowing
illicit
actors
to
make
more
than
100,000
transactions
that
supported
activities
such
as
terrorism
and
illegal
narcotics.

U.S.
Attorney
General
Merrick
Garland
said
in
a
press
conference
on
Nov.
21
that
the
fine
is
“one
of
the
largest
penalties
we
have
ever
obtained.”

“Using
new
technology
to
break
the
law
does
not
make
you
a
disruptor;
it
makes
you
a
criminal,”
Garland
said.

The
$4.3
billion
settlement
and
plea
arrangement
with
the
U.S.
government,
including
the
Department
of
Justice,
the
Commodity
Futures
Trading
Commission
and
the
Treasury
Department,
resolves
a
multiyear
investigation
into
the
world’s
largest
cryptocurrency
exchange.
The
Securities
and
Exchange
Commission,
however,
was
notably
absent.

Zhao
and
others
were
also
charged
with
violating
the
Bank
Secrecy
Act
by
failing
to
implement
an
effective
anti-money-laundering
program
and
for
willfully
violating
U.S.
economic
sanctions
“in
a
deliberate
and
calculated
effort
to
profit
from
the
U.S.
market
without
implementing
controls
required
by
U.S.
law,”
according
to
the
Justice
Department.
The
DOJ
is
recommending
that
the
court
impose
a
$50
million
fine
on
Zhao.

In
the
meantime,
CZ
has
been
released
on
a
$175
million
personal
recognizance
bond
secured
by
$15
million
in
cash
and
has
a
sentencing
hearing
scheduled
for
Feb.
23.
Bankman-Fried
faces
a
sentencing
hearing
on
March
28.

Legal
experts
tell
CNBC
that
one
critical
distinction
in
the
case
of
Zhao
versus
Bankman-Fried
is
the
success
of
their
respective
enterprises.

“One
key
difference
between
CZ
and
SBF
that
should
not
be
underestimated
is
that
CZ
ran
a
company
that
remains
highly
profitable
and
solvent,”
said
Mariotti.
He
added,
“Binance
has
a
war
chest
that
it
could
use
to
pay
hefty
fines
and
provide
leverage
that
gave
the
DOJ
and
CFTC
a
reason
to
settle.”

Binance
will
continue
to
operate
but
with
new
ground
rules,
per
the
settlement.
The
company
will
be
required
to
maintain
and
enhance
its
compliance
program
to
ensure
its
business
is
in
line
with
U.S.
anti-money-laundering
standards.
The
company
is
also
required
to
appoint
an
independent
compliance
monitor.

FTX,
on
the
other
hand,
remains
in
bankruptcy
court
in
Delaware
as
it
looks
to
claw
back
cash
in
an
attempt
to
make
the
exchange’s
former
investors
and
customers
whole.

“Several
factors
may
play
into
the
outcome
of
CZ
and
why
his
guilty
plea
may
have
him
spending
minimal,
if
not
any,
time
in
prison
versus
SBF’s
likely
lengthy,
if
not
life,
sentence
behind
bars,”
Braden
Perry,
who
was
once
a
senior
trial
lawyer
for
the
CFTC,
FTX’s
only
official
U.S.
regulator,
told
CNBC.

Perry
said
that
the
connection
with
foreign
crime,
including
money
laundering
and
breaching
international
financial
sanctions,
was
key
to
Binance’s
undoing.
There
was,
however,
no
pursuit
of
criminal
fraud
of
its
customers’
money
—
a
key
distinction
from
the
case
of
Bankman-Fried.

Another
thing
in
Zhao’s
corner:
his
willingness
to
cooperate
with
the
government.

Any
time
the
Justice
Department
pursues
a
criminal
prosecution
or
the
SEC
brings
a
civil
enforcement
action
against
a
defendant,
they
will
consider
the
cooperation
of
the
defendant,
according
to
Richard
Levin,
a
partner
at
Nelson
Mullins
Riley
&
Scarborough,
where
he
chairs
the
fintech
and
regulation
practice.

While
CZ
faces
considerably
less
time
in
prison,
Mariotti
points
out
that
despite
the
Binance
founder’s
significant
fortune,
he
will
still
take
a
financial
hit
from
the
U.S.
government.

“In
the
end,
neither
CZ
nor
SBF
won,”
said
Mariotti,
adding,
“Leaders
within
the
crypto
community
have
seen
what
can
happen,
and
perhaps
the
fall
of
these
crypto
‘titans’
will
signal
smoother
times
ahead.
But
the
continued
lack
of
regulatory
clarity
and
regulation
through
enforcement
has
not
helped
those
looking
for
guidance
on
crypto
compliance.”

Even
as
the
dust
settles,
some
of
the
companies
still
standing
have
struggled
to
stay
afloat
after
venture
capital
dollars
sought
safer
shores
in
startups
geared
toward
generative
artificial
intelligence.

But
a
turnaround
in
token
prices
and
crypto-pegged
stocks
has
begun
to
buoy
investor
sentiment.

Traders
are
also
increasingly
bullish
that
the
SEC
will
begin
approving
applications
for
a
new
spot
bitcoin
ETF,
launched
by
leaders
in
traditional
finance,
by
the
first
quarter
of
2024.
This
type
of
exchange-traded
fund
would
allow
investors
to
buy
into
digital
currency
directly,
through
the
same
mechanism
they
already
used
to
buy
stock
and
bond
ETFs.

Top
asset
managers,
including
BlackRock,
WisdomTree
and
Invesco
have
all
filed
applications.
A
note
from
Bernstein
says
that,
if
approved,
this
will
be
the
“largest
pipe
ever
built
between
traditional
financial
markets
and
crypto
financial
markets.”