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.”