SBF's Defense, Part III: FTX's Collapse Happened According To Binance’s Plan
If SBF is found guilty, what should become of Binance’s CZ?
By: Zack Abrams, Zack Guzman
August 29, 2023
The most critical moment in the public collapse of FTX was — fittingly for a story about crypto — a tweet.
In some ways, Binance CEO Changpeng “CZ” Zhao may have been waiting years for the perfect moment to post it. As the head of the world’s largest crypto exchange, he had originally invested in Sam Bankman-Fried’s crypto platform in 2019 when it was just beginning, and in return, received an allocation of FTX’s token FTT. There was little use for it — until that changed. On November 6, 2022, just days after CoinDesk published a report highlighting FTX’s shaky financials, CZ tweeted that he would be selling his $2.1 billion stake in his company’s biggest rival and dumping its FTT allocation.
“Due to recent revelations that have came [sic] to light, we have decided to liquidate any remaining FTT on our books,” CZ tweeted, noting that he expected the liquidation to take a few months.
Days later, as FTT’s value plummeted 95% to trigger an ensuing crisis, SBF would watch as his entire empire was signed into bankruptcy. Binance had vanquished his greatest competition, and CZ began looking more and more like the king of crypto.
And yet, instead of the story ending there, the cascading collapse and ever-growing regulatory magnifying glass has once again swung back around on Binance.
America’s top financial regulatory agencies, the CFTC and the SEC, have each filed civil charges against CZ and Binance for allegations of fraud and mismanagement in CZ’s empire that echo similar accusations levied against SBF and FTX after its eventual collapse: Commingled customer funds, misleading statements to regulators, and self-deleting internal messaging systems.
While FTX’s collapse certainly helped uncover the alleged fraud that will form the basis of SBF’s upcoming criminal trial, SBF isn’t charged with the collapse of FTX — he’s charged with what preceded it (as we’ve highlighted in our series.) As such, it’s unlikely CZ’s role in FTX’s eventual fate will be litigated at trial. And in the court of public opinion, CZ has actively distanced himself from being at all implicated in the unwinding that occurred at FTX after his tweet.
“No healthy business can be destroyed by a tweet,” CZ tweeted just a few weeks following FTX’s collapse.
While that may be true, it does raise an interesting question — and given that FTX’s collapse is separate from the charges SBF is currently facing, it’s certainly worth asking: If SBF were to be found guilty, what should become of CZ?
To recap, some of the allegations against CZ don’t exactly match SBF’s alleged actions – but they certainly rhyme. As we covered in the first part of our series, both the prosecution and SBF’s defense team agree on the fact that SBF’s hedge fund, Alameda Research, played a role in FTX’s collapse. They just just disagree, however, on how involved SBF may have been in directing his employees to trade and operate without controls on his own exchange.
By extension, the SEC and CFTC have alleged that CZ also had at least two trading firms — Merit Peak and Sigma Chain — that engaged in much of the same behavior. The firms allegedly traded on CZ’s exchanges, while also accepting deposits from Binance customers for other purposes, like over-the-counter sales of Binance’s own cryptocurrencies. The SEC also alleges that Sigma Chain was used to artificially increase volume metrics on Binance.US through wash trading of a significant variety of assets.
And that’s merely where the similarities seem to begin. CZ also maintains a highly centralized level of control over his empire, just as SBF once did, mostly avoiding the oversight of boards where possible, according to previous reporting. Binance also has its own token, BNB, just as FTX once launched FTT. And, according to reports, Binance’s staff uses tools to enable disappearing messages, just as FTX’s staff once did.
CZ has also faced allegations that he looked the other way while unsavory individuals like terrorists and dark web exchange operators used Binance to launder money and cash, avoiding the know-your-consumer checks that are typical in most other exchanges.
"In some ways I think Sam learned learned what he did from Changpeng," said FTX victim and former Ikigai Asset Management Founder Travis Kling. "But Sam committed fraud on his own. He is an adult. Changpeng did not make him commit this fraud."
Are criminal charges for CZ on the way?
A report from Semafor indicates that the Justice Department is reluctant to charge CZ criminally because doing so could spark a bank run on Binance similar to the one that took down FTX. Of course, we should note that even hinting at the prospect of a bank run in crypto has historically also shown the same effect, so it's unclear what the DOJ's motive might actually be. Crypto lawyer James “MetaLawMan” Murphy told Coinage in an interview that the disagreement comes from the top.
“The [reporting] out there is that there's a significant disagreement within the Department of Justice itself and that the people closest to the investigation believe that they have enough evidence to bring charges and make them stick,” said Murphy. “And it's the bosses in Washington DC that have been pushing back and not approving that action.”
Considering the fact that SBF’s fate in his upcoming trial has little to do with FTX’s actual collapse, CZ may certainly find himself in the hot seat next.
For more on CZ’s role in FTX’s collapse, all the similarities between the two founders and their two empires, and a dispatch from an alternative universe, watch our latest episode above.
Disclosure: Alameda Ventures is one investor among many in Trustless Media, the production company behind Coinage.