GODFREY GEORGE writes about why Nigeria, the United States, and other countries are fighting these crypto kings, some of whom have been arrested, jailed, or made to pay compensation for their activities bordering on fraud, regulatory issues, and taxes
A few days ago, news flooded the media of how a court in the United States sentenced the founder of Binance (one of the world’s largest crypto firms), Changpeng Zhao, to four months in prison after he pleaded guilty to violating the US anti-money laundering requirements.
According to several sources, this was a ‘lighter punishment’ than requested by prosecutors, who hoped to send a message about crime in the industry.
“You had a responsibility to comply with United States regulations. Not some, but all. You failed at that opportunity,” US District Judge Richard A. Jones was quoted as saying.
Zhao had, in the course of the case, pleaded guilty last year to a money laundering violation, acknowledging that his company allowed terrorist groups and other criminals to have access to its platform.
Defence lawyers asked for probation without any prison time, while prosecutors requested a three-year sentence, calling it an “unprecedented” crime.
But Judge Jones, who oversaw the case in the US District Court in Seattle, said that Zhao had taken responsibility for his offences and was unlikely to break the law again.
“Your conduct does not warrant a 36-month sentence,” Judge Jones said.
He called Mr Zhao “a dedicated family man and a giving person” and praised his “staggering accomplishment” in building Binance.
Dressed in a black suit and light blue tie, Zhao, 47, did not seem to visibly react as the sentence was announced. But he nodded vigorously during Judge Jones’s statement and touched his hand to his heart, the New York Times reported.
“I failed here. I deeply regret my failure, and I’m sorry,” the Binance chief said.
It was not immediately clear when Mr Zhao would report to prison. His lawyers asked the judge to expedite the process and requested that he serve his sentence at SeaTac, a federal prison in the Seattle area.
The sentencing was the second high-profile penalty this year in the Justice Department’s campaign to root out criminal behaviour in the crypto industry.
In March, the founder of the now-collapsed FTX exchange and Zhao’s onetime business rival, Sam Bankman-Fried, was sentenced to 25 years in prison for fraud.
Some analysts with the NYT said Zhao’s sentence was an extraordinary contrast to Bankman-Fried’s penalty and the consequences that would ‘likely await other crypto executives who have been accused of crimes’.
Another high-profile crypto founder, Do Kwon, was charged with fraud last year and sent to jail in Montenegro, as he awaits extradition to either the United States or his home country, South Korea.
This is as Alex Mashinsky, the Chief Executive Officer of the failed crypto bank, Celsius, is battling charges that may carry decades of prison time.
Zhao’s four-month sentence has been criticised as “an egregious miscarriage of justice” that “sends exactly the wrong message to criminals worldwide,” according to Dennis Kelleher, the President of Better Markets, a nonprofit advocating stringent financial regulation.
Representatives for Zhao’s legal team and the Justice Department have chosen not to comment. In a recent letter to Congress, Carlos Uriarte, an assistant attorney general, urged lawmakers to consider imposing harsher penalties for violations of the Bank Secrecy Act, the law Zhao admitted to breaking.
Not long ago, Zhao reigned over the multitrillion-dollar crypto industry, boasting a substantial fortune and a dedicated online following. Binance, the company he led, held the title of the most powerful crypto company globally, processing up to two-thirds of all transactions. However, it also found itself under investigation by several US agencies, probing whether Zhao had unlawfully built his empire.
Amid mounting legal scrutiny, Zhao, known as CZ, often shrugged off concerns about Binance, dismissing them as “FUD,” or fear, uncertainty, and doubt—a common term in the crypto world for false rumours intended to damage a business.
In November 2022, his influence in the industry surged further after he orchestrated a series of social media posts that contributed to the downfall of Bankman-Fried, a rival executive.
Following this, Zhao briefly entertained the idea of acquiring FTX, Bankman-Fried’s exchange, before retracting the offer.
Subsequently, Bankman-Fried faced arrest on fraud charges, leaving Zhao as the industry’s dominant figure.
Behind closed doors, Zhao and Binance engaged in negotiations with federal prosecutors, seeking to resolve their legal troubles. Residing in the United Arab Emirates, where no extradition treaty with the United States exists, he aimed to secure an agreement that would prevent him from facing criminal charges.
In anticipation of a potential indictment, Zhao enlisted a team of white-collar defence attorneys from the prestigious law firm, Latham & Watkins.
Ultimately, a deal was struck.
In November, Binance agreed to pay $4.3bn to various US agencies, including the Justice Department, to settle charges related to its platform’s use by terrorist organisations like Hamas, the Islamic State, and Al Qaeda. Prosecutors alleged that under Zhao’s leadership, Binance had flouted American sanctions, granting access to customers in countries such as Iran, Syria, and Cuba.
Additionally, the company failed to report suspicious transactions involving narcotics and child sexual abuse materials, according to government officials.
Prosecutors highlighted Zhao’s mantra to Binance employees, stating that “it was better to ask for forgiveness than permission.”
They also cited his assertion that had Binance complied with US law, it wouldn’t have achieved its current level of success.
Unlike some of his counterparts, Zhao admitted to only a single criminal count.
He acknowledged his failure to establish an adequate anti-money-laundering system at Binance, resigned as CEO, and consented to a $50m fine.
Despite this, he retained his ownership stake in Binance, preserving his status as crypto’s wealthiest executive with a reported $33bn fortune, as per Forbes.
In court filings, prosecutors recommended a sentence of 12 to 18 months in prison under federal guidelines. However, they urged Judge Jones to impose a three-year term, arguing that Mr Zhao’s violations were of an unprecedented scale.
“This wasn’t a mistake—it wasn’t a regulatory oversight,” remarked Kevin Mosley, a lawyer from the Justice Department’s money-laundering section during a court session.
“Breaking U.S. law was not incidental to his plan to maximise profits. Violating the law was integral to that endeavour,” Mosley added.
In contrast, defence lawyers asserted Zhao’s remorse and acceptance of responsibility for his actions. They contended that he should not serve any time behind bars, emphasising that he had not been charged with fraud or embezzlement, unlike Bankman-Fried. Furthermore, they portrayed Zhao as a dedicated philanthropist, who intends to donate the majority of his wealth.
On a global scale, there have been high-profile cases of crypto kings and founders facing legal scrutiny and enforcement actions.
One notable example is the case of Arthur Hayes, the co-founder, and former CEO of BitMEX, one of the world’s largest cryptocurrency exchanges.
In October 2020, Hayes and other BitMEX executives were charged by US authorities with violating anti-money laundering regulations and failing to implement proper know-your-customer procedures.
This led to Hayes stepping down from his role at BitMEX and facing legal proceedings in the United States.
Similarly, in December 2020, the US Securities and Exchange Commission filed a lawsuit against Ripple Labs, the company behind the cryptocurrency XRP, and its executives, including co-founder Chris Larsen and CEO Brad Garlinghouse.
The SEC alleged that Ripple had conducted an unregistered securities offering by selling XRP tokens, leading to a legal battle that has had significant implications for the cryptocurrency industry.
Nigeria’s running battle with Binance
Just like in the United States, the Nigerian government is clamping down on crypto giant, Binance, after it arrested two of its senior officials and charged them to court for ‘tampering with the country’s foreign exchange market’.
Although cryptocurrencies have emerged as a disruptive force in the global financial landscape, challenging traditional notions of currency, finance, and regulation, several countries have continued to have regulatory concerns.
Countries like Nigeria and the United States, among others, have grappled with the complexities of regulating this rapidly evolving sector.
Cryptocurrency, at its core, according to a tech expert, Mr Samuel Oke, is a type of digital or virtual currency that uses cryptography for security and operates on decentralised networks based on blockchain technology.
Oke noted that unlike traditional currencies issued by governments (like the Nigerian naira or the US dollar), cryptocurrencies are not controlled by any central authority, such as a central bank.
Instead, they rely on a distributed ledger system, where transactions are recorded across a network of computers.
In recent years, Nigeria has emerged as one of Africa’s leading hubs for cryptocurrency adoption and trading.
This is due to several factors, including a large population of tech-savvy individuals, a relatively high level of smartphone penetration, and a growing interest in alternative financial systems.
Platforms like Luno, Binance, and Paxful have seen significant growth in their Nigerian user base, offering avenues for buying, selling, and trading various cryptocurrencies.
However, the Nigerian crypto market has also faced challenges and uncertainties, particularly in terms of regulation.
For instance, the Central Bank of Nigeria has issued several directives and warnings regarding the use of cryptocurrencies in the country.
In February 2021, the CBN instructed banks and financial institutions to close accounts linked to cryptocurrency trading, citing concerns about money laundering, terrorism financing, and other illicit activities.
This move sent shockwaves through the Nigerian crypto community and raised questions about the future of cryptocurrency regulation in the country.
Oke, however, noted that despite these regulatory challenges, the demand for cryptocurrencies in Nigeria remained strong.
“Many Nigerians see cryptocurrency as a means of preserving wealth in the face of economic instability, currency devaluation, and limited access to traditional banking services. Additionally, remittances from Nigerians living abroad play a significant role in driving crypto adoption, as cryptocurrencies offer faster and cheaper alternatives to traditional money transfer services.
“In some cases, regulators and law enforcement agencies have targeted prominent figures in the crypto industry, alleging various violations of laws and regulations,” he said.
In Nigeria, there have been reports of individuals involved in cryptocurrency trading facing legal challenges and crackdowns. These include cases where crypto traders have had their bank accounts frozen or closed in compliance with the CBN’s directives.
Additionally, there have been instances of arrests and prosecutions related to cryptocurrency-related activities such as alleged fraud or money laundering schemes.
The Federal Government had detained at least two senior executives of Binance, Najeem Anjarwalla and Tigran Gambaryan. Both of them were charged with fraud and not adhering to regulations, among others.
According to a report by Financial Times, both executives flew into Nigeria, following a ban on their website, and were arrested by officials of the Office of the National Security Adviser and their passports seized.
Nigeria’s P2P market
Nigeria is one of the largest peer-to-peer crypto markets in the world. Between July 2022 and June 2023, crypto transactions in the country reached $56.7bn, according to Chainalysis.
The Chief Executive Officer of one of the leading cryptocurrency platforms in Nigeria, NoOnes, Ray Youssef, revealed that peer-to-peer popularly known as P2P is probably like a $500bn business in Nigeria alone.
Youssef said this in an interview with Techpoint Africa on the heels of an imminent ban on cryptocurrency in the country.
Speaking on the astronomical P2P transactions on Friday, the NoOnes boss asserted, “Peer-to-peer is probably like a half a trillion dollar business inside Nigeria alone. That’s the truth. Officially, cryptocurrency volume in Nigeria is at $59bn a year, and that’s just all the official volume of everything that is happening on centralised exchanges that can be tracked on the blockchain. Yeah, let’s say $59bn to $60bn.
“That’s a joke; the real volume is 10 times more than that. That’s peer-to-peer, and that’s not just volume that has happened.”
Youssef added that most of the P2P transactions did not happen on Binance or any other platform but on WhatsApp, Telegram, coffee shops, and everywhere on the streets.
“Most peer-to-peer doesn’t happen on Binance P2P or NoOnes or any of these other platforms. They happen on WhatsApp, Telegram, coffee shops, and everywhere on the streets. That’s where most peer-to-peer is really happening.
“And, in fact, I would even say $60bn going through the centralised exchanges. I think most of that is actually peer-to-peer volume, they are kinda covering up too because Nigerians are very crafty and have ways to use things for things they weren’t necessarily meant to be used for,” he maintained.
In February 2021, the CBN issued a circular to deposit money banks, non-bank financial institutions, and OFIs to close accounts of persons or entities involved in cryptocurrency transactions within their systems.
Regulatory uncertainties
A senior official at the Economic and Financial Crimes Commission, who did not want to be named because he was not authorised to speak for the agency said there were a lot of grey areas in the way Binance and other crypto platforms carried out their operations.
“This is not a thing of just Nigeria. A lot of other countries are haunting these guys down for fraud and other unclear practices like currency speculation.”
A tech expert and lecturer at a hackerspace in Lagos, Tochukwu Ude, commenting on regulation, said the lack of clear regulatory frameworks for cryptocurrencies had been a significant source of tension between operators and regulatory authorities.
“In Nigeria and the United States, policymakers have struggled to develop comprehensive regulations that balance innovation with consumer protection and financial stability.
“The absence of clear guidelines has left cryptocurrency operators and investors in a state of limbo, unsure of how to navigate the regulatory landscape,” Ude added.
Ude also said cryptocurrencies, with their decentralised nature and price volatility, posed potential risks to financial stability.
“Regulatory authorities fear that the widespread adoption of cryptocurrencies could destabilise traditional financial systems and markets,” he said.
Security risks, regulatory oversight
Cryptocurrencies have been associated with a range of security risks, including hacking, fraud, money laundering, and terrorism financing.
“Regulatory authorities are keenly aware of these risks and are working to implement measures to combat illicit activities in the cryptocurrency space. However, the pseudonymous nature of cryptocurrencies presents challenges for law enforcement agencies seeking to identify and prosecute criminals,” Ude said.
He, however, stressed that it was not enough for the government to paint the entire lot with one brush simply because fraudsters had begun to use the platforms for their illegalities.
Regulatory oversight of the cryptocurrency industry is complex and multifaceted.
Speaking on this, another tech expert and a trader with Binance, who refused to give their name, said, “In Nigeria and around several other countries, regulatory authorities are tasked with monitoring and enforcing compliance with existing regulations, but the decentralised nature of cryptocurrencies makes this task challenging.
“Regulators must strike a delicate balance between fostering innovation and protecting consumers and investors from fraudulent activities.”
Taxation
Cryptocurrency transactions are subject to taxation in both Nigeria and the United States, but the tax treatment of cryptocurrencies remains a contentious issue.
Experts have noted that the anonymity and cross-border nature of cryptocurrency transactions present challenges for tax authorities seeking to enforce compliance and collect taxes. Policymakers are grappling with how to adapt existing tax laws to accommodate the unique characteristics of cryptocurrencies.
Clashes with traditional financial institutions
The rise of cryptocurrencies has disrupted traditional financial institutions, including banks and central banks.
Regulatory authorities in Nigeria and the United States are under pressure to strike a balance between supporting innovation in the cryptocurrency space and protecting the interests of traditional financial institutions. The tension between cryptocurrency operators and traditional financial institutions underscores the need for clear regulatory frameworks that promote innovation while safeguarding financial stability.
Ude, for instance, noted that the conflict between cryptocurrency operators and regulatory authorities in Nigeria and the United States reflected the broader challenges associated with regulating a rapidly evolving and decentralised industry.
According to him, as policymakers grapple with these challenges, it is essential to strike a balance between fostering innovation and protecting consumers and investors.
He added, “Clear regulatory frameworks that provide legal certainty and promote transparency will be crucial in navigating the complex landscape of cryptocurrencies in the years to come.”
