The cryptocurrency exchange Binance pushed a novel, low-risk approach to participate in the activity during the first few months of this year.
On May 16, CEO Changpeng Zhao disclosed the extent of Binances own Terra-related losses.| Photo: Wikipedia
GMP -- The cryptocurrency exchange Binance promoted a new, low-risk way to participate in the action during the first few months of this year, when purchasing digital tokens with dog meme names was still considered, at least in some of the most forward-thinking circles, to be a perfectly reasonable way to participate in finance's bright new future. It encouraged clients to buy into a product called TerraUSD. The token was a "stablecoin," a sort of cryptocurrency that works somewhat similarly to a savings account and guarantees to always be worth $1.
Customers who used Binance's platform to buy, sell, and invest in different cryptocurrencies were informed that this stablecoin offered something unique by promising annual returns of around 20 percent. Customers of Binance were told that TerraUSD may possibly be "secure" and "good yield."
Terra turned out to be neither safe nor high yield, as crypto fans well know and as anyone familiar with the conventional norms of finance can certainly assume. Critics claim that the coin was a Ponzi scam, the start of a collapse that sent the price of Bitcoin tumbling and forced businesses throughout the industry to rapidly lay off personnel and halt consumer withdrawals. Since its peak in November, Bitcoin has dropped by almost 70%, and the industry has dubbed this decline the "crypto winter."
This has been bad news for Binance as well as for investors caught up in the craze. The size of Binance's own Terra-related losses was revealed on May 16 by Chief Executive Officer Changpeng Zhao. The company's investment, which had been valued at $1.6 billion, was now almost worthless. Not that Zhao was issuing or paying attention to any cautions. In an interview that day, he stated, "So, there are a few things about myself. I honestly don't care about money.
It was difficult to believe the comment, which he made while sipping a $14 glass of orange juice at a French restaurant inside a Four Seasons hotel in Dubai, coming from the richest person in a business where money is everything. Zhao has a gentle voice, a shaven head, and a clothing that appears to be made up entirely of black Binance shirts. He's also a bit of a mystery. Depending on who is speaking, he is either leading the development of a ground-breaking system that will see a group of vertically integrated digital currency giants—including Binance and rivals like FTX—replace not only the world's stock exchanges but also the entire global financial order, or he is managing the biggest illegal casino in the world.
Zhao, or CZ to those who speak cryptocurrency, was supposedly among the top ten richest persons in the world in January. According to the Bloomberg Billionaires Index, his net worth has plummeted alongside the price of Bitcoin, dropping from $96 billion to $11 billion. Despite this, Binance continues to be by far the largest cryptocurrency company, handling more transactions than the following four exchanges put together. On the platform, which typically charges a 0.1 percent fee, more than $50 billion is traded each day. In actuality, this implies that Zhao, the company's by far largest shareholder, benefits whether or not its clients purchase or sell. Actually, he continued, referring to the Terra collapse, "what amazed me was the resilience. "Bailouts don't exist. No central bank exists. No involvement from the government." The market crash was still happening, but Zhao didn't witness much of it. He claimed that the industry was moving forward.
Late last year, Zhao moved to Dubai. It seemed appropriate that he lived in the futuristic desert metropolis, where foreigners outnumber residents nine to one, where visitors can ski indoors in 110°F heat, and where any sense of place has long since been hidden by the enormous wealth created by its oil-rich neighbors. Zhao, a Canadian citizen born in China who immigrated to Vancouver when he was 12 and earned a degree in computer science from McGill University in Montreal, has spent his whole adult life traveling, rarely settling down for more than a few years in any one place.
He created code for the Tokyo Stock Exchange when he was in his early twenties. Then a job with Bloomberg LP in New York City followed (which publishes this magazine). Moving on, he co-founded a business in Shanghai that created tools for high-frequency traders before launching Binance in 2017. However, the Chinese government outlawed cryptocurrency exchanges the following year, so he began looking for a nation that wouldn't try to shut down his company or fine him for offering unregistered securities. I was residing out of two suitcases, the man admitted. Actually, I just have one large and one tiny suitcase.
He at last felt at home in Dubai. As part of a new phase of Binance that he described as being "the adults in the room, really," he purchased an apartment, acquired a minivan, relocated his belongings, and leased an office. He boasted about having a tight relationship with the Emirati government and highlighted that, at 45, he was at least ten years older than most crypto entrepreneurs. He claimed that Binance will be the firm to show that cryptocurrency was a much more reliable investment than detractors had anticipated. He claimed that our 120 million people trusted us with their whole life savings. "We safeguard our users. Governments and regulators are contacted by us. We're the reliable men, you know."
It was a bold assertion. Even the most reputable cryptocurrency initiatives can appear, to the unlaser-eyed, to be lightly powdered with dirt. Money laundering, fraud, and hacking have all been a part of the industry's history. But at Binance, the shadiness has an air of completion. Nearly every significant US financial agency is presently looking into the corporation, including the Department of Justice, the Commodity Futures Trading Commission, the Internal Revenue Service, the Securities and Exchange Commission, and others globally. These inquiries, according to Binance, are a part of a good faith discussion it is having with governments that, in its opinion, simply don't know what to make of cryptocurrencies. But it's far from evident that the regulators share that perspective.
Using unregulated bets on lesser digital tokens, some of which are referred to as "shitcoins," Binance, whose history is described here using court records, company filings, and interviews with more than 40 current and former employees and business partners, became very successful. (Dogecoin, the most well-known of them, was first developed as a joke and has already amassed a market value of $8 billion.) Binance then developed highly leveraged financial instruments based on the value of those tokens. Since Binance is based outside of any countries where these derivatives are prohibited, this hasn't affected it. Critics have long raised concerns about potential gaps that could allow fraudsters and money launderers to transfer funds through the exchange. According to a June Reuters article, Binance was used to launder at least $2.35 billion, including money from common con artists as well as money from North Korean hacker gangs and dark web drug markets.
Binance's share in cryptocurrency market. | Photo: cryptocompare.com
A 120-person security and investigation team led by former senior law enforcement officers from the US, UK, and Europe, according to Binance, refutes these assertions. Zhao claims that Binance has only been acting as an offshore exchange, similar to a modern Cayman Islands bank or, less favorably, the Republic of Pirates, the illegitimate pseudo-state that ruled over trade in the West Indies at the beginning of the 18th century. He claimed that those days are over in any case—and Zhao would much prefer the Cayman Islands scenario. In response to inquiries from authorities, he added, "Office, headquarters, parent company—at the beginning, we told them we don't have that, and of course they were all pissed off." So we set all that up over the past year.
Zhao is taking the route taken by other tech disruptors like Airbnb, Uber, and PayPal in seeking accomodation after years of defying the law: As long as you can, disregard government demands. When you are large enough, cooperate with the aforementioned governments to secure market share. But because a large chunk of global banking is now connected to cryptocurrency exchanges, regulators have already expressed their desire to punish those they believe to be the worst offenders, potentially setting up an epic conflict. Zhao might be charged with a crime when it's all said and done. He might also be the richest man in the planet.
If the word "business" even applies to what Zhao is doing, Binance has always positioned itself as a decentralized organization. Legally, Binance Holdings Ltd. owns its trademarks, which include the image that is inked on Zhao's right forearm. The ownership of such entity has never been made public. Zhao is the sole proprietor of the British Virgin Islands-registered Binance Capital Management, which paid $400 million for the cryptocurrency statistics site CoinMarketCap and contributed $200 million for a stake in a business that intended to IPO Forbes. According to corporate documents, Zhao is also the sole owner of a number of Binance activities, including those in Malta, Singapore, Ireland, France, and Italy. He either owns these operations personally or through a company under his control. The majority of transactions on Binance take place on its flagship exchange, Binance.com, which has no fixed location and is owned by no one in particular.
The "companies that run Binance," as stated in the conditions of use, may change at any time, and traders who open a Binance account agree to do business with them. One attorney stated to a client who had sought compensation for allegedly losing $1.2 million trading an unknown stablecoin, "It appears that the Binance Platform is not owned by any firm or other legal body," according to a note acquired by Bloomberg Businessweek. Although the client gave up, others who attempted to sue Binance have listed a long list of businesses and executives.
In talks with the Chinese media, Zhao has said that he merely uses the word "business" for the benefit of visitors. He considers Binance to be a "organization." "Team members" refer to employees. It doesn't seem like Binance has a regular shareholder structure or a board of directors, whatever it is. According to Zhao, who subscribes to the crypto-ideology, leaderless movements that unite behind the blockchain's immutable logic are appealing. However, according to former workers and investors, Zhao is the only person in control of Binance. A former executive who, like other others interviewed in this article, sought anonymity to prevent upsetting Zhao adds, "At the end of the day, he's the holding company."
None of this matters to the majority of Binance investors. Their ownership in Zhao's exchange isn't based on equity—Binance doesn't seem to have many outside investors—but rather on the company's BNB coin. The currencies were initially offered by Binance in 2017 as part of an ICO, or initial coin offering, which is the unregulated cryptocurrency equivalent of an initial public offering. Today, they trade for around $220 per coin, with an indicated total market value of about $36 billion. Blockchains are international, according to Binance's investor prospectus.
In the beginning, everyone who wanted to trade on Binance had to first purchase Bitcoin, unlike on a regulated exchange like Coinbase. They may move money from a bank account to a licensed exchange before sending it to Binance, or they could circumvent the financial system by, for example, exchanging a used car or some opiates for cryptocurrency or by purchasing cryptocurrency with cash from another enthusiast. Anyone may open an account on Binance.com from practically anywhere in the globe with just a minimal set of personal information and an email address—nothing that establishes their identity. Users with unverified accounts can't do much these days, although they used to be able to withdraw up to $120,000 worth of Bitcoins per day—two Bitcoins—every day before the rule changed in 2021. The corporation reduced the daily cap to 0.06 bitcoins, or around $1,200 at the current exchange rate. Zhao currently claims that, in terms of nearly all of them, "We are probably one of the first firms to grow in 180 countries at the same time." "Users were present everywhere. Teams were present all over.
However, nowhere did not imply everywhere. Zhao has worked from hotels, residences, and resorts all around the world while traveling and interacting with workers via text, email, and video conversations. Former workers claim that Binance also had a covert home base for many years. This was problematic because it contradicted the company's claimed idea of being a decentralized "organization," as well as because the home office was located in China, where cryptocurrency was illegal. So, even as Beijing shut down competing exchanges, more than 100 Binance employees showed up daily to an office in Shanghai's Huangpu neighborhood, where they worked at standard desks with bilingual name cards. They claim that Ruique Cultural Development, a corporate alias, was used to hire them, submit their business visa applications, and advise them to exercise caution when sporting company apparel in public and keep their employment information a secret.
Then, in November 2019, they received instructions to leave the building. Computers, desk accessories, and other trinkets were packed in boxes. Several people who were present at the time said that some people tried to make their name cards unreadable by rolling them up and running them under water in the bathroom sinks. They were transferred to a network of coworking locations in and around Shanghai, or, like Zhao, they left the country.
Zhao refuted claims made by the Block, a crypto news site, claiming the Huangpu office had been the target of a "police raid" as part of China's campaign against cryptocurrencies. He asserted that there had been no raid and that there was no Binance office at all in Shanghai. He tweeted, "No cops, no raid, no office. He called the Block's report "FUD," an abbreviation for "fear, uncertainty, and doubt" that is used as a pejorative in the cryptocurrency community to refer to any news that is thought to harm people's impressions of Bitcoin. “We will be suing,” he continued. The Block clarified that the term "raid" was challenged in their story update, but otherwise stuck with its original narrative.
Zhao opted not to file a lawsuit. He did not also refute the existence of a Shanghai office during the interview at the Four Seasons in Dubai. He said, "Some government official stopped by the office. Not even a regulator, that is. He was merely a government representative. He then started criticizing the media. He added with a sly smirk, "You can write two completely different narratives as a journalist, right?" You can either say, "This person walked gently into the restaurant and enjoyed the sunshine view," or you can say, "This guy escaped into a restaurant."
He paused and cast a glance around, seemingly expressing his preference. Zhao's security guard had checked out the room we were in and it was entirely empty. Additionally, sunlight entered via the windows. There are other tales out there that are founded on false facts, he continued.
Narratives have always been important to the cryptocurrency sector. National currencies, or the "fiat" in fiat money, are founded mostly on popular belief and governmental decision, as proponents of Bitcoin have long argued. But unlike cryptocurrencies, which have gained popularity due to a widespread belief that their value will skyrocket without much consideration for their fundamental value, the dollar benefits from the general consensus that it will more or less keep its value over time. “Why? I have no idea as to why. When asked about an investment in a mysterious token that wasn't traded on Binance, Dave Portnoy, the sports media entrepreneur who, for a while, acted as a mascot to meme stock investors, indicated that it might be a Ponzi scam. "Get in on the ground floor if it's a Ponzi scheme".
A trader who utilizes the exchange calls Binance "a big shitcoin casino." The individual, who requested anonymity out of concern that Binance may react and freeze his account, believes Zhao should be commended for seeing that a significant portion of the appeal of cryptocurrencies was purely speculative. He made the industry's silliest components quite simple to utilize. The trader claims that Binance's motto has always been to "go buy your Dogecoins and get rich." The business employs a "rigorous process" to verify its listings, according to Jessica Jung, a spokeswoman for Binance, who also points out that some cryptocurrency exchanges provide even more tokens than Binance. According to her, Binance started examining coin advertising following Terra's demise.
Nevertheless, during the early stages of the startup, Binance's approach to shitcoins emerged as a fundamental differentiator: while the major US exchange, Coinbase, only offered three tokens, Binance provided more than 100. With a multilevel marketing-inspired referral network that gave influencers a share of the trading fees of anybody they referred, it sold them like protein drinks. While volunteers known as Binance Angels promoted the company in Telegram chats and organized in-person events to share the wisdom of investing in cryptocurrency, Binance ran competitions in which users with the biggest trading volumes fought for prizes like Lamborghinis and Maseratis. According to Binance, the Angels give their time freely because they love the crypto community more than they want to become wealthy. Co-founder He Yi, a former TV star who reinvented herself as a crypto influencer and is now the business's chief marketing officer, describes them as "like priests."
Zhao seems to have had much larger ambitions practically from the start, despite assurances made in the ICO that Binance would be a "pure crypto" exchange. In a 2017 job interview, a former product manager recalled hearing that Binance planned to control not only the cryptocurrency exchange market but also a stock exchange similar to Nasdaq. It would have to work with banking institutions and regulations in order to service users who did not already hold cryptocurrency in order to do that. Zhao stated at the Dubai Four Seasons, "The early crypto adopters, they're OK with offshore." But the remainder are typical users. Most likely, they favor a regulated exchange.
Similar calculations had been made by other cryptocurrency exchanges, but whereas Coinbase adopted measures to appear to ward off US regulators, such requiring customers to present official identification, Binance embraced a strategy in line with its more libertarian attitude. Although the business would attempt to establish regulated local exchanges where customers could purchase cryptocurrency using dollars or other local currencies, Binance.com would continue to operate as an uncontrolled exchange.
While other regulators—including those in the Netherlands, South Africa, Thailand, and even the Cayman Islands—warned that the exchange wasn't permitted to operate locally, Binance courted governments in Japan, Malta, and Singapore, all of which finally acted to prohibit its opening. These losses, according to Zhao, were a result of "looking at different sites to attempt to identify which would become more favorable towards crypto," a process that he defined as "searching at multiple places."
There were two competing Binance operations in the UK, which made things even more chaotic, according to former employees. This was indicative of a haphazard business strategy that stoked fierce internal rivalries. Due to the lack of communication between the two subsidiaries, a senior executive at one claimed to have learned about the existence of the other only after being praised for hiring a person he had never met. The UK teams collaborated, according to Jung of Binance. She describes the company's strategy as "not haphazard." It serves a purpose, One of the companies, Binance Markets Ltd., was told by the UK's Financial Conduct Authority in June 2021 to stop all "regulated activities" and post a notice on its website stating that it was not permitted to conduct business in the nation. It concluded that Binance "cannot be adequately supervised." The notice was posted on Binance's UK website, but the country's traders may still use Binance.com because, according to the law, it has nothing to do with the criticised British affiliate.
Zhao founded Binance.US in 2019, claiming that it would be completely independent and work to adhere to US rules by restricting access to riskier products. A leaked document, however, described a proposed "bait and switch" technique in which Binance.US would be a fake intended to deflect attention from the primary exchange, according to a Forbes report from 2020. With Charles Harder, the well-known attorney who successfully sued Gawker Media on behalf of Peter Thiel, leading the case, Binance claimed that the plan had been misrepresented and filed a defamation lawsuit.
Binance eventually dropped the lawsuit as Forbes stood by its story. Zhao stated in Dubai that "the report is false," but he added that the conflict had no bearing on his choice to invest $200 million for a share in the publication and that he won't meddle in editorial decisions. He replied that he wasn't sure what information in the story was incorrect. Some interpret Zhao's lack of travel to the US in recent years as an admission of his concern of being detained. He claimed that's not the case and that he's only avoiding the nation to avoid starting a fight. He declared, "I think I'm absolutely authorized in the US, no difficulty." However, I don't want to create the impression that we are attempting to attract users there. He uses Zoom to deliver his speeches at US conventions.
The SEC is currently looking into Binance in relation to suspected insider trading and the sale of unregistered securities during the 2017 ICO. The agency also has inquiries about the connection between the international exchange and the US arm. These investigations, according to Todd White, managing partner of Rulon & White Governance Strategies, a cryptocurrency-focused Washington lobbying firm, are the outcome of Zhao's disregard for compliance. They were merely fostering global interactions, according to White. Although I appreciate your efforts to create anything, anti-money-laundering regulations are crucial.
Tax on cryptocurrency. | Image by: Yahoo! Finance
In a meeting in 2018, White claims he pushed Binance management to take compliance more seriously but was ignored. He claims, "They were quite contemptuous." A strategic decision led to the amorphousness. A cloud cannot be sued. Binance contests this claim and asserts that it is serious about compliance.
Ironically, Binance is more centralized than even the largest financial institutions, despite being a firm founded on a distrust of Wall Street. Today, it serves as a trading platform, brokerage, savings institution, venture capitalist, data provider, and operator of a "shitcoin casino" all at once. In other words, it is a combination of Nasdaq, Charles Schwab, Bank of America, Andreessen Horowitz, Morningstar, and Caesars Palace. According to Lex Sokolin, an economist at blockchain firm ConSensys Software Inc., Zhao's cryptocurrency company "is vertically integrated in a way you'd never allow a regular financial institution to be."
In short, there are several possible conflicts of interest in Binance's economic strategy. For instance, because of its magnitude, a listing on its exchange often causes the coin's price to surge, and there have been increases in trading activity right before Binance listings, which has led some detractors to speculate that insider trading may have taken place. According to Jung, a spokeswoman for Binance, staff members are subject to a "strict ethical code" that forbids short-term trading. She claims that anyone discovered to have broken such policy is fired by the company.
Although the business is well-liked by cryptocurrency dealers, its past has included outages, withdrawal freezes, and at least one hack. According to John Reed Stark, a former director of the SEC Office of Internet Enforcement, even as Binance and other cryptocurrency exchanges develop, they continue to operate in ways that go against laws intended to safeguard customers. He claims that they are simply functioning with no oversight, no consumer protection, and no fiduciary infrastructure—they are simply free to act like you and I. When it comes to your finances, it's not what you desire.
Zhao made the observation in Dubai that many of the critiques of Binance could just as readily be directed at the company's competitors. Even well-established competitors have had regulatory issues, and many crypto exchanges have been accused of crimes or securities violations. Sam Bankman-Fried, a co-founder of FTX and Zhao's competitor, has benefited greatly from his riches and media connections to support Democratic candidates and gain the endorsements of Tom Brady, Gisele Bündchen, and Steph Curry, but FTX has also moved about tax havens. Its present base of operations is the Bahamas. While Dogecoin and Shiba Inu—a Doge-like currency that has somehow managed to function both as a meta joke and a legitimate investment opportunity within the hype cycle—are listed by Coinbase, which first adopted a conservative approach before embracing shitcoins. A leveraged shitcoin index with the ticker symbol "Bullshit" is among the investments that are covered in guides on Coinbase's website. (Binance has a comparable manual.) Since last fall, the price of Bullshit has dropped 99.96 percent.
Zhao said he has altered course over the past year and accepted that his organization has made some mistakes. Previously, Binance made an effort to convince regulators that a sizable, uncontrolled cryptocurrency exchange wasn't a major deal. But Zhao has realized that "we're not going to educate them and change their beliefs on that," to use his own words. Change is simpler for us to make than for them to make.
Through a kind of influence effort, Zhao has attempted to drive home this message. As investors have lost interest in SPACs, the Forbes investment through a projected special purpose acquisition company appears to have failed. However, Binance has invested tens of millions of dollars in high-profile soccer sponsorships (including those for Brazil's top league, Italy's Lazio, and Argentina's national team) and has promised to contribute $500 million to Elon Musk's attempt to take over Twitter. Regarding the Musk deal, Zhao stated, "We want to encourage free speech," albeit he was unsure of how to reconcile this position with the choice to hire Harder and sue Forbes. He noted that "free expression is exceedingly difficult to define." Charles Harder and I have never spoken. Our group took care of it.
Zhao has been obsessed with the media as part of his new "adult in the room" phase. His publicists had advised that he show Businessweek some of his human side by showing them around some of his favorite spots in his new area. The tour was reduced to a 10-minute drive between hotels in Zhao's minivan, a black Toyota Granvia, because he seemed to have few apparent interests outside of work.
Zhao stated, activating a button and lowering himself onto the knees of one of the two handlers seated in the third row. "People suggested a Rolls Royce or a Bentley, but none of those cars have the seats that go flat," Zhao said. That was all I asked for. As we traveled, it became clear that if he had a favorite aspect of Dubai, it wasn't the indoor skiing or the cutting-edge architecture but rather the tolerant regulatory environment. Giving a tour of that is challenging.
Zhao's shift to conventionality may not be as urgent as it first appears, according to other indications. Zhao stated a reporter might visit the new Dubai office on the day of the interview. The office was actually closed due to an increase in Covid-19 instances, a Binance official claimed after a flurry of emails, calls, and texts during which assistants and PR consultants offered numerous justifications. That was strange because neither Zhao nor anyone else at the company had mentioned the illness during the interview. The company's head of Middle Eastern operations showed up uncovered in a crowded hotel lobby where he seemed to be holding in-person meetings on the day Binance had scheduled a separate interview with him.
Ten days later, Peng Pheng Tan from the HR team granted Businessweek a virtual tour of Binance guided by the company's head of publicity. The offices weren't quite busy, but Binance had mentioned before the trip that they gave the sense of having at least some action going on there. Zhao had explained, "So, we have offices, but people just go to the offices a few days a week." Tan made a similar statement when she entered an elevator in a building close to the Dubai World Trade Center while streaming the scene live on her phone. She said, "We're implementing a hot-desk system.
After that, she entered a set of blue doors. There was a sizable room inside with a breathtaking view of downtown Dubai. There was nothing except raw concrete flooring, open ductwork, and drywall. A strange pause followed. She remarked, "Nobody is coming here. One more pause "Yeah, pretty much,"
Meanwhile, Zhao and the rest of the Binance leadership team were once more on the move. The day following the interview, he took a flight to France to attend the Cannes Film Festival (Binance was giving away pizza at the event), and then he continued on to Paris for the summer. He has lately experienced a string of successes in Europe, where both Binance France and Italy recently got regulatory license. Zhao had recently been promoting the idea of Paris as a potential new home base.
The following month, Zhao stated that Binance was "hiring for 2000 open positions," in contrast to other cryptocurrency businesses that were firing staff due to the downturn. He tweeted a photo of himself in what appeared to be a busy office, reaching out to an imagined new hire. Even though it wasn't completely genuine, it was welcoming. The office is exactly like one on the free stock photo website Shutterstock. Zhao's head was a model's body that had been photo-shopped onto it. According to Jung from Binance, Zhao was parodying his own Shiba Inu joke in the tweet, which was "part of a meta joke." More than 50,000 people liked the tweet.
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