Not everyone shares the same view on why Binance seems to be the subject of such intense scrutiny by the US government. However, the blurry boundary between Binance Global and Binance US is one reason that has caused concern among regulators.
Author: WILL GOTTSEGEN
Translation: Block unicorn
- Ordinals NFTs: Blue Chip Index (2023/6/4)
- zkSync TVL shows healthy growth, taking stock of its early and non-token projects to capture substantial profits.
- How to preserve life trajectory under the NFT mindset
Changpeng Zhao (CZ), CEO of Binance, has recently been avoiding public attention. However, after Sam Bankman-Fried’s stunning rise, all eyes are on this mysterious tycoon in the crypto world.
The news was sudden and decisive: Binance Global, led by Changpeng Zhao, announced plans to acquire its biggest competitor FTX, led by young American SBF, in what looks like a world-historic chess game. SBF not only gave up his once-booming business, he actually capitulated, selling off everything left of FTX in the form of scrap.
However, just as the deal was announced, it disappeared. Binance canceled the deal the next day, saying “the issues were beyond our control or ability to help.” On November 11th, FTX crashed, causing an estimated $1 trillion in global cryptocurrency value to be lost and forever tarnishing the reputation of the crypto industry.
SBF, the Silicon Valley wunderkind with an explosive haircut and the dutiful son of two Stanford law scholars, has become one of the most notorious suspected criminals in financial history. Books, TV shows, and movies about the FTX disaster continue to emerge, undoubtedly ensuring SBF’s lasting cultural legacy. However, if you don’t follow cryptocurrencies, you may have never heard of CZ (the abbreviation of Changpeng Zhao’s name), despite his business empire and personal fortune surpassing that of SBF. This mysterious Zhao has always been a true cryptocurrency tycoon, and this mystique is no accident.
On December 13, 2022, SBF was taken away in handcuffs by the Royal Bahamas Police in the Bahamas. However, as the head of the largest and most important exchange in an industry under strict scrutiny, Zhao Changpeng is more exposed than ever before: in late March, Binance was sued by the US Commodity Futures Trading Commission (CFTC), which accused it of a large-scale plan to evade US law. Binance has faced investigations by the US Department of Justice, the Internal Revenue Service, the Securities and Exchange Commission (SEC), and other regulatory agencies worldwide. After the collapse of SBF, the spotlight that Zhao Changpeng had been avoiding now finds him as regulators come knocking.
Senator Van Hollen, who has been following Binance, said: “Obviously, Zhao Changpeng has been lurking in the shadows, it’s hard to say where they (Binance) operate, what they’re doing. And as our concerns about the stability of funds held by them grow, this is very important. We just went through the collapse of SFB, which was a regulated bank with at least some review process, but in the case of Binance, we have no idea, it’s a black box. So I’m worried it could collapse and a lot of people could lose a lot of money.”
So who is Zhao Changpeng? What is he hiding?
In a blog post from 2018, Zhao Changpeng wrote: “Just an ordinary guy doing the job that needs to be done, that’s it.”
What we know is that Zhao Changpeng was born in Qingkou Town, Jiangsu Province, China, in the late 1970s. He and his family reportedly left the rural area when he was 12 and moved to Hefei, then immigrated to Vancouver.
Zhao Changpeng had many part-time jobs when he was in his teens, the most famous of which was working at McDonald’s for two years. His work at McDonald’s is an important part of Zhao Changpeng’s legendary story – this fast food chain has become a meme in the cryptocurrency world (just like failing in stocks or cryptocurrency trading means you have to go work at Meituan), symbolizing the fate of failed traders who must go work at McDonald’s.
Later, he followed in the footsteps of his academic father and studied computer science at McGill University in Montreal. After graduating from university, he worked as a software developer in Bloomberg’s trading department. Zhao Changpeng was described to me by his direct supervisor at Bloomberg as “a smart software technology expert with excellent interpersonal skills,” but added that he was “not a typical Wall Street jerk” and “not a typical technology anti-social person.”
After leaving Bloomberg, Zhao Changpeng moved to Shanghai and co-founded a financial software company called Fusion Systems with others. A poker game in 2013 introduced him to Bitcoin, and Zhao Changpeng immediately sold his home in Shanghai for $1 million to buy Bitcoin and resigned from Fusion to enter the cryptocurrency industry. Over the next four years, he worked at various cryptocurrency startups until he co-founded Binance in China in 2017, dreaming of building a center for international digital assets.
The key to the platform’s success is that it serves as an entry point for the entire industry: if you want to own some Bitcoin or use any network application based on cryptocurrency, you need to convert non-cryptocurrency into cryptocurrency. For millions of users worldwide, Binance is the place to achieve this goal, with enough ease of use for beginners and enough sophisticated analysis tools for professionals. It was almost an instant success, attracting 120,000 users in its first 45 days of operation. Today, that number has grown to 120 million, and Binance is the largest cryptocurrency exchange. Because of his controlling stake in the company, Zhao Changpeng is now one of the 60 richest people in the world.
He Yi founded Binance with Zhao Changpeng in 2017
Zhao Changpeng co-founded Binance with a woman named He Yi, who has held various positions at the exchange. A former Chinese TV broadcaster, she was appointed head of Binance’s venture department last year, managing $7.5 billion in funds. She is now the company’s chief customer service officer and one of the few female leaders in the cryptocurrency field. She has said in an interview, “Forget about your gender and don’t focus too much on the fact that you are a man or a woman leading the world. Instead, focus on how to become an excellent business leader, regardless of whether you are male or female.” She and Zhao Changpeng also have a romantic relationship: they have two young children together, although little is known about their relationship.
It became clear early on that Binance’s leadership was operating on their own terms. After a few months of operation, China began to threaten the entire cryptocurrency industry, and Zhao Changpeng chose to move the business to friendly jurisdictions – first relocating the company headquarters to Japan and then to Malta. When even Malta’s regulatory requirements seemed too strict for Binance, the company set off again.
During SBF’s rise, he maintained friendly relations with politicians and journalists, making strategic donations to both parties and providing funding to major media outlets such as ProPublica, Semafor, and The Intercept, as well as secretly supporting a cryptocurrency news media called The Block.
Zhao Changpeng took a more direct approach. When Forbes magazine published an exposé in 2020 about Binance’s alleged attempt to evade US regulation, Binance sued Forbes for defamation; a year later, Binance announced plans to purchase a $200 million stake in the soon-to-be-public media giant. Forbes confirmed to me that the investment never materialized because the IPO plan ultimately fell apart, but the announcement itself showed Zhao Changpeng’s actual purchasing power, whether in terms of his influence in court or his favor in traditional media.
(No wonder Zhao Changpeng refused traditional media interviews like Rolling Stone magazine – he rejected multiple interview requests through Binance representatives.)
However, Zhao Changpeng did not remain silent. He is very active on his own blog and Twitter, where he feels comfortable communicating with the core user group that is addicted to high-risk cryptocurrency trading and uses memes that can only be understood after years of following. When an anonymous YouTuber made a meme video implying that Binance’s website was down, Zhao Changpeng quoted the meme in the company’s official policy, indicating that he is good at memes (and also good at marketing).
Familiarity with cryptocurrency culture has given Zhao Changpeng a credibility within the industry, though he refuses to disclose details about his business structure. Because Binance operates outside of the US, it has so far been unrestrained by the US regulatory system and does not need to disclose its operating procedures rigorously. While Coinbase claims to have “no headquarters,” it is still a publicly listed company registered in Delaware, and therefore legally accountable to its shareholders and customers. Although Binance has branches in the US, it does not have to comply with the same regulations. While you can find Binance offices in places like Paris, Dubai, and Abu Dhabi, the question of where Binance is actually headquartered remains unresolved as of 2023. “(Cryptocurrencies) have different rules in different places, so we’re not trying to bend the rules or even avoid the rules. We’re just trying to find a more favorable place,” Zhao Changpeng told Fortune magazine. (A Binance spokesperson told me, “We are going through a corporate restructuring aimed at providing regulatory bodies with more clarity about our organization.”)
Zhao Changpeng has always been without a fixed abode, though earlier this year he told a rare interview with Decrypt that he divides his time between Paris and Dubai.
Rohan Grey, a law professor at Willamette University who frequently comments on cryptocurrencies, said: “Zhao Changpeng’s biggest skill is that he has no commitment to any particular place, because that’s what it takes to manage risk like CZ does, like a crypto drifter who can play different roles in different places.”
The implicit bet is that if customers can’t determine Binance’s actual company location, perhaps regulators can’t either. Although in a statement charging Binance with allegations earlier this March, CFTC Chairman Rostin Behnam specifically said, “Claiming to have no actual address will not prevent the CFTC from protecting US investors.”
But now, the crypto drifter has become a key focus of the US government. In March of this year, Maryland Senator Chris Van Hollen (D), Massachusetts Senator Elizabeth Warren (D), and Kansas Senator Roger Marshall (R) jointly signed a letter expressing concern about “Binance’s role in evading regulation, moving assets for criminals and sanctions evaders, and hiding basic financial information.” Although the company quickly said the letter was based on “incorrect or incomplete” reporting and “misunderstandings” about the company, it marked the clearest legislative focus on Binance since the SBF era.
Zhao Changpeng and his company are still grappling with the fallout from the 24-hour FTX trading halt, which threw the cryptocurrency world into chaos, wiping out much of the momentum that had propelled it through 2021 and into early 2022, and causing prices for a range of assets to plummet. The company is distancing itself from cryptocurrency partners (remember Instagram’s NFTs?), and US regulators have launched what some see as targeted actions aimed at curbing the damage caused by FTX and its notorious founder, SBF.
The blurry line between Binance Global and Binance US is part of the reason regulators are concerned. In Binance’s first two years, all customers were directed to the same website, but in 2019, when Binance decided to conduct more thorough checks on its US clients, it set up a completely separate entity and barred US traders from using the original Binance platform. The problem is that, due to a relatively simple technical workaround (known as a VPN), anyone can still theoretically access the lower-cost, more loosely identified Binance Global site from within the US.
Kristi Goldsmith Romero, a commissioner with the US Commodity Futures Trading Commission (CFTC), tells me she sees a pattern of international companies deliberately or inadvertently circumventing US regulation developing throughout the industry, though she declines to comment specifically on the ongoing case involving Binance. “I see risks similar to those we saw with cryptocurrency in 2008, and some new risks. If you want the benefits of access to the US market, then you have to go through the necessary steps to get that permission, and that involves regulation,” says Zhao, who has insisted that Binance is doing everything it can to comply with US law. Regarding efforts to block US VPN users from accessing Binance Global’s trading services, Zhao wrote in a March blog post that he “didn’t know of any other system used by any company that is more comprehensive or effective than Binance.”
Not everyone shares the same view on why Binance appears to be such a focus of attention for the US government right now. For Hester Peirce, a SEC commissioner appointed by Trump and a longtime champion of cryptocurrency, the lack of clarity around regulation is actually more the government’s responsibility than that of the private crypto sector. “We’re in a situation of our own making right now, where we haven’t provided a pathway for entities that want to trade in crypto assets to register,” she tells me. “If we did that, then a lot of the questions about where the headquarters of different operations are located might have to be answered.”
However, for others, including lawmakers like Senators Warren and Van Hollen, it is Binance’s actions that are cause for real concern-these actions demonstrate a “clear attempt to evade global financial regulatory bodies.”
Earlier this year, Zhao Changpeng tweeted that he wanted to keep 2023 simple, spending more time on fewer things so that he knows what to do and what not to do. 2023 will focus on four things: 1) education; 2) compliance; 3) products and services; and 4) ignoring FUD, fake news, and attacks. Additionally, Zhao said that there is no product without security in the cryptocurrency industry, and money should never be the goal.
Option 4-“ignore fear, fake news, attacks, etc.”-when his business and personal life are under attack and questioned, he tells everyone not to FUD (meaning panic, question, uncertainty), which means telling everyone: “Don’t pay attention to anything they say.”
“May the 4th be with you,” he wrote on Star Wars Day. “Ignore FUD and keep building!” He tweeted this last December, around the time when blockchain regulators warned traders about sudden withdrawals of billions of dollars from platforms without explanation. (He also referred to Bloomberg’s report on the missing $1 billion as “fear, uncertainty, and doubt.”) When a similar situation occurred in response to the CFTC’s lawsuit a few months later, Zhao tweeted about “traditional media writing incorrect narratives.”
However, when Zhao dodges and avoids the issue, the entire industry holds its breath. Zhao is not only responsible for Binance, but the cryptocurrency industry cannot afford the reputational blow that SBF has. “To some extent, the bankruptcy of FTX so spectacularly helps eliminate some of the most serious corruption problems and bears the impact that other ecosystems are unwilling to bear and try to avoid,” speculated Rohan Gray. “So Zhao has won more time in this regard, but I don’t think there’s any reason to believe that the basic health of their business model is better.”
Binance’s market share is still huge-two-thirds of all cryptocurrency transactions occur on its website-but for Gray and other commentators, the regulatory grace period may be coming to an end. In the face of increasing threats, CZ has hired white-collar defense attorney Latham & Watkins to represent him personally and added hundreds of employees to Binance’s compliance department. The company’s head of financial crime compliance recently told The New York Times: “Binance sees itself as a technology company, which may help explain its actions, and they have broken some principles, suggesting principles in the tech world,” “Fast action, breaking all the rules,” all exchanges do that.