Coining the cash

Tweets from Elon Musk have a history of sparking sudden moves in share prices, not just for his own company Tesla but also in sectors like cryptocurrency, where prices soar, or slump, in response to his pronouncements.

So another of his comments last month that some of the trading activity on Binance, the world’s leading cryptocurrency exchange, “sounds shady” was bad news for the platform’s bosses.

Musk was tweeting in response to customer complaints that they weren’t able to trade Dogecoin, one of his favourite cryptos, on the platform because of a technical glitch.

Binance responded that the problem was “an unlikely and unfortunate coincidence” and “not quite the shady circumstances that some had suggested”.

But Musk’s comments were also a red rag to a bull for Binance’s founder Zhao Changpeng, who fired back with tweets of his own highlighting a recall of thousands of Tesla’s cars. “When I saw the word ‘shady’, I overreacted,” he later admitted. “I’m usually very stable, but at the time I have to admit that I was a little bit emotionally charged.”

Perhaps that’s because Binance has been getting unprecedented scrutiny from governments as it tries to grow its business outside China, with its globetrotting boss on an extended charm offensive towards regulators.

Rather like Elon Musk, Zhao has built up an adoring following on social media, where he is known as ‘CZ’. He started Binance in Shanghai in 2017, building a brand that likes to describe itself as an ecosystem of crypto-related services. Its trading platform is its crown jewel, however, with $170 billion in daily transaction volumes, making it easily the largest of the Bitcoin exchanges. Insiders whisper about a valuation of more than $300 billion – or more than the UK’s five largest banks combined.

Zhao was born in China but moved to Canada with his family in the late 1980s when he was 12. He returned to Shanghai to set up a software company for high-frequency traders in 2005 and later moved into blockchain, before launching Binance as a cryptocurrency trading platform after raising $15 million from an initial coin offering.

Trading volumes grew rapidly but so did interest from local regulators, who were suspicious of the platform’s sudden success. In fact, within months of launch Binance was already moving some of its operations offshore in expectation of further scrutiny from the government, which began to impose wider restrictions on the sector from the winter of 2017.

China’s central bank has embraced blockchain technology as part of the launch of its own digital yuan but it started to make life much more difficult for independent players in the cryptocurrency industry, before finally classifying crypto trading as illegal in September this year.

The notice, issued in tandem with nine other government agencies, said that all related business was illegal and warned that cryptocurrency transactions originating outside China will also be treated as crimes.

All of the major exchanges then scrambled to close the accounts of their Chinese customers. Before the ban, digital wallets in China had taken receipt of about $150 billion of cryptocurrency in the first six months of this year (second only to the United States), according to Chainalysis, a blockchain data platform.

The authorities have also forced the closure of thousands of server farms in China where new currency was being mined, in a massive reversal for a domestic industry that was producing as much as two-thirds of new Bitcoin supply.

Much of the energy-intensive production has headed to locations like Texas, prompting new demand for electricity. In a single year, the entire Bitcoin network consumes around 112 terawatt hours of energy, or more than the whole of the Netherlands, according to research by Cambridge University’s Bitcoin Electricity Consumption Index. If Bitcoin were a country, it would rank 33rd in the world by annual electricity consumption.

Zhao has acknowledged that the crypto platforms have no real future in China but his company had been planning for this possibility for a while by pushing into other markets, despite concerns from other governments, who want more oversight of a platform that offers services to anyone with an internet connection.

Regulators have demanded more details on Binance’s corporate structure, for instance, but Zhao had until recently defended its decentralised status, refusing even to commit to a formal address for his headquarters.

This created farcical situations like the legal action this summer from a group of Italian customers angered by a platform outage, whose lawyers sent letters to 13 different locations in the hope that one of them might reach the company.

The lack of a formal address wasn’t much to the liking of financial regulators either, who began to look closer at Binance after the same platform crash in May (triggered by frenetic trading after China’s ban on crypto payments, which prompted bitcoin prices to fall more than 30%).

Other offerings in the Binance ecosystem then triggered further concerns, especially trading in financial products like derivatives, for which the company did not hold the required licences. Regulators in a number of countries revoked Binance’s trading permissions and the company suspended its derivatives business in a range of other markets.

Binance’s strategy in key markets is to create partner platforms below the level of the global parent firm. Investors in the United States have been denied access to the full suite of services on the Binance exchange, for instance, although more than 50 cryptocurrencies can still be traded through a platform that licences technology and trademarks from the parent company.

Even so, the Binance platform has been outlawed in a number of US states and there have been media reports since the middle of the year that it is under investigation for abuses including money laundering and insider trading.

All of the regulatory bodies are calling for more clarity on Binance’s corporate arrangements, although Zhao has played it coy about the selection process for his new headquarters, saying only that the company is on the verge of announcing its global HQ, which it will communicate first to regulators.

France and the United Arab Emirates were rumoured to be frontrunners, as was Singapore, where many of the former Chinese crypto firms have been opening new offices.

City officials in Singapore have given the crypto sector a cautious welcome but are yet to commit to a fuller handshake. Binance’s parent company has been prevented from trading there since October, although its local unit this week purchased a stake in HG Exchange, a Singapore-based entity that has a licence to trade tokenised assets.

“We think the best approach is not to clamp down or ban these things,” Ravi Menon, the Monetary Authority of Singapore’s managing director, explained to Bloomberg, adding that the city was “interested in developing crypto technology, understanding blockchain, smart contracts and preparing ourselves for a Web 3.0 world”.

On Zhao’s part there has been a rethink on how best to get permissions from governments to operate its exchanges as well. “To be very frank, four years ago when we started Binance, we wanted to go the decentralised way. So we wanted to decentralise everything: no offices, no bank accounts and no headquarters,” he told the Wall Street Journal last month. “Guess what? That’s a problem for the regulators… It gets tricky. So we understand now that in order to work with the regulators as a centralised business, we need to have a centralised structure.”

Indeed, in a significant switch of approach, Binance now says it sees more regulation as an inevitability as crypto trading goes more mainstream than the “2%” penetration of early adopters.

“The rest of the 98% of people, they’re what we call the normal people, the regular people…” Zhao explained to the Journal. “The regular users, they want the safety, they want the regulations to be in place.”

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