Did Binance miss its chance to rule crypto?

This is an audio transcript of the Behind the Money podcast episode: ‘Did Binance miss its chance to rule crypto?’

Michela Tindera
Hi there. It’s Michela. I wanted to let you know that the FT Weekend festival is back, and it’s happening on Saturday, September 2nd in London. You can book your pass now to enjoy a day full of debates, performances, Q&As, and this podcast. I’ll be doing a live recording of our show on Saturday afternoon, joined by my colleague Tim Bradshaw, who’s the FT’s global tech correspondent, and James Ashton, who’s the author of The Everything Blueprint, to talk about the British chip designer Arm and its path to a Nasdaq IPO this year. And as a listener of our show, you can receive £20 off your festival pass with the promo code listed in our shownotes. Now, let’s start this week’s show.

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It’s November 2022 and the crypto exchange FTX is on the verge of collapse, and its founder, Sam Bankman-Fried, is scrambling for a way to save his company from bankruptcy. Over the last couple of years, FTX has become one of the go-to places to buy and sell cryptocurrencies like Bitcoin or Ethereum. But now it’s falling apart.

Scott Chipolina
During those days where FTX was really sort of teetering on the brink, Sam Bankman-Fried was frantically searching for some capital to save his company.

Michela Tindera
That’s the FT’s digital assets correspondent Scott Chipolina. He tells me that Bankman-Fried looks to an unlikely source for that capital, his direct rival. We’re talking about a man named Changpeng Zhao, who’s the founder of another even larger crypto exchange called Binance. Bankman-Fried asks Zhao, who’s better known as CZ, to bail him out.

Scott Chipolina
Eventually, Zhao declined to do that, which effectively just sealed FTX’s fate.

Michela Tindera
And while the rest is history . . . 

News clips
From a $32bn company to bankruptcy . . . 

Sam Bankman-Fried stepping down as CEO of FTX

The exchange FTX filed for bankruptcy protection today.

Scott Chipolina
It meant that one of Binance’s largest competitors was no longer going to be there. They were going bankrupt and CZ had this clear road to crypto utopia, so to speak. And on November 10th, one day before FTX filed for bankruptcy in New York, Sam Bankman-Fried tweeted to Changpeng Zhao, Well-played. You won.

Michela Tindera
FTX’s collapse left Binance and CZ with the crypto world at their feet.

Scott Chipolina
I think a lot of people thought at the time it was sort of like the end of it was like an end of history moment for crypto exchanges, right? Like it meant that once FTX had fallen through, it paved the way for Binance to be the true industry pillar and for Changpeng Zhao to be the true industry kingpin.

Michela Tindera
But this big chance to rule crypto markets also came with a lot of regulatory scrutiny. After FTX lost billions of dollars in customer deposits, regulators around the world have been crawling all over the shadowy space of digital currencies.

Scott Chipolina
After every FTX’s failure, which was such a public story and it was such a catastrophic bankruptcy. There was going to be a renewed sense of urgency on behalf of regulators to start cracking down on crypto companies. Binance, being the largest company in town, meant that unavoidably, really, they were going to bear the brunt of that scrutiny.

Michela Tindera
If Binance could ride out the wave of regulatory issues headed its way, it could become the undisputed leader among crypto exchanges. But the thing is, regulatory concerns haven’t always seemed to be at the top of CZ’s priorities.

Scott Chipolina
CZ describes himself as driven by freedom. A lot of people in crypto are very, for want of a better phrase, there is a lot of libertarian undertones in the crypto industry. It’s you know, it was born out of this era where people wanted to separate state and money. While I was reporting out my latest story, I was looking at a recording of a meeting that took place in Binance, the Shanghai office, and CZ, he said, What is a cryptocurrency? Is it a security? Is it a commodity? Is it something else? I disregard a lot of the different countries’ interpretations of that, even though some of them may be regarded as law.

Michela Tindera
Binance says that now they’re a very different company when it comes to compliance. But Binance’s hubris in its early years has ultimately led to clashes with regulators around the world, and now it’s looking like Binance may have missed its chance to dominate crypto markets.

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I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’re looking at why Binance, the biggest crypto exchange in the world, has struggled after its rival collapsed and whether that could be good for an industry founded on ideals of a decentralised currency.

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Hi, Scott. Welcome to the show.

Scott Chipolina
Thanks for having me.

Michela Tindera
So Binance was founded in 2017 by Changpeng Zhao. Tell me more about him.

Scott Chipolina
Changpeng Zhao is better known in crypto circles by the moniker CZ. And he is in some sense the face of crypto, the de facto face of crypto, at least I should say, following the demise of Sam Bankman-Fried last year, he’s a Canadian citizen. He was born in China. He studied computer science back in the day. And you know, learned his trade in the Tokyo Stock Exchange. And then eventually he became a crypto believer. He dove right into the crypto industry.

Michela Tindera
And what would you say kind of based on your reporting does he, does CZ value as a leader?

Scott Chipolina
Market share. It’s been a major priority for Binance, at least during its earliest years.

Michela Tindera
Hmm. And why is that?

Scott Chipolina
So whenever someone executes a trade, then the house, be it Binance or another crypto exchange, would take a cut of that transaction. That transaction revenue is a very important part of the company’s income and obviously it’s just stands to reason the more of the market that you have then financially speaking, the more stable you should be. So we know that he set out very, very early on during Binance, his lifespan to control the market as best he could effectively and dominate the market, I should say. We know that he instructed employees to put everything second to market share during Binance’s early years, including profit and comfort and other things. Yeah.

Michela Tindera
Yeah. Could you tell me more about what it was like working at Binance in those early days? What did you learn?

Scott Chipolina
I think one really interesting aspect of the way that Binance ran very early on was that it was sort of coated in a lot of secrecy, and employees were explicitly instructed to hide their connection with the exchange, either by not wearing, you know, identifiable Binance attire close to the office or not even sharing the office’s location with people, being really mindful of who was on their social networks. And Yi He, which is the lesser known co-founder of the exchange alongside Changpeng Zhao, at one point described Binance as 007 organisation.

Michela Tindera
Well, it’s hard to get much more secretive than James Bond. So how did that translate to success of the company, though? What did its growth look like?

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Scott Chipolina
The growth has been insane, really, if you look back at the earliest months. So under CZ’s leadership, Binance became the largest crypto exchange in just a matter of months. So in January 2018, which was just six months into its existence, Binance had 26 per cent of the market share. And as well, its workforce was growing incredibly as well. It spanned 27 countries by July of 2018, just a year after it was born.

Michela Tindera
Wow. Yeah. So very rapid growth early on. So then when did issues start with regulators?

Scott Chipolina
Right at the beginning it was launched in China and within months it ran into its first major hurdle when Beijing banned initial coin offerings, which effectively ended the possibility of Binance operating legally as an exchange in China.

Michela Tindera
Hmm. What else?

Scott Chipolina
So, four years into its existence, the Thai Securities and Exchange Commission filed a criminal complaint against Binance for allegedly operating without a licence. In the summer of 2021, the UK’s Financial Conduct Authority said that it wasn’t capable of properly supervising Binance after the company allegedly failed to respond to some of the basic queries that the regulator had presented to them. One former employee told me that it felt like they were rebels upending the financial system and getting chased out of countries as they went along.

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Michela Tindera
Now, I want to fast forward to last year when FTX collapsed in November. We know that CZ decided against bailing out his biggest rival, Sam Bankman-Fried. So what happened to Binance after that?

Scott Chipolina
In the aftermath of FTX’s collapse, there was this post-FTX honeymoon where people considered Binance to be at the absolute pinnacle of crypto because FTX had gone bankrupt. Sam Bankman-Fried was no longer in the picture. So their market share skyrockets at the end of 2022. We’re talking about, you know, Binance reaches a position eventually where it controls comfortably well over half of the crypto trading market.

Michela Tindera
So it looks like Binance was set to take on this top spot. Has that happened?

Scott Chipolina
The interesting thing about 2023 is that that just has not happened. It hasn’t at all really. Binance’s market share has fallen from the mid-fifties to 40 per cent, you know, as per latest figures. And it is again still the largest crypto exchange by some distance, but relative to its own success, it’s certainly going in the wrong direction in terms of market share.

Michela Tindera
Oh, wow. That’s a big drop. Why is that happened?

Scott Chipolina
What has chiefly gone wrong in terms of like a narrative, if you will, would be that the regulatory pressure that it’s come under just to list a few of the things that have happened to them this year. In New York regulators halted the issuance of a coin that at one point was really important to Binance as trading volume. They’ve been sued by the CFTC and the SEC, two major regulators in the US. The Commodity Futures Trading Commission sued the crypto exchange and alleged that it was illegally accessing US customers and that much of the companies reported trading volume and profitability came from a, quote, “extensive solicitation of and access to US customers”.

Michela Tindera
OK. And so by accessing US customers, you mean that was an issue because Binance had claimed repeatedly that it didn’t serve people in the US.

Scott Chipolina
Yeah.

Michela Tindera
So what else?

Scott Chipolina
It then continued three months later, the Securities and Exchange Commission accused Binance of engaging in and again, this is a direct quote, “an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law”.

Michela Tindera
What has Binance said? Have they made any comments about these lawsuits in the US?

Scott Chipolina
Yeah. You know, the CFTC lawsuit they described as unexpected and disappointing. And I think the SEC’s action, they also said that they were disappointed and disheartened by that lawsuit. And the US affiliate of Binance — Binance US — called the SEC’s action baseless.

Michela Tindera
Got it. So regulators are all over Binance. There’s the coin that got quashed and now these multiple lawsuits. Is all this regulatory pressure the reason that Binance is market share is down?

Scott Chipolina
It’s not all about regulatory scrutiny. It’s also about the market that they inhabit. Ultimately, the crypto industry or the crypto market is a very thinly traded market at the moment. A lot of people have been burnt by digital assets over the last 12 to 18 months and they’re not willing to make those bets again. So it’s not just Binance that we’ve seen struggling to either extend their market share or to, you know, come out unscathed from what’s really been a tumultuous year and a half for crypto. So yeah, I think that that’s a really important point. It’s a macro context that needs to be taken into account that Binance is living in this market that is really stuck in a rut, I think it’s fair to say now. It crashed catastrophically and it is nowhere near the heights that it was at before the crash. So that’s obviously going to put some financial pressure on any participant in that market.

Michela Tindera
Hmm. So how is all of that been impacting finances, business operations?

Scott Chipolina
Earlier this summer, Binance planned a round of job cuts that was impacting at the time what was a roughly 8000 strong workforce in the exchange. They said at the time that it wasn’t a case of right-sizing, although one person who is familiar with the company told me at the time that it, I quote, “doesn’t take a genius to understand that market forces could prompt the company to refocus some of its resources”. And again, this speaks to not only their declining market share, but also the fact that the crypto industry itself has really been clobbered not only by regulators, but also by price movements going very firmly in the wrong direction. And Binance, like any other company, is not immune to that. One thing that a former employee told me was that although Binance wants to show that they’re a community, it’s not really a company where you feel respected or valued, another department employee said, I was told I had been let go and immediately after that I received a message from human resources saying they were sending someone to pick up my laptop and phone. You know, Binance got back to me on those charges and it said that it disagreed strongly with the characterisation that employees don’t feel respected or valued and that it tries to limit risk to the company by obtaining company devices from employees that were leaving. But I think what’s really interesting here is that, you know, facing regulatory intervention and losing market share based on what former employees and other folks familiar with the company have told me is that it’s made the company more cut-throat and it’s made it perhaps a harder place to work.

Michela Tindera
Now, Scott, I’m curious, crypto’s an industry where a lot of early supporters thought that the whole mission was to stay decentralised. Right? How does that play into this?

Scott Chipolina
There are members of the crypto industry itself that really believe in the sort of ideological promise of the industry, which is that it’s meant to be this sort of utopian peer to peer, decentralised, explicit rejection of traditional finance. In that world there isn’t really meant to be one major kingpin that calls the shots or that dominates the market.

Michela Tindera
So do you think that Binance’s struggle, is ultimately good for that mission to stay decentralised?

Scott Chipolina
Yeah, well, I guess it depends on your perspective, right? If you think that the industry should mirror more of an equal playing field where there isn’t one major player, then a declining market share for Binance is ultimately good news for you because what you’re trying to pursue is, again, no one single kingpin. A lot of other folks would simply retort and say, well, we need someone to be a success story. And whether it’s Binance or another company skyrockets and owns 60, 70 per cent of the market share and becomes sort of like, you know, the Apple or the Google of crypto, maybe that’s how the industry finds its success. So I suppose it depends on where you stand, what side of the debate you find convincing.

Michela Tindera
Yeah. So talking about some of your reporting that you did on Binance’s early days and the example of a start-up that’s pushing really hard to grow and then hitting some big roadblocks, you know, that made me think of the Mark Zuckerberg mantra: “Move fast and break things.” Are there any lessons that can be learned from seeing this happen in the crypto industry in what you’ve observed?

Scott Chipolina
There has been, you know, in large swaths of the crypto industry for a long time, this idea that the crypto industry is sort of separate from the traditional world of finance. That may be true in certain perspectives, but it certainly isn’t true when it comes to regulation at the end of the day. You know, governments around the world will ultimately try and exercise jurisdiction over crypto business if they believe that they are cutting across their laws and an assumption that crypto is this decentralised utopian alternative to the world of finance where these regulators oversee things is frankly absurd. Folks that say that, they only have to look at how many cases have been brought not only against Binance’s but against other exchanges like Coinbase and other crypto businesses writ large to understand that that’s just not the case. I think that that’s an argument or a perspective that this year really put to bed.

Michela Tindera
Do you think is it too late for Binance to recover and gain more market share back? Is there any chance that it could bounce back or . ..

Scott Chipolina
You know, as I said, that’s been very much on a downward trend for some months now. I think it’s six consecutive months where it’s been declining. It would be interesting to see if that continues onwards up until the end of the year, let’s say, or if they manage to reverse course on it somehow. But it’s certainly not impossible for Binance to regain some market share. It’s also not impossible for them to lose the market share that they still have. The crypto industry is so inherently unpredictable that it’s very hard to say which way that will go.

Michela Tindera
Scott, thanks for being on the show.

Scott Chipolina
Thank you. It’s been, it’s been great fun. Cheers.

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Michela Tindera
Thanks for listening. If you want to read more from the FT on what we talked about during this week’s episode, the articles linked in our show notes are free to read right now. Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Breen Turner. Our intern is Monique Malema. Special thanks to Phillip Stafford. Cheryl Brumley is the global head of audio.