Is the ‘big boss’ of the cryptocurrency world, Binance, starting to decline?

Is Binance, the 'big boss' of the cryptocurrency world, declining?

Source: Financial Times

Translation: LianGuaiBitpushNews Mary Liu

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As the year 2022 draws to a close, Binance co-founder and CEO Changpeng Zhao (CZ) seems to have the whole world under his feet.

FTX, Binance’s biggest competitor, approached CZ in November last year, hoping that the CEO of Binance could help rescue their exchange. CZ declined, effectively sealing FTX’s fate. On November 10, the day before the cryptocurrency empire FTX filed for bankruptcy, SBF sent a message to his competitor on Twitter: “Well done, you’ve won.”

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FTX’s collapse made Binance the undisputed leader in the cryptocurrency market, controlling more than half of the rapidly growing market by the end of 2022.

If Binance can safely navigate the regulatory impact following FTX’s collapse, it will become the preferred venue for cryptocurrency trading, and CZ can position himself as the “acceptable face” of cryptocurrency, even though many still view the market as the wild west.

“Many people see SBF as a leader in the industry and someone who saved the industry in the eyes of regulators,” said Charley Cooper, former chief of staff at the Commodity Futures Trading Commission (CFTC). “When FTX collapsed, everyone saw CZ as the potential savior of the industry.”

However, despite the stability of major cryptocurrencies like Bitcoin after FTX’s collapse, Binance found itself in a predicament. Its sheer size made it a target for regulatory agencies and lawmakers who want to ensure that the broader financial markets are never impacted by “too big to fail” cryptocurrency exchanges.

In the United States alone, financial regulators have accused Binance of illegally serving US customers, improper control of customer assets, and disregarding compliance and anti-money laundering standards.

The scale of Binance is not just a concern for regulatory agencies. Crypto advocates also believe that for an industry that champions decentralized finance, no single participant or entity should have too much influence in theory.

“Binance’s predicament highlights the fundamental challenge facing the crypto industry. The tension between major centralized entities contradicts the industry’s initial ambition to establish a new form of finance based on decentralized, transparent, and equal competition,” said Charles Storry, Growth Director of DeFi project and on-chain index fund provider Phuture.

Binance has stated that it believes “healthy competition” is beneficial to the industry and is committed to the “overall” development of the industry.

But its future and how it resolves these issues will help determine whether cryptocurrencies become a mainstream part of finance or remain a niche industry beloved by those who want to separate currency from the machinery of nation-states.

At all costs, achieve growth

At the end of 2017, shortly after CZ’s cryptocurrency exchange was born, Zhao sent an internal message to his employees: “Everything you do should be aimed at increasing our market share.”

“Profit, revenue, user experience, and other factors are secondary. If you have two things you can do right now, ask yourself which one will help us increase our market share, and then do that,” he added.

Binance stated that “like any startup, the top priority is to expand the business as quickly as possible,” but “today, we see Binance as a small part of a larger financial ecosystem.”

Zhao, a Canadian citizen born in China, studied computer science and made a name for himself while working at the Tokyo Stock Exchange before turning to cryptocurrencies in 2013. “CZ” quickly became a well-known name in the digital asset industry.

Under his leadership, Binance quickly became the world’s largest cryptocurrency exchange. According to internal documents seen by the Financial Times, by January 2018, just six months after its founding, Binance had a 26% market share, and within one year, its employees were spread across at least 27 countries.

Like many young tech companies, it has a culture of aggressive growth. Internal recordings obtained by the Financial Times show Zhao announcing at an internal meeting in Binance’s Shanghai office: “We want to spend 2% of the time making decisions and 98% of the time executing. Our competitive advantage so far is that we do things, we execute, we do them well. Everything is about doing things well.”

An onboarding document seen by the Financial Times stated: “If you just sit there waiting for someone to tell you what to do, you might be waiting for a long time. In fact, you won’t last long, because someone will likely kick you out.”

Binance did not directly respond to questions about Zhao’s statements or the onboarding document, but instead referred to a blog post about the company’s principles and culture.

Zhao has built a loyal following who defend him against “FUD” (fear, uncertainty, and doubt). One key group of followers is the so-called Binance Angels, which the company describes as “volunteers” who support the Binance community and advance the crypto industry.

An insider said that the Binance Angels are actually an integral part of the company’s operations. “They help us with translation, organize local events, assist us in understanding the law, manage communications, and help us source goods from local companies,” they said.

The company told the Financial Times that its “angels” are passionate ambassadors who support the Binance community in various ways.

Like many startups seeking to change the world, Binance’s early years were also highly publicized. In the summer of 2018, Zhao accompanied all Binance employees at the time to Thailand to celebrate the company’s first year of existence.

In the footage of this trip seen in the Financial Times, Zhao stands on the beach with yachts lined up and about 100 Binance employees around him as they unveil the milestone marker.

Binance said such trips are now less likely: “It is easier to do such trips when the company is smaller.”

Its rapid growth in the cryptocurrency field has been shrouded in confidentiality agreements. In the summer of 2018, a security alert instructed employees to be cautious with their social media language, disable geolocation tracking on electronic devices, and avoid disclosing personal information to uncontrolled audiences.

The alert stated: “Reserve your social media space for family and friends. Check your Facebook, Twitter, LinkedIn, and Instagram accounts for suspicious individuals.”

Binance has made it clear to employees that personal social media profiles increase the risk of targeted phishing and other social engineering attacks.

Binance co-founder He Yi once described the company as a “007 organization” in internal messages. A Binance spokesperson said, “As with anything, context is everything.”

A former Binance employee said the company’s hiring process includes “a specific PPT that tells you if you claim to be a Binance employee on social media, you will be fired.”

The company denied this claim.

The individual added, “Government agencies are the only place I can think of where you can’t disclose your position— in financial institutions, I hardly encountered such a situation.”

An onboarding document instructed new hires to install VPN on all devices, computers, or phones. Binance told the Financial Times that it considers security “critical,” and VPN adds an extra layer of security for mobile employees.

“Regulatory Encirclement”

Binance’s early rapid growth was fueled by regulatory uncertainties surrounding the emerging cryptocurrency phenomenon. Zhao described himself as “freedom driven” at a Shanghai conference, where he told a group of employees that he doesn’t like “too many rules” and took advantage of controversial aspects that still exist in the cryptocurrency industry to achieve this goal.

He said at the same conference, “What is cryptocurrency? Is it a security, a commodity, or something else? I ignore many interpretations from different countries, even though some of them may be considered as laws.”

When asked about these comments, a Binance spokesperson said the company admitted to making mistakes in the early stage, but after investing heavily in talent, processes, and technology, “today, we are a very different company in terms of compliance.”

This young cryptocurrency startup ran into regulatory trouble just a few months after its establishment when Beijing banned initial coin offerings and described the issuance and sale of tokens as “unauthorized and illegal public financing.” This put an end to any possibility of the exchange operating legally in China.

Binance later expanded to Japan without obtaining permission from the Japanese regulatory authorities. Internal communication channels instructed employees not to use Binance email addresses when communicating with external entities in that country.

The company stated that it has taken measures to ensure the highest level of compliance in Japan and acquired a licensed exchange there in November.

Just three years after the Binance team’s vacation on a beach in Thailand, the Securities and Exchange Commission of Thailand filed a criminal lawsuit against the exchange, accusing it of operating digital asset business without a license. Binance stated that a joint venture called Gulf Binance has now obtained a license and is regulated in Thailand.

As Binance has grown, the list of conflicting regulatory authorities has also continued to increase. In August 2021, the UK Financial Conduct Authority stated that it “does not have the capacity” to properly regulate Binance after the exchange allegedly failed to respond to basic inquiries.

A month later, the Monetary Authority of Singapore placed Binance on its investor alert list, warning consumers that the exchange is not regulated or licensed in Singapore. The Dutch regulatory authority also imposed fines on Binance, amounting to over 3 million euros last year.

A former employee of Binance said, “We felt like rebels disrupting the financial system and being kicked out of the country.” The company responded by stating that it had made some initial mistakes during its rapid growth but has since corrected them.

The conflicts between Binance and financial regulatory authorities have made it difficult for the company to establish a long-term base, and Zhao often claims that the company does not have a formal headquarters.

However, in May 2022, French regulatory authorities allowed a subsidiary of the exchange to act as a registered digital asset service provider. Zhao said that the country will at least serve as its regional headquarters.

A former employee said, “When I went to the office in Paris, it was clear that this was the (Binance) most important office. Zhao didn’t really come to the office, but he was in Paris several times. It felt like they were promoting their Paris office, and this feeling was very obvious.”

But in June of this year, French police launched an investigation into the exchange, accusing it of illegally promoting its services to consumers and failing to conduct sufficient checks to prevent money laundering. Binance stated that it operates legally in France and is cooperating with local authorities.

Crackdown by US regulatory authorities Binance’s good days after the collapse of FTX did not last long. In early 2023, the US Securities and Exchange Commission (SEC) opposed Binance’s plan to acquire the assets of bankrupt cryptocurrency loan company Voyager for $1 billion, and the deal subsequently fell through.

In February of this year, the New York Department of Financial Services ordered the halt of issuance of BUSD, a Binance-branded cryptocurrency token designed to track the price of the US dollar, which at one point accounted for about one-fifth of Binance’s trading volume.

In March of this year, the Commodity Futures Trading Commission (CFTC) sued the cryptocurrency exchange, accusing it of illegally accessing US customers and that the company’s reported trading volume and profitability largely came from “extensive solicitation and access” to US customers.

In the lawsuit, the CFTC accused a Binance executive of stating in 2020 that certain customers, including some from Russia, “come here to commit crimes.” It is alleged that an employee replied to a colleague, “We see the bad side, but we close our eyes.” Binance previously described the lawsuit as “unexpected and disappointing.”

Three months later, the Securities and Exchange Commission (SEC), which regulates the US stock and bond markets, filed 13 civil charges against Binance-related companies, including Binance US and CZ himself.

SEC Chairman Gary Gensler accused Binance of engaging in a “wide-ranging scheme of deception, conflicts of interest, lack of disclosure, and intentional evasion of the law.”

Binance’s offshore trading platform expressed disappointment and frustration with the SEC’s action, while its US subsidiary called the lawsuit “baseless.”

Latest data shows that as official scrutiny of Binance intensifies, its market share in the cryptocurrency spot market has fallen to 40% after six consecutive months of decline.

The regulatory challenges faced by Binance are also reflected in the demands placed on its employees. Some believe that the organization’s cult-like culture has been replaced by a more ruthless culture.

The company responded, “We know Binance is not for everyone. We even wrote a blog about why not to join Binance. Cultural fit is important.”

A former employee said, “Despite their attempt to portray Binance as a community, it’s not a company that truly makes you feel respected or valued.” Another departing employee said, “I was told I was fired and then immediately received a message from HR saying they would send someone to collect my laptop and phone.”

Binance said it strongly disagrees with the description that “employees feel disrespected or undervalued,” but added that retrieving company equipment from departing employees is done to limit risk.

This summer, the company plans to undergo a round of layoffs affecting approximately 8,000 employees at the time. The exchange said the layoffs were “not a situation of appropriate scale,” but a source responded that it was clear that market forces forced the company to restructure its resources.

Facing regulatory intervention and losing market share, Binance’s predicament is not just Zhao’s problem. The entire cryptocurrency industry, which had hoped for a period of stability, is now in more turmoil. This is not surprising for former CFTC executive Cooper.

He said, “The idea that the most scrutinized crypto companies will become the saviors of the industry is foolish. If you are in this industry for long-term development and you are actively seeking stable long-term participants, you will find that Binance is definitely not one of them.”

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