Binance crypto empire dwarfs FTX at peak and dominates industry

In every single corner of the crypto landscape, one name pops up: Binance.

Run by Changpeng “CZ” Zhao, the world’s largest crypto exchange is a dominant force in everything from Bitcoin trading and digital art to venture capital. With its power and influence only increasing after the collapse last year of Sam Bankman-Fried’s FTX empire, the inconvenient truth is that Binance has a grip on the $US1.1 trillion industry that has few parallels in traditional finance. That’s despite all the decentralization talk from crypto’s true believers.

So the news Monday that the US Commodity Futures Trading Commission sued Binance and Chief Executive Officer Zhao for allegedly evading federal laws and operating an illegal digital-asset exchange threatens to send shock waves across the world of virtual currencies. Bitcoin fell as much as 4.5 per cent after the lawsuit was filed.

It’s a big deal for both Binance and Zhao, who famously became crypto’s singular titan after contributing to the demise of FTX. The CFTC is seeking permanent trading and registration bans in the enforcement action it filed as well as unspecified penalties and restitution. It’s one of several US authorities including the Securities and Exchange Commission and the Department of Justice that have been investigating Binance’s activities.

For all the excitement that accompanied the arrest of former wunderkind Bankman-Fried, Zhao’s sway over the industry is far larger - meaning the fallout may be that much wider. The company is the biggest target by far in a US regulatory crackdown that has engulfed other big players, from US exchange Coinbase Global Inc. to entrepreneur Justin Sun and fallen algorithmic stablecoin king Do Kwon.

In response to Monday’s action, a Binance spokesperson called the CFTC’s lawsuit “unexpected and disappointinfg,” saying the exchange had made strides in beefing up compliance, had been working with the regulator and would continue to collaborate with authorities in the US and elsewhere. Zhao in a separate blog post said the CFTC’s complaint “appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.”

After Zhao co-founded the exchange in 2017 and embarked on an acquisition spree, Binance has morphed into a brokerage, digital wallet, venture fund, custody service, data provider, digital-art marketplace and token issuer - all in one.

So far this month, the exchange has accounted for about 70 per cent of all trading volumes across the spot market, compared with just 6 per cent for Coinbase, according to digital-asset data provider Kaiko. It’s the kind of market heft that dwarfs the role of Apple Inc. or Samsung Electronics in the smartphone market, for example.

In a popular product known as perpetual futures, Binance controlled a record 62 per cent of global volumes in 2022, a CoinGecko report shows. In the US, where Binance started a separate platform in 2019, it’s accounted for a more modest share of spot trading at nearly 7 per cent over the past year, Kaiko data show.

The move will reverberate across an industry that boomed outside regulated finance in a decade of low interest rates — before Ponzi schemes, exchange mishaps and more helped snuff out speculative euphoria.

For critics, the charges will look like delayed justice for a firm that has for years refused to name a corporate parent or even its headquarters, amid allegations of corporate mismanagement.

Diehard believers will either cling to the bull case that a new era of regulatory action will legitimise the industry — or will argue crypto needs to go back to the fringes to live up to its libertarian vision.

Some crypto fans may well shrug off the charges, yet Binance’s many ties to traditional finance may now be at risk. Institutions that have flirted with crypto will have to weigh new charges against the liquidity offered by the world’s largest exchange. The CFTC complaint noted that Binance had courted US institutions and directed “VIP” clients to open Binance accounts via shell companies.

Binance’s ties with traditional banking channels have also recently frayed after Signature Bank, which had been supporting its dollar transactions, went under and Paysafe, which did the same for trades in the British pound, stopped the service due to regulatory risks.

Large reach

Born in China, Zhao moved to Vancouver when he was 12 and became a Canadian citizen. With a computer science degree from McGill University, he began a career building trading systems, including a stint at Bloomberg LP, the parent company of Bloomberg News.

In 2013, Zhao was running his own software company in Shanghai when he discovered Bitcoin over a poker game with the co-founder of BTC China, Bobby Lee, and tech investor Ron Cao. After working at Blockchain.info and OKCoin, he started Binance.

His expertise and the lack of material crypto regulation have helped make Binance a global giant. In decentralized finance - a corner of crypto where trading runs on software rather than any corporate platform - Binance also has its BNB Chain, a network whose independence has always been in question. Its own token BNB is the fourth-largest in the world, with a total value of roughly $US62 billion, CoinGecko data show.

As the exchange drew more retail traders, a host of regulators have issued loud warnings, including from Malta, Japan and the UK. Binance has subsequently sought to strike a more conciliatory tone. It expanded its compliance team, registered with regulators in some jurisdictions and admitted to past “gaps” in compliance.

Binance Holdings, a Cayman Islands entity, owns the exchange’s trademarks and is generally presumed to be the main entity. It was named in the CFTC suit, along with two Binance firms in Ireland and former chief compliance officer Samuel Lim.

In jurisdictions where owners have to be disclosed, the exchange’s local entities are typically owned by “CZ” alone. Unlike FTX, it is not clear whether there are any external investors in Binance. The seed round for its US arm raised money from Circle Ventures, VanEck and RRE Ventures.

Bloomberg