Crypto is full of overnight success stories and people who’ve parlayed technical know-how and savvy marketing into incredible wealth. But even within the fast-moving and crazy-money world of cryptocurrency, Binance CEO Changpeng “CZ” Zhao is remarkable. Binance raised $15 million through an ICO for the platform’s BNB token in July 2015. At the end of its first quarter of operation in October 2017, Binance had generated $7.5 million in profit through trading fees. By the time its second quarter of operation ended in January 2018, quarterly profits had hit $200 million, while CZ had amassed a personal fortune of $2 billion.
January 2018 represented the climax of cryptocurrency’s incredible 2017 bull run. Binance’s launch was perfectly timed to capitalize on the incredible surge of money and interest into cryptocurrency, with the exchange adding millions of new users each week at the bull run’s peak. Like all others within the cryptocurrency space, Binance has seen a decline in its fortunes since those dizzying highs. Daily trading volume has fallen from multiple billions to multiple hundreds of millions, while the value of Binance Coin has tumbled from its all-time high above $24 on January 12, 2018, to a 12-month low below $5 in mid-December.
The price has recovered a little over the past month, amid a flurry of attention-grabbing announcements such as the launch of fiat trading pairs and the debut of its Binance Launchpad ICO platform. And Binance seems as secure in its position as the highest-volume cryptocurrency exchange as Bitcoin is at the top of cryptocurrency market cap rankings: while Binance’s $610 million 24-hour trading volume is a long way from the billions in daily trading seen a year ago, it’s a solid 20% higher than the $500 million of trading volume seen on nearest competitors OKEx and ZB.COM.
As the Binance Blockchain Week 2020 is approaching, we look at the story of Binance’s incredible rise to prominence, how the exchange side-stepped some enormous potential disasters, and how CZ and his team plan to retain their top spot for the foreseeable future.
Binance & China
After raising $15 million through its ICO in July 2017, Binance quickly established itself as China’s most popular cryptocurrency exchange. Binance launched right at the start of the crazy 2017 cryptocurrency bull run, a fact which helped the exchange generate $200 million in profit in just its second quarter. The appetite for cryptocurrency within East Asia was particularly ferocious, a perfect storm of tech-enamored societies with cultures highly geared toward saving and investment, coupled with government policies that strictly control capital outflows. There’s also an enormous appetite for legalized forms of gambling, with China, South Korea, and Japan all having strict laws restricting citizens’ access to casinos and betting.
But while citizens of these countries were quick to embrace the cryptocurrency craze, authorities were much more reticent. While a desire to regulate cryptocurrencies can partially be blamed on these governments’ desire to strictly control money leaving the country, there were also numerous horror stories of scam ICOs defrauding investors on a massive scale. This Hacker Noon post from June 2018 details one such incident, with 3,000 ordinary Chinese investors pumping $47 million into a scam ICO.
By September 2017, the Chinese government’s unease around cryptocurrency was channelled into concrete action, with the country banning ICOs and crypto exchanges. At the time, many felt this would bring the crypto bull-run to a halt, with Binance being one of its most immediate casualties. Binance acted swiftly to ban all Chinese IP addresses from trading, restricting much of its core userbase to cancelling orders and withdrawing their funds. But as CZ explained in a CCN interview a month later, “We had a feeling the news wasn’t going to be good, so we prepared ahead of time. And acted quickly. That turned out to be instrumental in handling the situation… I learned again it is better to be prepared than sorry.”
The same interview saw CZ describe the idea that “Binance is a Chinese exchange” as a “misconception.” Like CZ himself, Binance may have been born in China, but it has a sweeping global worldview perfectly aligned with the borderless visions of crypto idealists.
Money Without Borders
CZ was born in Jinagsu, China, but moved with his family to Canada soon after. His parents were described in a Forbes cover story as “pro-bourgeois” intellectuals, and the move to Canada followed fears of a clampdown on the educated classes around the time of a brutal crackdown on 1989’s Tiananmen Square protests. The same Forbes article details CZ’s rapid mastery of financial tech. CZ studied computer science at McGill University in Montreal. After graduation, he moved to Tokyo, where he developed “a system for matching trade orders on the Tokyo Stock Exchange” and “software for futures trading” at Bloomberg’s Tradebook. By the age of 27, CZ had received three promotions and was managing teams based in Tokyo, New Jersey, and London. In 2005, he left his position at Bloomberg and returned to China to start his own venture, Fusion Systems. Operating out of Shanghai, Fusion Systems quickly established a reputation “for building some of the fastest high-frequency trading systems for brokers.”
It was during his time in Shanghai that CZ first discovered cryptocurrency. Ron Cao, Managing Director of venture capitalists Lightspeed Ventures, introduced CZ to Bitcoin during a poker game. CZ was also friendly with Bobby Lee, co-founder of BTCC. BTCC was China’s first Bitcoin exchange. By 2014, it had grown to become the world’s second-largest crypto exchange by trading volume. CZ quickly became a firm believer, telling CNN: “It was clear then as it is even clearer now, crypto is the future.” In 2013, CZ ended his 8-year stint with Fusion Systems and moved into crypto. In 2014, he sold his home in Shanghai for $1.1 million and bought Bitcoin with the proceeds.
CZ’s first role in cryptocurrency was as Head of Development at Blockchain.info. CZ became the third member of the Blockchain.info team, working alongside the former “Bitcoin Jesus” and later Bitcoin Cash figurehead Roger Ver, as well as British programmer and prominent Bitcoin evangelist Ben Reeves. CZ’s role at Blockchain.info made him an important contributor to the development of what remains one of the world’s most popular cryptocurrency wallets.
CZ’s stint at Blockchain.info lasted just 8 months, after which he became Chief Technology Officer at OKCoin. OKCoin’s exchange allowed spot trading between fiat and digital assets, but CZ was already considering the possibility of an exchange dealing purely in cryptocurrencies. However, as CZ explained to CCN: “After I joined Blockchain.info in 2013, we discussed [launching a crypto-to-crypto exchange] at length. But it was too early. There just wasn’t enough altcoins worth trading back then. The mission was to [move] people from fiat to crypto. After leaving OKCoin in 2015, we considered the idea again, but decided it was still too early.”
By 2017, the time was right. Binance’s ICO was a resounding success, generating $15 million from 20,000 participants. An article published by CZ’s former employers at Bloomberg in March 2018 refers to Binance’s meteoric rise defying “financial orthodoxy,” with the company having neither a bank account nor a public address. The lack of a public address was the cause of some FUD within online cryptocurrency communities during the exchange’s rapid rise, but it ultimately proved to be massively beneficial to the company’s survival and success. While CZ’s friend Bobby Lee’s BTCC exchange shut down following the Chinese clampdown on crypto exchanges in September 2018, Binance escaped unscathed. As CZ explained in the CCN interview:
“Many Chinese exchanges were shutdown. Luckily, we were always registered outside of China, and we had our servers outside of China when the news came out. So we were not affected as much. In fact, we benefited a little bit due to less “competition” in the end.”
While a majority of Binance’s customers came from mainland China prior to the clampdown, this mattered little as the exchange’s userbase grew in step with the 2017 bull run. According to Forbes, by February 2018 “38% of Binance’s users” came from the United States, with Japan being its second-largest market.
Binance has similarly survived multiple difficulties with Japanese regulators. Forbes quotes CZ as explaining how the firm had difficulty securing adequate office space in Tokyo: “We were growing so fast… they say the taxes you paid last year is not going to be able to cover one month of rent.” This forced Binance “into a space with only room for small work stations crammed next to each other,” with “desks right outside the toilet.”
These problems grew more serious in March 2018, with Japan’s Financial Services Authority (FSA) warning the exchange criminal proceedings would be launched if it continued trading in Japan without a license. This followed a similar warning from Hong Kong’s Securities and Futures Commission (SFC) a month earlier that Binance “should not trade cryptocurrencies which are “securities” as defined in the Securities and Futures Ordinance (SFO) without a licence.”
Bloomberg’s March 2018 article depicts these run-ins with regulators as representing an existential threat to Binance’s long-term viability. While this assertion is backed up with quotes from numerous Asia-based financial experts, the article also notes that, “If any of this has shaken Zhao, he’s certainly not showing it.”
Indeed, the CCN interview quotes CZ as speaking glowingly of “the borderlessness of crypto,” describing it as “the true international currency,” and stating Binance’s aims of building “a true international crypto exchange.”
The Bloomberg article explains with some interesting detail just how strong CZ and Binance’s commitment to borderlessness is:
“Zhao keeps the locations of Binance’s offices and servers secret — making it tough to determine which country has jurisdiction over the company — and he instructs employees to keep quiet about their affiliation with the exchange on social media. He said he never stays in one place for too long, living out of short-term rentals and hotels in Singapore, Taiwan and Hong Kong (where he prefers the Mandarin Oriental or the Ritz-Carlton).
He has also kept Binance insulated from the traditional financial system and all the regulatory requirements that come with it. The exchange only handles trades between cryptocurrencies, meaning clients can swap one token for another but not for a fiat currency like the dollar or the euro. Instead of a bank account, Binance uses other exchanges that facilitate crypto-to-traditional currency transfers when it needs to send cash to employees or vendors.”
Before the regulatory bodies of Hong Kong and Japan began taking serious action against Binance, CZ was already explaining to CNN that crypto projects were likely to adapt and “go where regulations are favorable”:
“We already see many strong projects, talented people, and vast funds moving away from countries that’s unfavorable to countries that are. So countries with smart regulations will attract these and grow.”
These words were transformed into concrete action soon after the warnings from Hong Kong’s SFC and Japan’s SEC. In March 2018, Binance announced plans to open offices in Malta, a country which Blockchain Summit Malta quotes CZ as calling “very progressive when it comes to crypto and fintech.” In August, the Maltese government invited CZ to review a bill aimed at transforming the small European state into a “blockchain island.” A month later, Binance signed a Memorandum of Understanding (MOU) with the Malta Stock Exchange to develop a platform for trading security tokens.
And in October 2018, Binance came full circle and made its first fiat-to-crypto offering available in Uganda. As reported by CoinDesk, the service was an instant success, with 40,000 users signing up within its first month of operation. The service was seen as being particularly attractive in a country where many lack access to traditional banking services.
Binance has now brought a similar service to Europe, offering British Pound and Euro-to-crypto services out of Jersey. This has already proven another resounding success for Binance, with CZ tweeting that the service was “overwhelmed with registrations.” CZ wryly added in a follow-up tweet that “One thing we do “well” is underestimating ourselves, and the market.”
https://t.co/THxfdd3RD2 is overwhelmed with registrations. There is a backlog of KYC verifications already. More resources are allocated to reduce it. In the mean time, we appreciate your understanding and patience. The registration prize is FIFO based, no worries. Just crazy!
— CZ 🔶 Binance (@cz_binance) January 17, 2019
Funds are SAFU
As well as surviving multiple run-ins with regulators, Binance has built up a reputation for responding swiftly to attempted hacks and other issues which have tanked many other crypto exchanges. One of the most serious issues occurred in the eventful month of March 2018, when many users noted their altcoin balances had been changed into Bitcoin. Binance’s servers briefly went down, prompting panic that the exchange had been hacked. But Binance was soon back online, with withdrawals suspended. CZ took to Twitter to reassure users that “funds are safe,” spawning a meme that will be familiar to anyone who’s frequented online discussion forums surrounding the exchange’s activities. The tweet has since been deleted, but the meme lives on.
Binance determined that the source of the irregularities was users’ use of malicious trading bots. Binance reversed all transactions associated with the attempted theft of users funds.
The safety of keeping coins on an exchange is an issue of much contention within crypto. In 2014, the then-largest cryptocurrency exchange, Mt. Gox, suffered a hack amounting to 850,000 bitcoins, worth $450 million at the time. Other infamous hacks and exchange collapses include the loss of between $150 and $200 million of NANO by Bitgrail in February 2018. Most recently, a hack of New Zealand’s Cryptopedia less than a week ago saw losses valued at between $3 and $15 million.
Binance has so far maintained a stellar reputation for guarding against such incidents. Of course, the Mt. Gox experience is a stark remainder than no entity within cryptocurrency can truly be considered too big to fail. But Binance is still seen as the gold standard of exchange safety within much of the cryptocurrency community. Many traders avoid dealing with any coins that have yet to be listed on the exchange.
Binance’s recent move into fiat-to-crypto offerings for Europe coincides with the debut of Binance’s Launchpad. This new platform looks to eliminate many of the risks associated with ICOs. A report from Statis Group released in July 2018 claimed that as many as 80% of Ethereum-based ICOs launched in 2017 were scams. Two successful ICOs were completed through the Launchpad platform in December, with Bread and Gifto tokens being offered in exchange for BNB and ETH. Next up is the much-hyped launch of Tron’s BitTorrent token on January 29, which we wrote about in detail here.
When CCN asked CZ where he saw Binance in the next five years, he described the exchange as being “well positioned for explosive growth,” with ventures such as the Launchpad and blockchain start-up incubator Binance Labs being crucial to building a strong ecosystem around the cryptocurrency. If Binance’s past performance is any indication, the firm will play a crucial role in cryptocurrency’s future development.