In the latest episode of “The Biz Doc Podcast,” Tom Ellsworth dives into the recent turmoil surrounding Binance, the world’s largest cryptocurrency exchange.
Tom unpacks the company’s guilty plea to money laundering charges, the departure of CEO Changpeng Zhao (or CZ), and the mounting regulatory scrutiny Binance faces. Uncover the potential impact on the future of Binance and the broader crypto landscape.
Binance was co-founded by Changpeng Zhao (nicknamed “CZ”), the founder of Fusion Systems (a High Frequency Trading Software), and Yi He, Vice President at Yixia Technology, a mobile video tech company.
Together, the pair would build a company and system that operates the largest cryptocurrency exchange in terms of daily trading volume of cryptocurrencies.
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In 2013, CZ joined the crypto wallet team of Blockchain.info. Then, in 2014, he moved onto OKCoin, serving as its Chief Technology Officer (CTO), having been hired by Yi He.
CZ asked Yi to help him found Binance in July 2017, and they almost immediately moved its servers out of China (as the Chinese government banned crypto) and into Japan (actually Malta, as you will soon see). Yi rewrote the white paper for Binance’s $15 billion initial coin offering.
By 2018, Binance had a market capitalization of $1B — it was officially a Unicorn. It was then that they supposedly moved their HQ to Malta. The facts around this move were cloudy, and at one point Malta’s financial regulator issued a warning about the exchange.
That year, Binance also announced Stablecoin, a cryptocurrency that was less volatile than Bitcoin.
In 2019, it was revealed that a “large scale security breach” of Binance occurred during which hackers stole 7,000 Bitcoin worth around $40 million. CZ, who had a background in software and crypto security, was especially criticized for his lack of foresight.
CZ explained that the hackers “used a variety of techniques, including phishing, viruses and other attacks in a way that passed our existing security checks.” This was suspicious because it was seen as a non-answer, as it named everything under the sun and contradicted itself (phishing is a way around security checks…). Binance halted further withdrawals and deposits at that time while they cleaned up the mess—the mess being a loss of trust, as many users wanted to pull everything from their Binance accounts.
By 2021, Binance came under investigation by US Department of Justice and the Internal Revenue Service (IRS) on allegations of money laundering and tax offenses, concerned that Binance and its clients were conducting transactions without paying necessary taxes.
Then, the UK’s Financial Conduct Authority ordered Binance to stop all regulated activity in the UK and effectively banned the website from the country.
It turned out that Binance also had shared client data, including names and addresses, with the Russian government (despite not having shared it with the US), and did NOT comply with reporting suspicious activity.
A flurry of investigations were launched over concerns that Binance could be facilitating illegal activities that would harm the national security of the US.
Finally, in November 2023, the US Government demanded that CZ pay a $50 million fine. CZ resigned as CEO and is set to do prison time. His sentencing hearing has been scheduled for February 2024. Binance as a company received a $4 billion fine.
Biz Doc says this only adds to general concerns about the cryptocurrency exchange industry, already on red alert with the prosecution of FTX founder Sam Bankman-Fried.
However, Coinbase CEO Brian Armstrong is not perturbed: he said the U.S. government’s enforcement action against Binance will allow the crypto industry to “turn the page.”
He pushed back on the suggestion that crypto is mainly used for nefarious purposes such as fraud, money laundering and terrorist financing. Critics will not be convinced by this, but we will see if Coinbase and other similar entities can fully rescue the reputation of the crypto world.
(RELATED: Coinbase CEO Says Crypto Industry Can “Turn the Page” After Binance Plea Deal)
Biz Doc’s takeaway: 1st Rule of Disruption is that disrupting an industry is not the same as disrupting a government (which has monetary or tax controls). If you plan on disrupting the government, you better have a squeaky-clean record because governments usually win. Fighting City Hall is not the same as fighting the DOJ and IRS. You must Compete With Clarity (Cooperate Along The Way). You can be brash, you can be disruptive, you can create a new future — but you must do it the right way.
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