BAD NEWS, BINANCE
The early days of crypto were an interesting time.
As a nascent asset class, users and investors struggled with basic things in crypto. Things like valuing tokens; understanding what tokens and blockchains even were; figuring out which laws apply to a thing without intermediaries being traded by intermediaries that crossed those boundaries in novel ways; how to secure the tokens; and how to build a business amidst all of this complete and utter chaos.
The frontier does not remain the frontier forever, though. With global regulators finally catching up to the crypto boom, legislation has been passed globally, from the EU to America to various Asian efforts. Now, the early operators in crypto are being forced to make a choice: professionalize and become significantly more robust, responsible, and reliable, or be forced out of their local markets.
Every crypto exchange will ultimately be forced to make this choice: reform or retreat. Though some, it seems, might try a secret third thing?
Binance, the Spider
Binance, in particular, does not seem to be handling this situation well.
As a reminder for those not familiar, Binance was founded in 2017 by Changpeng Zhao (commonly known as CZ), and rapidly scaled to become one of the largest crypto exchanges in the world.
At times, Binance has accounted for 50% or more of observable crypto trading volume, though an important detail there for non-experts is that it is difficult (though not impossible) to disaggregate wash trading and arbitrage-related activities from what we would consider more traditional trading volume.
Binance also has a fascinating history of operating in regulatory gray areas. They have shifted operations and domiciles across the world repeatedly. The short list of locations in which they have claimed to have headquarters or licenses includes: Shanghai, Japan, Malta, Cayman Islands, Seychelles, Singapore, Abu Dhabi, France, and Brazil.
This sprawling structure is not an accident; there are valid operational reasons to ensure personnel, groups, and key holdings are not in a single place in crypto (see: wrench attacks in France). But there are also, shall we say, somewhat less noble reasons around evading regulatory scrutiny.
On one hand, the bad behavior of certain regulators (hi, Gary) means that it’s hard to fully criticize this approach in the crypto space. Certainly, not waiting for geriatric politicians still spooked by the newfangled invention known as television has proven to be a winning move.
On the other hand, Binance in particular clearly did use this as a tool to evade genuine regulatory scrutiny and got slapped pretty hard for it a few times, most notably by the US when CZ was sent to jail over money-laundering and terrorism-finance-related issues.
That point is still heavily contested by CZ himself, in conduct typical of the Binance strategy: CZ claimed recently he was jailed over poor KYC, but the substance of the DOJ claims relied much more heavily on specific instances of wrongdoing and terrorism financing passing through the Binance pipes. CZ did plead to lesser crimes, and then received a pardon (itself a topic of much contention, and one which I discussed during my appearance on 60 Minutes) from President Trump.
In short: they live in the grey area. Binance is not the most odious of the pirate ships (looking at you, Nobitex), but Binance is also not pristine, clean, and up to par. Perhaps the best sort of analogy would be someone like Han Solo at the outset of the original Star Wars: a smuggler, engaged in a combination of legal (but perhaps unsavory) and outright illegal things, willing to cut corners, willing to be aggressive to make a buck.
Fundamentally not evil in a grand cosmic sense like true villains - but also not a hero.
This sort of moral grey has always proven difficult for the media to handle because of nuance. Is CZ a villain? No. Is he a hero? Also no. “Well fuck,” I hear some editor scream, slamming their hand on the desk, “What do I put in the headline!”
Binance vs. Europe
I can tell you what I think about that: Binance is the perfect vehicle to look at the evolution of crypto.
Years ago, being an offshore pirate ship was completely acceptable. Binance was a functional exchange, providing services, in an era where the rules around this were a question mark. They have not experienced major hacks or lost customer funds due to breaches. When they said they had your tokens, they apparently actually had your tokens. CZ’s criticisms of Sam Bankman-Fried, while sharp-elbowed, were largely correct.
However, the flip side of that (which is to say, the U.S. Justice Department going after them for (very) lax controls, sending CZ to jail, and continuing to box out the parent company from operating here) is also all varying degrees of justified. The jail part in particular was contentious, but I would frame it this way: your answer to whether CZ belongs in jail should be the same as if you believe bank executives who facilitated this same activity should be in jail, and my view is yes, actually, I do believe some bank executives should have gone to jail.
Now, however, there is another set of rules that Binance has to contend with: MiCA, that being the Markets in Crypto Assets regulation created by the EU in order to govern the service, offering, issuance, and behavior of crypto assets within the bloc. This was a big deal when it came out, and then everyone seems to have forgotten about it for a while, perhaps because there were bigger issues out there in the world, perhaps because nobody takes the Europeans seriously, or perhaps because regulatory things are often a specific kind of boring that induces either deep (but not restful) sleep or intense avoidance of reality.
Either way, Binance seems to have not taken it terribly seriously as they applied for their license in Greece. Only at the finish line did they find out that no, in fact, the Greeks did not intend to give them a license. Some reports indicate that they were directly told that their KYC and AML issues (those same ones the US is still monitoring and not totally satisfied with the resolution of) are the reason they would not be granted a license. CZ himself countered, calling it a lose-lose situation and alluding, in some places, to the EU itself being the problem, with other countries wanting the Binance application.
As someone with deep experience on the regulatory side, I’m going to say that such behavior from CZ ranges somewhere from a deep misunderstanding of how to get this done to an outright red flag. First, regulators rejecting applications do tend to give direct feedback, and sometimes that feedback is incoherent or misunderstood, but it’s rarely “another regulator blocked it because they want your application”. That’s just not plausible, especially as the Greeks would want the revenue and the activity if they thought they could manage it.
Second, even if that’s true, throwing that all out in public is not the way to convince people they can work with you. Almost nobody is bigger than the regulators or governments. Even Jamie Dimon treads carefully on these topics. Certainly, CZ is not the right person to be throwing rocks after pleading guilty to regulatory violations here.
There is also reporting from Forbes, among others, that Binance has always had a long-term strategy of evading regulations by being formless. This is not a dumb tactic, from a profit perspective. Clearly it’s made CZ and the Binance crew a lot of money. The problem is that the timeline where this works, within certain jurisdictions, is likely coming to an end.
Ending Piracy
In the 1600s, there were pirates. Specifically, there were pirates in the Caribbean and bordering areas. From out-and-out pirates like Blackbeard, to nation-state actors like Drake, to less easily classified smugglers and scallywags, the high seas were a dangerous place to be. However, this era is a historical anomaly precisely because nation-states don’t take well to some dude with a beard and a parrot rolling up on their stuff and stealing it. After all, if you can’t enforce basic security guarantees and rule of law, your state is not long for this world.
So they stopped it. And by stopped it, I mean the European powers basically got their act together and imprisoned, murdered, sank, or just cracked down on the activity to the point that international shipping was something like ninety-five percent less likely to be stolen or interdicted by the time we got to the 1800s. It did not end well for the pirates, as a whole, even though some individuals were smart enough to get out while the getting was good.
My personal prediction is that a lot of the legacy crypto firms are now going to face the pirate’s choice: take the bag and retire, hopefully somewhere out of the way, without poking anyone major in the eye, and enjoy hanging out with your parrot on the beach; or …
Keep fighting and eventually meet your end at the pointy end of the stick.
Regulations are either here (MiCA, Japan’s FSA acting, etc.) or they are coming rapidly (Singapore and HK all coming online, the US debating Clarity vs. regulatory guidance and the Genius Act passing, etc.). The strategy of being a pirate ship evading the regulators was effective when they were unprepared, under-resourced, and not focused on this exact issue, but now that the nation-state guns are being brought to bear, the unrestricted waters of the world are quickly being limited to central Asia, Africa, the Middle East, and Latin & South America.
That’s not Europe. That’s not Japan or China. That’s not Russia. That’s not the United States. And so most of the world’s wealth is now out of bounds, at least in official terms, for crypto exchanges that don’t follow the rules. Certainly mainstream retail is boxed out.
The other option is to get legit. Pull down the skull and crossbones, put up the flag of a nation state, and play by the rules. Now you have to do all the boring parts that crypto hates: managing risk, having an actual compliance program, and having inspections from grouchy people who at least potentially know what they are doing, asking questions about things and then making you fix them. It’s not fun! I know this firsthand. Ask me about compliance at a bank (especially, and specifically, if you ever need to get to sleep). But you have to do it to stay in the game.
What appears to have happened here is that Binance tried to do a secret third thing, which is to pretend to be doing the legitimate thing while actually still being a bunch of pirates. They cleaned up the ship, took down the skull and crossbones, but all the pirates were still inside. It’s the crypto exchange version of the Trojan horse.
Except the Greeks were wise to that trick. If you had even passing knowledge of history, you’d probably realize trying to pull that on the people who first came up with it was not the best move?
Regardless of the obvious historical lesson, it did not work. So where are we now? Binance is no longer allowed to operate in the EU, and the road to getting back is probably harder than the road to staying there in the first place, as CZ was torching bridges on the way out and throwing some bombs.
The end of the era of crypto pirates has begun.
