Binance battles regulatory headwinds as world's largest cryptocurrency exchange seeks financial legitimacy

UK, centralised exchange, has faced challenges, El Salvadorians grapple with, e-yuan

Binance, the world’s largest cryptocurrency exchange, is making a pivot to a licensed financial institution by rebuilding itself into a centralised business, as it navigates through a myriad of regulatory red flags that threatens to set back its past four years’ of growth.

The exchange, which has been hit by multiple regulatory warnings this year including those in the UK, Hong Kong, Japan, Singapore, has started to initiate dialogues with regulators as it looks to win their approvals and distance itself from the ongoing wave of crackdowns on unlicensed platforms globally, said founder and chief executive Zhao Changpeng.

“As we run a centralised exchange, we have come to realise that we need to have a centralised entity to work well with regulators,” said Zhao, in an interview with the South China Morning Post. “We need to have clear records of stakeholders’ ownership, transparency and risk controls.”

In building a centralised firm with headquarters, the sprawling exchange – with entities incorporated in the Cayman Islands but not for the purpose of running cryptocurrency business – would be disavowing the core ethos of blockchain, the backbone technology of virtual assets which seeks to disintermediate centralised authorities.

But as cryptocurrencies’ market cap has grown to US$2 trillion, too big for regulators to ignore, players that have profited from the cryptocurrency “wild west” in the past can no longer operate by simply hosting their matching engines on the cloud or by operating without a registered office.

“As the largest player in the industry, we need to prepare ourselves for the shift. We are making changes to make it easier to work with regulators,” said Zhao.

Binance is the world’s top cryptocurrency exchange, according to CryptoCompare, which tracks close to 300 cryptocurrency exchanges. The exchange claims to have an average daily trading volume of US$2 billion.

Binance has made efforts to embrace best governance practices, but it has faced challenges. While it made many high-profile hires recently, including former regulatory and finance executives in a bid to facilitate dialogue with regulators, not many have stayed long enough.

Binance’s former US CEO Brian Brooks, the previous acting comptroller of the currency in the US, resigned in August after just three months in the job. Former chief financial officer Zhou Wei, vice-chairman of LGBTQ social platform Grindr, also resigned.

It recently hired Richard Teng as its Singapore CEO, a former director of corporate finance at the Monetary Authority of Singapore (MAS), where it is seeking a payment services licence.

Debate is also raging about whether cryptocurrencies should be considered as “securities” or means of payment. But Zhao said that bitcoin can be the national currency for smaller nations, pointing to El Salvador’s move to adopt bitcoin and diversify from the US dollar.

This month, El Salvador became the first country in the world to adopt bitcoin as legal tender, on par with the US dollar, the Central American country’s currency since 2001. President Nayib Bukele said the move would help its citizens save some US$400 million in remittance commission a year, a claim that has been disputed by critics.

The drastic move sparked off street protests, as El Salvadorians grapple with bitcoin’s volatility. The price of the oldest cryptocurrency plunged by 17 per cent on September 7, the day it was adopted as legal tender, dropping at one point to US$44,000 from over US$52,000, snapping a seven-week rally from July 19.

“Many regulators are concerned about countries that do have a national currency, but smaller countries are probably better off in not having a national currency,” said Zhao. “With finite supply of 21 million and the immutable nature of blockchain, bitcoin possesses a lot of properties of a hard currency that support its use as a national currency.”

UK, centralised exchange, has faced challenges, El Salvadorians grapple with, e-yuan

El Salvadorians protest in the capital San Salvador against the adoption of bitcoin as legal tender on September 7. Photo: Reuters

Central banks globally, meanwhile, are also developing their own sovereign digital currencies. China has started trialling its e-yuan across 11 pilot areas and cities. According to a white paper released by China’s central bank in July, a total of 34.5 billion yuan (US$5.3 billion) across 70.75 million transactions were completed as of end June.

With legal backing and support from commercial banks, central bank digital currencies are more likely to be accepted as money, which could potentially marginalise bitcoin, according to industry observers.

However, Zhao said the roll-out of central bank digital currencies could end up helping increase the acceptance of cryptocurrencies.

“Once people start using central bank digital currencies locally, then they’ll use bitcoin to pay their friends in other countries,” he said.

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