The bankruptcy of crypto exchange FTX and the indictment of its former CEO Sam Bankman-Fried, who’s pleaded not guilty to 8 criminal counts - is shining a light on the world’s largest crypto exchange - Binance - and its CEO, Changpeng Zhao - known as CZ. The exchange is estimated to be worth around $300 billion and holds nearly 60 percent of the crypto derivatives market. Binance has managed to eclipse its rivals when it comes to market share and CZ appears confident that the company will successfully navigate the crypto winter.
But with FTX out of the picture, there are increasing fears among some investors that Binance has become too big, and as the largest exchange, holds too much power in an industry that prides itself on being decentralized.
How did Binance get so big? What was the fuel behind its meteoric rise? Bloomberg reporters Justina Lee and Muyao Shen join crypto senior editor Phil Lagerkranser to unpack how Binance and CZ came to dominate crypto, and whether that dominance creates a threat to the future of digital assets.
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This podcast is produced by the Bloomberg Crypto Podcast team: Supervising producer: Vicki Vergolina, Senior Producer: Janet Babin, Producers: Sharon Beriro and Muhammad Farouk, Associate Producers: Mo Andam and Ty Butler. Sound Design/Engineer: Desta Wondirad.
This is Bloomberg Crypto Daily Bloomberg I heard podcast, and I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News. It's Tuesday, January ten, and so there was one man left. After the rapid fall of crypto Exchange f t X and the indictment of its former CEO, Sam Bankman freed Binance now rules supreme in this sector. By one estimate, it now accounts for more than all spot trading. But whatever the number is, one thing is for sure. Finance CEO Chang Peng Zhao, known by his initials C said, is now by far crypto's most powerful man. That's given rise to fears that finance has become simply put too arch. Critics call it the ultimate post child for too big to fail, and they say that if finance goes down, so does whatever is left or crypto. But exactly how did Viinance get so big? How did C said achieve this in a market where so many others have fallen by the wayside. On today's show, I'm joined by Bloomberg reporters Justina Lee. I think finance is very good at jumping on every crypto trend and giving the people what they want. And Muya Shan, every trader I've been talking to you who being active on finance, they said that boneance is not FDx. We unpack how binance and sees it came to dominate crypto and whether that dominance creates a new threat to the future digital assets. Hi, Muyo and Justina, and thank you so much for joining me today. Hello. Can I ask you guys to move Maybe you want to go first. Just take your name and what you cover from Bloomberg. Sure, thanks for having me today. My name is Muya Shan and I am a reporter at boom Berg News on the Crypto Team. I cover everything from the you know, the biggest centralized exchanges to um the the centralized players in the space. And my name is Justina Lee. I'm a reporter on the cross as the Market team, which basically just means everything including crypto. I wrote the Business Week cover story last year on finance, which is probably the longest story you will ever want to read about them. Let's take ways perfectly into what we're going to talk about today, which is binance. It is a fascinating topic in the sense that we have an industry that built itself on the idea of decentralization that is now I guess you could argue more centralized in some ways than her Um and Binance. This is obviously at the heart of that. Just Diina, you've met and spent some time with the CEO of Binance, he said, shang ping Zao and mangling the name probably, But se said, to those who know crypto, what can you tell us about him? Yeah, I mean the first time I met him was actually back in eighteen when I interviewed him and he invited me to this dinner with him, his co founder and a Binance volunteer. So in that sense, he's a bit like his social media persona. You know, he's very friendly, he's down to earth. I think for some crypto skeptics he probably comes across as a little simplistic, But in that sense he's also a very approachable guy. And I think behind the scenes he's probably a bit more shrewd than he lets on. You know, he's very good at discerning the trans and crypto and jumping on like every bandwagons just fast enough, with like really good execution, and in a way he's you know, your your classic founder CEO I mean, he's so very much involved with the management of his company and his current strategy. Yeah, and Muyal, what's your experience with c said and you sez things. I first started covering crypto back in twenty eighteen, and he has always been a very important player in the space, and at the time with the China Band, I think Cuz was one of the first, I think, really intelligent leader at least in the space that moved finance overseas like immediately on like a lot of other Chinese changes. And one thing that I find fascinating if you look at the last two to three months in crypto, months in crypto, it's pretty much been as terrible at a time as anybody can remember. And she said is running by arguably by far, the largest company in crypto. He is literally on Twitter, or was at least for a couple of weeks there on Twitter every single day. He was doing a m as he was doing interviews with me. Yeah, he was speaking at conferences, he was traveling all around the world meeting with regulators and heads of state and who knows what how does he do that? Is he just a good delegator? What's the story there or does he just work twenty four hours a day. Well, he has said before that he has no other interests because he doesn't see anything else that's worth doing. I think he very much is conscious of the fact that he's become, you know, the spokesperson for the entire industry, and of course he and Finance benefit a lot from that, and that you know, it's very important for him to be there supporting the industry, talking it up, you know, dispelling the fund as they say in crypto, because at the end of the day, you need the volumes to be high and you need sentiment to be strong for the business to be profitable. I think maybe also, like you know, coming from immigration family background. Obviously I don't know him personally, I feel like in general what I see from immigration family like his, they usually kind of have this hard working, really good quality in general, and they don't really mind the working that much or their care is like if it's worth it, Yeah, mission mission driven to say the least. And let's zoom out a little bit on binance, because we talk about binance as a crypto exchange, but they're more than that. It doesn't really work the same way in crypto as for instance, and stock markets. Justina, can you talk a little bit about like what the entity looks like in terms of the functions that they fulfill. Yeah. I mean part of this is down to crypto market structure, where it is very typical for a big exchange to also be you know, the brokerage in a way, the clearinghouse m the issuer of products. But I think finance is also unique in that it's always wanted to be this really user friendly one stop shop, and it's kind of managed that through acquisitions as well. You know, for instance, it also owns trust wallet, which kind of lets you hold the coins yourself. Um, let's try to do an n f T market place. It kind of has all these derivatives, and you know, it even has his hand in um defy, which might sound ironic given that the D is supposed to stand for decentralization. But it also has its own blockchain, which is called the B and B chain. And so I think some of this is down to like the crypto market structure inherently, but some of that is also down to CZ recognizing that at the end of the day, what users want is one app, you know, one website that can help them get into various aspects of crypto, and is this what's allowed them to become so big, so fast? What's the secret sauce here? I think finance is very good at jumping on every crypto trend and giving the people what they want. I mean, the decision that they made early on that really made them the dominant exchange is capturing the I c O boom. I mean back in the day when a lot of exchanges were a bit reluctant to basically for all the coins in the world. I mean, that was exactly what they did when initial coin offerings were all the rage. And I mean since then, they've also jumped into the futures trend when they decided to get into derivatives back when you know, there was a bit less up moves and so a lot of traders started using leverage to capture volatility. And then of course they got into defy would they be in the chain? And of course I think a lot of people would say they are quite user friendly, even if you're not a very sophisticated traders, and the fees are reasonably low. Another aspect is they're very good at marketing. You know, early on they had this Finance Angel program, which is where they recruited these volunteers to be in a way, like community representatives to talk about finance and crypto and their native languages in their native countries. And they very famously helped these trading competitions where they gave out Lamborghinis and all that. And they also do a lot of like affiliate marketing and so all. No. I just think they're very good at mark kidding themselves a marketing crypto to like the broadest audience possible. They have the sees that as the market in chief as well. I mean, when it comes to being out there pumping your product, prompting your brand name, not many CEOs do it as much as Heesa does them right exactly. And the other thing about them that is a pretty strange thing is that they're everywhere, but they're also nowhere. And by that I mean they have no pinpointed global headquarters. So they're pretty much in every market that is meaningful in crypto, yet they have no global headquarters. What we think is the thinking behind is I think early on they learned from the China experience. They launched in China and got kicked out after you know, basically a few months after they launched when China decided to ban crypto exchanges, and so that really forced them to go overseas. And I think if you're being you know, um a bit generous, you could say it's always been a bit difficult for crypto companies to obtain a license, especially in the stage when regulators didn't really know what to do with them. But I think it's also true that they were never really ready to offer all the concessions to obtain those licenses and to be regulated, and their particular benefits to this because basically it's really hard to establish the jurisdiction over finance and if you're nowhere, then you're no regulators problem. And that's also made them harder to sue, you know, for disgruntled business partners and users, because essentially you cannot establish, you know, what is the parent company that runs this exchange and where are they based and kind of by sort of operating in this gray area, they've also managed to broaden their market and offer their services to the entire world. Now that's kind of start to change in recent years when crypto became higher profile and start to draw the attention of regulators and so basically what's kind of been happening is sometimes when our governments started to crack down on them, they would say that they're going to withdraw from this particular market, maybe they're going to stop offering futures to Hong Kong people, for instance. But you know, even then, it's basically offered them a lot of flexibility and kind of made them not to beholden to any particular market, which is a lesson that they learned early on from being kicked out of China. Was it a shrewd power move or just a luck of the draw up? Next, more on finance, this role in the f TEX collapse. I want to rewind a little bit and I want to talk about those early days in November, but I want to start with discussing a little bit the relationship with between c S and the former CEO of f t X, Sam Bank Maunfreed, who is now you know, under US indictment. How did they different terms of their public persona and the early on they seemed to have been allies because c Z actually invested fd X when it first started. But I think as f t X grew, I mean naturally they became rivals, and it's been kind of interesting to look at how the two have been differently perceived by the press and the public, because I think for a lot of people, SPF was really, you know, as he said, like the golden child of crypto, especially in the US. I mean, he very openly courted politicians. He kind of had this stellar background with you know, a degree from M I. T and parents who were these famous and well respected academics. And at the same time, it would seem like CZ was being treated as someone who dodged regulations um and who was lesser known by the mainstream, even though finance was a lot bigger than f t X and he seemed to be you know, less sophisticated, a bit more foreign. But at the end of the day, I think it would be fair to say, um, even you know, before their recent revelations, that in a way they play the same game, like you know, a lot of crypto exchanges are taking advantage of kind of the regulatory ambiguity. And of course f t X also operated off shore. And now we get to um to a part that is, you know, where the drama really starts, and this actually takes it through. So you mentioned Justina that C said actually invested in f t X, and that investment to a to a certain extent, becomes in not the root cause, there's certainly not the root cause, but an accelerant in the implotion of f t X, because he said got the ex native exchange token f t T when they exited that investment, Justina, can you talk us a little, you know, those those events around November six, I think it all kicked off with a tweet from C said about selling FTT. What happened there? Yeah, Well, the background to that tweet was that there was a coin dust story about how Alimator researches balance sheet was mostly f t T. You know, the f t S token and elimeter research is the high frequency trading arm of f t X. And after that CZ threatened into tweet to dump his FTT holdings, and that really set off a vicious cycle there where a lot of clients began withdrawing from f d X, which kind of in turn increased the pressure on the exchange. And after that, in what I think to a lot of us at the time, was a shocking turn of events. Um kind of SPF tweeted that Finance was looking to acquire fd X, but then very shortly after that, finance kind of backed out of it, seemingly, you know, after it looked into f t x is finances and discovered kind of what a black hole it actually was. All right, well, here we are, ft X is gone and buying is supremely dominant. Justina, you've covered this a bit. Where are they now? I think I saw a figure the other day of of all spot trading going through Binance right now, no matter how flies, and I said, how you slice, And I said, they're pretty They're pretty on top now, right exactly. I mean, that's always been sort of an irony of the crypto industry that it talks so much about decentralization, but at the end of the day where we are seeing consolidation take place right before our eyes. And I think it's kind of interesting because c z has always been pretty honest about how he also thinks that decentralization does have its downsides and so and we shouldn't sort of just glorify that. But I think this theme is especially true for Binance because it's a very opaque company that we know is at the end of the day dominated by c Z um you know, a lot of my reporting has shown that if you look at the entities UM that are within the Binance Empire, out of them are owned entirely by CZ and no one else. And if you look at the acquisitions that it's done over the years, it's really tried to buy a lot of different crypto entities kind of within the industry to have a toe hold in every single aspect of it. The one thing that we need to sort of point out here is that they were put to the test during a couple of weeks late in the year. They were pretty massive outflows from finance and they did to their credit. I mean, and this is something that they are not shy about pointing out. I mean, they did meet all these redemptions, and I think they said we met them without ever breaking stride. Where does that put us um, Justina? Do you do you think that should we give them the benefit of the doubt in terms of they have been able to handle really sharp outflows? Well, this is a dangerous question to answer in crypto right now, but I would say, you know, to a lot of people, it was reassuring that they survived that test. And in my rate of CZ, I do think that he is a much more cautious and you can say even conservative operator than SPF. I think that obviously, there are still some reasons to worry, and most of that has to do with the opacity of finance. They released what they called like a proof of reserves audit by this um auditing firm you know, a few weeks ago I think exactly, and it was actually extremely limited. Mazaris was very explicit that they only did that based on the instructions of finance, which were not comprehensive at all. And very soon after that, Mazaras actually said that they were going to stop doing all crypto work, and so I think that's definitely something that's very worrying if you compare that to at least the traditional finance sector. Well, yeah, what do you think? Where do you stand on this? What are you hearing from market contacts? Every trade I've been talking to who being active on binance? They said that Bienniance is not FTX, but again, like who knows. I think for like the public or users in general, to really get sort of trust from Binance, the key thing is whether if they can find an audit like one of the big audit firm to really help them to prove to the public that they don't have the sort of liability that FTX had. And also they are not using users sponsoring any sort of way as FTX had. Justina, thank you so much for coming on and giving us your insights. You can find more of their reporting on the Bloomberg terminal and on Bloomberg dot com. For more, be sure to check out twice weekly newsletter Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heeart Radio. For more shows from I Heeart Radio, visit the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer is Janet Babin. Our producers are Mohammed Farouk and Sharon Barrero. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Marie Schmal We'll be back tomorrow