Zhao Changpeng, founder and chief executive officer of Binance.
© 2021 Bloomberg Finance LP
Binance CEO Changpeng Zhao (often referred to as CZ), runs the world’s largest crypto exchange. He is a billionaire, valued at $1.9 billion, ranked number 5 on Forbes’ Crypto Rich List, and one of the most followed and influential members of the industry. He is also a controversial figure mostly due to Binance’s arms-length approach to regulation. For years CZ claimed that Binance had no headquarters, as a nod to Bitcoin’s decentralized nature. However, as the industry has grown and brought regulatory attention along with it, CZ is now changing his tune and actively embracing licensing and regulators. It remains to be seen if this strategy will prove to be successful.
Much has been written about CZ and Binance’s history, but lost in those narratives is the story of a deeply integrated, profitable, and systemically significant organization in crypto.
I spoke to CZ to find out what investors around the world should know about Binance’s business model, trading flows and activity on the platform, how Asian markets differ from the rest of the world, how Binance’s blockchain platform fits with its centralized exchange, and how the company’s operating model will differ following its regulatory reboot.
Forbes: One thing that I find really interesting about Binance is that in some ways you forced Coinbase to change strategy a few years ago. Coinbase was really leaning into the institutional space. Then you launched, listing hundreds of tokens, and Coinbase had to switch back to focusing on the retail market because they were worried about losing that share. What did you think about that?
CZ: It wasn’t intentional. What you said may or may not be true. To be frank, we could take that view, and most people may agree with it. But we didn’t really think about Coinbase that much. When we first started, there were very few exchanges that were internationally focused. Coinbase and Kraken were focused on the U.S. market. Poloniex and Bittrex, which were the biggest exchanges back then, their trading volume was bigger than that of Coinbase. Okcoin and Huobi were focused mainly on China. And even though they do have the bilingual interface, English and Chinese, the way they run operations is very Chinese. There’s a bunch of exchanges in Japan, and they focus on the Japanese market. Those are the bigger countries, bigger economies, but we saw that no one was really servicing 80% of the economy outside of those countries. Coinbase’s website was only in English. We had support for four languages on the day we launched and nine languages within a month. Today, we support 31 languages on our interfaces. Our customer support is in 16 different languages. Even today, others mostly provide customer support in one language; they’re very country specific. So I think listing a high number of tokens was an advantage, but being more international was also the first thing we did. There are many other things. For example, on the product side, when you traded on most websites, you had to scroll up to see the chart and scroll down to place orders—a very non-intuitive way of trading. We said, this is not how trading should work. So we designed one full-screen trading, actually two versions of it. Both were very widely copied by the industry. I can go into a lot of detail. It is not just a number of coins.
Forbes: A lot of Forbes readers are American or U.S.-based. One of the reasons I wanted to speak with you is because I want them to get a sense of the Asian market. In many ways, it is the largest, yet it’s a black box to a lot of people that don’t have the time to read Twitter, Discord, etc. What do you think a U.S. investor needs to know about trading patterns and the trading industry in Asia?
CZ: China is more of a speculative market—and that’s not a recommended way for trading. China actually has a lot of novice traders who don’t really know much.
Forbes: Is that a function of pretty restrictive capital markets that they don’t have a lot of other options? Why do you think they’re that way?
CZ: I don’t know why exactly. There is a lot of money flowing in China. For the last few decades, the economic growth there has been tremendous. There are a lot of people who are wealthy, and there’s not much of an institutional market in China because people don’t trust other people to manage their money. Even billionaires manage their own trading accounts themselves and place orders using a mobile phone.
Forbes: Or they invest in property markets, which is why Evergrande has become such a problem?
CZ: Even China’s stock market has always been highly speculative. People follow other people, they don’t do as much fundamental research themselves. And other aspects of crypto have not grown much in China—like payments, which were banned there in 2013. China’s more speculative in that way. To be fair, there are groups who are doing fundamental development of blockchains. That still happens, but compared to the U.S., I think it will be a smaller proportion. Japan has a different market. South Korea is extremely active in trading. In the rest of Southeast Asia, there are larger populations, but per capita wealth is lower. People have less contributions, but the number of users is very high. Those guys are much more interested in earning money, like staking yield, GameFi, etc. These are overgeneralizations though and may not be fully correct.
Forbes: What about the interplay between Asian and U.S. trading hours? Talking about meme stocks and dog coins, sometimes people buy things because they are fun, not because of the fundamental research behind them. Because it’s a global market active 24/365, there’s ramifications here in the U.S. and elsewhere. What are your thoughts on the impact of these dynamics?
CZ: I think it’s impossible to have a formula. There’s nothing that’s too specific to Asia that will cause a U.S. trader to trade differently, I think. So far, I’ve not seen any Asia-specific strategy that’s guaranteed to work. There are speculative traders in both Asia and North America. There are long-term holders in both places. Sometimes Asian markets pump or dump more, and sometimes it’s the other way round, so there’s no clear pattern. And because it’s a 24/7 market, people trade at midnight too.
Forbes: I am sure you are familiar with the idea of the “Coinbase premium.” Have you paid attention to that metric at all?
CZ: In my opinion, the difference in price is never a difference in how many people want to buy. It just shows efficiency or difficulty in moving fiat money across different exchanges. Korea also has a premium. In the crypto world, bitcoin is traded on multiple exchanges. If bitcoin is trading higher on Coinbase, people should buy it on Binance and sell it on Coinbase. But after that sale on Coinbase, they still have to move the fiat money onto Binance to buy again and then to sell again. But if the fiat transfers are not fluid, or if there are restrictions, then the difference stays. You could have a smaller exchange with a smaller number of users, but because those fiat channels are not flowing smoothly enough, it will keep having a premium. It doesn’t mean that the demand is much higher, it just means that there’s a bottleneck somewhere for people to arbitrage. Crypto is very fluid: you can move bitcoin and ethereum very quickly. If you could also move fiat very quickly, those premiums would never exist.
You should be able to send fiat money onto Binance and buy on Binance so we will push the price up, and then move those coins to Coinbase and sell on Coinbase and push the price down. You repeat this cycle a few times, the price will align. People are financially incentivized to do that, because when you do, you make money. The only reason people don’t do that is when they can’t, which usually means a loop is broken. Where it’s broken is usually the fiat channel.
Forbes: Let’s talk about Binance’s business model. Can you break out the different buckets of products that you offer (I know that there’s a wide range) and where the BSC fits in.
CZ: Binance today is an ecosystem of projects. Most people view Binance as an exchange, but they probably don’t know some of the other products we have. We are by far the largest crypto-to-crypto exchange. In terms of trading volume for both spot and futures, we have the commanding market share. Most of the time, we’re 10x bigger than the second biggest players. We also have the largest fiat-to-crypto exchange most people don’t know about. We support 50 something fiat currencies all over the world, and nobody has this coverage. In addition to those, we’re also one of the largest peer-to-peer marketplaces. Typically in places where banks don’t want to work with crypto exchanges, people trade peer-to-peer, and crypto is escrowed to our platform. Local Bitcoins is typically viewed as a leader in that space. We are slightly bigger than them.
We have one of the most downloaded mobile crypto wallets, Trust Wallet. We acquired the Trust Wallet team 100% three years ago. They had a very good product then and small market share, but now they are the most actively downloaded wallet on mobile phones. We also own one of the most visited websites in crypto, CoinMarketCap. We also have, I think, the second largest NFT marketplace, which was launched only three or four months ago. OpenSea is still the biggest; it’s been there for years. Ours is catching up. We also contribute to BSC, Binance Smart Chain, which is one of the most actively used open blockchains in the space. Yesterday it carried about 14 million transactions, Ethereum carried about 1.2 million. And if you look at the number of daily active addresses, or what we call DA use (daily active users), Binance Smart Chain has about an 80% market share in the DeFi space. Other blockchains may have higher TVL, total value locked, but if you look at the number of users, BSC has a higher number of users. And there’s many others.
Forbes: Some of the popular DEXs have moved from Ethereum to Binance Smart Chain (BSC), which is EVM (Ethereum Virtual Machine) compatible. I am interested in 1) the differences in trading patterns between the DEX, which is on the BSC, and the Binance centralized exchange and 2) DEX trading activity on BSC compared to DEX trading activity on Ethereum-based indexes.
CZ: I think the keys are performance, capacity and fees. Ethereum, with its capacity to handle 1.2 million transactions per day, is saturated. So to do transactions there, you have to pay more to other people. It’s a bidding process until people feel it’s too expensive. That’s why the gas fees—the cost to do transactions on Ethereum—were quite high. It typically costs $10 to $30 for normal transactions; for more complex transactions involving a larger smart contract, it can cost up to $50 to $150 per transaction. So if you’re trading only a couple thousand dollars, you can’t pay those kinds of fees. If you transact $2 million dollars, maybe those fees are okay. It costs a few cents to do a transaction on Binance Smart Chain. We have seen more of the retail and high frequency guys that are more price sensitive move on to BSC. When users move because they want to save money, we have 80% to 90% of the users. Now, projects think about whether they are going to stay on a channel with only 10% of the users or they’re going to move to a chain with 80 something percent of the users. The project will follow the users, so we’ve seen that migration happening. And creators of the Binance Smart Chain deliberately designed it to be fully EVM compatible so it would be easy for projects to move. I think that was a pretty smart decision.
Forbes: As far as the token pairs that are traded on Ethereum DEXs vs. BSC DEXs, are they the same type of tokens and it’s just smaller denominations? Or do you see different tokens that are more popular on BSC compared to Ethereum?
CZ: I would say probably about 70%-80% are the same tokens, because most project teams now can work cross-chain; they issue tokens on both places. But there are certain projects that are bigger on one chain versus the other. For example, Uniswap started on Ethereum, so it has more trading volume. Whereas in regards to PancakeSwap, many of the Binance Smart Chain tokens are not even available on Ethereum at all. If people want to trade those, they have to come to Binance Smart Chain. There are differences, but by and large the popular ones are bridged.
Forbes: What about the differences between BSC and the centralized Binance exchange?
CZ: I think you’re talking about the Binance Chain. The terminology is a bit confusing. The Binance Chain blockchain was developed two to three years ago. It is based on the Tendermint protocol, so it’s much closer to the Tendermint architecture. But for whatever reason, that thing didn’t really take off. There was a second team that came along and said they wanted to do another blockchain with BNB as the native coin of that blockchain. So BNB is native to both blockchains. I think no other coin has this.
Forbes: So BNB is native to Binance Smart Chain and Binance Chain?
CZ: Yes. There’s two separate blockchains, two different technology stacks. BNB is the native coin on both, and the total supply across both chains is capped. No other coin does this. There are actually teams working on third and fourth blockchains using BNB as a native coin. We could have one coin that’s the native coin of multiple blockchains; technically this can be done. But technically, architecturally they are very different. The Binance Smart Chain is using EVM compatible architecture. I don’t know what they did specifically, but they re-engineered a lot of back end to make it a lot faster.
Forbes: So Binance DEX runs on Binance Chain?
CZ: Yes.
Forbes: Any noticeable patterns between the centralized Binance exchange and the Binance Chain?
CZ: Right now the centralized exchanges are still bigger, but the decentralized exchanges are getting significant traction. PancakeSwap, which is another project on BSC, is reaching 3%, 5% of Binance’s volumes, and they’re ranked probably as number three or four globally, including all the other centralized exchanges. So the volumes are pretty significant even on decentralized platforms. What we see is that decentralized platforms and centralized platforms service different types of user segments. Decentralized platforms service more advanced crypto-native users, the guys who can hold their own cryptocurrency themselves securely. The centralized exchanges typically service slightly more nervous types of users, who are more comfortable with a username and a password.
Forbes: Let’s talk a little more about some of the tokens that are offered and the listing process. What do you look for, in particular for a token that will be listed on Binance?
CZ: The most important criteria is the number of users. If a coin has a large number of users, then we will list it. That’s the overwhelming significant attribute. Consider for example meme tokens, even though I personally don’t get it, if it’s used by a large number of users we list it. We go by the community, my opinion doesn’t matter. There are other factors, such as the number of active addresses on the blockchain, Twitter followers, Telegram, group sizes, code commits. But number of users is the key metric.
Forbes: Let’s discuss Binance.US. I interviewed former CEO Brian Brooks a couple of weeks before he ended up leaving, and the quick exit was a little bit surprising to some people. I’m interested in your perspective on what happened there?
CZ: There’s not a whole lot of detail I can disclose because of privacy concerns. But, turnovers do happen and the interviewing process doesn’t guarantee the complete fit. So if people come in and they’re not a strong fit, then we part ways as quickly as possible. We hire a very large number of people. He was one of the more high profile guys, but you know, turnovers happen. We still actually onboarded many other ex-regulators after that, too, and most of them stayed.
Forbes: The U.S. market is heating up, not only with Coinbase going public and Kraken kicking the tires on an IPO, but FTX and Crypto.com are spending billions of dollars in market. What is Binance.US doing to compete?
CZ: Our new CEO Brian Schroder, has a game plan, and it’s his responsibility to execute it. But fundamentally, again, I go back to the product first. You have to have a superior product and service. And I think the marketing spend will come in third. I usually don’t believe in spending money on marketing to gain market share. I don’t think it’s a long-lasting approach and it usually doesn’t work well. My recommendation to them is to just get the product and service right and the market share will take care of itself.
Forbes: Let’s finish up by talking about regulation. After famously claiming to have no headquarters, you’ve really come out and started to embrace regulation. How are those conversations going? Do you know where you’re going to be domiciled in the future?
CZ: Most of the conversations are very constructive, and they’re very positive. From our perspective, we’ve been extremely collaborative, we are extremely open, and we have made a number of changes to our approach. The first step is that we are moving from a decentralized structure to a centralized structure, which the regulators are much more comfortable with. For a regulated business, you can’t have a decentralized structure. When regulators ask you, where’s your headquarters? Our previous response was we don’t have one, and that usually doesn’t work. So we have established a global legal entity for our headquarters, and we’re establishing local entities, local offices and board governance structures. That’s mostly established now, and the details will probably come out later. So that’s one aspect of it. The other aspect is, before we would take a slightly more reactive stance towards regulators. They would ask us questions, and we’d give them responses. Now we take a much more proactive response. We go to them and say, ‘Can we book a meeting? Can we come in?
Forbes: Thank you for your time.