Binance CEO warns Gulf banks they must adapt

Reuters/Darrin Zammit Lupi

• Changpeng Zhao urged the use of blockchain and decentralised finance
• Even late adopters of the tech will suffer, said the crypto exchange boss
• Binance CEO was speaking to Fintech Week conference in Dubai

Banks that fail to catch up with blockchain and decentralised finance technologies will have a “hard time in the future”, the chief executive of the world’s largest cryptocurrency exchange has warned.

Changpeng Zhao, CEO and co-founder of Binance, told a conference in Dubai today that embracing these tech advances allowed entrepreneurs to raise tens of millions of dollars in a matter of days.

He said that with decentralised finance (DeFi) “there’s many different ways for banks to adapt to it or adopt it. Some banks will, some banks won’t – [but] I do think that the banks that won’t will have a very hard time in the future, and even the ones that adopt DeFi or blockchain technologies late will be at a significant disadvantage.”

• Crypto crisis will weed out the Gulf’s weak players, say analysts

Zhao, a 44-year-old Chinese-Canadian software developer with an estimated net worth of around $17.5 billion dollars, according to Forbes, was speaking via a recorded message to the Dubai International Financial Centre’s Fintech Week, a two-day event about drivers of growth in financial services.

He added that banks should adopt new technologies “as early as possible” or risk being disrupted.

“We’ve already seen the progressive, innovation-driven banks adopting blockchain technology in a big way,” he said. 

“Many use blockchain technologies for ledgers now, and many of them even sell crypto to their customers through their services. [These] technologies are relatively mature and relatively stable now.

“Innovation means some disruptions, but the more you embrace new technologies the more benefit you will reap out of those technologies for your users.

“There will be disruptions for existing incumbents who refuse to change. Some of the use cases in DeFi and crypto today are not available in traditional finance.”

His comments follow reports that he has moved to Dubai, as Binance comes under scrutiny from financial regulators across the world.

Some have banned the platform from certain activities while others have warned consumers that the crypto exchange – the world’s largest by trading volume – is not licensed to operate in their jurisdictions.

In March Binance was granted a crypto-asset service provider licence from Dubai’s recently formed Virtual Asset Regulatory Authority, the company’s first licence from a GCC country.

The company will also anchor a blockchain technology hub in the Dubai World Trade Centre.

Global fundraising 

Zhao said DeFi, which uses cryptocurrency and blockchain technology to manage transactions, has opened doors for global fundraising that the traditional sector cannot match. 

“As entrepreneurs, we can raise money globally using our reputations, using a simple business plan, a simple website, a white paper – entrepreneurs can raise anywhere from $10 to $40 million in a matter of weeks, even days,” he said. 

“This is not something that exists in traditional financial industries.

“If you’re a new entrepreneur and you want to raise money, it’s going to take you a month to go to venture capitalists and it will take you a few years to raise amounts like $10, $20 or $30 million.

“So, this is a new tool that’s available to strong entrepreneurs, that you can raise money very easily from [potential users] all around the world.”

He added: “Every country that I speak to wants foreign direct investment. This is the most direct form of FDI.

“An entrepreneur that is raising money globally into a local economy … they can then hire people locally, rent offices locally, pay taxes locally. This is the best way for FDI, and this is something that traditional financial services cannot do.” 

Industry here to stay

While DeFi is defined differently by different people, Zhao said its definition as smart contract swaps with lending for liquidity is a “very large and sound business model”. 

“It’s a sustainable business model,” he added. 

“People who want to trade want to trade against large liquidities so that they get better prices.

“Most guys don’t mind paying a trading fee for that and that trading fee is used to pay for the interest rates for the lenders who provide that liquidity. It’s very transparent and it’s very logical, and it works.”

The Binance CEO described digital assets and blockchain as “fundamentally a way to transfer value”. 

“If you think about the internet as a way for us to transfer information, and how it has revolutionised how we live and how we do business – blockchain is going to do that even further” Zhao said. 

“Blockchain is going to change the way we think about investments, fundraising, transactions, large cross-border transactions that are not possible in traditional financial services.

“It’s going to change the way we do business fundamentally. It’s going to change the way we think about [and define] the fintech sector.

“So, who would not want to embrace this technology? Only guys staying in a cave [who] will miss out on all innovations.”

He added: “The blockchain is a proven technology [and] it works. That’s why we’re in this industry.

“Some cryptocurrencies may drop in price. Some projects will fail. But the industry will stay.

“It’s like saying, in 2000 the dotcom bubble – many companies failed, but the technology, dotcom, and the industry will stay. That’s very, very clear to us and that’s why I spend all my time in this industry.”

Zhao acknowledged, however, that the industry posed “quite a lot of risks” and warned investors to “manage their risks carefully”. 

“Do think about diversification. Don’t chase high returns. Just manage your risk properly and stay safe.”

Banks in the UAE are already seeing their profits squeezed because of the cost of digitalising their operations, but experts believe lenders need to invest more to keep up with global benchmarks.

The latest S&P Global UAE Purchasing Managers’ Index, released in May, found that costs were at their highest levels for more than three years in the UAE non-oil sector. 

Asad Ahmed, managing director and head of Middle East financial services at Alvarez & Marsal, told AGBI that many banks were ploughing their reserves into going digital.

Shankar Garg, managing director for the Middle East and Africa at Xebia, a US-headquartered IT consultancy that advises UAE banks on their digitisation strategies, said the investments required can vary depending on the scope of work involved.

“An onboarding app for a midsize bank in the UAE is not more than a quarter of a million dollars. Developing a fully fledged digital app could costs you $3 to $5 million, said Garg, who is based in Dubai. These are “ballpark figures”, he added.

Xebia has worked with more than 150 banking and financial service providers around the world, and Garg said the UAE was playing catch-up.

“We feel UAE banks typically are lagging behind when it comes to adopting the latest and greatest of offerings,” he said, pointing to blockchain as one area that needed development.

“HSBC and Wells Fargo [in the US] use blockchain technology for foreign exchange settlements, foreign exchange rates.

“We haven’t seen anyone doing it here. Mastercard and PayPal also use blockchain to allow payments on their listing.

“But most of the banks in the UAE don’t offer that on their cards. None of them offer blockchain on the cards,” he said. 

The UAE has a large pool of banks and is home to nearly 48 local and international lenders, serving a population of just under 10 million people.