Binance CEO says ‘shaken’ crypto market needs ‘a lot more’ scrutiny

Reuters/Willy Kurniawan

• Changpeng Zhao said the industry had to become more transparent
• The crypto boss made a speech at Abu Dhabi Finance Week
• Binance’s rival FTX filed for bankruptcy on November 11

Confidence in the crypto industry has been “shaken” and it needs to open up to “a lot more” oversight from regulators, the chief executive of the world’s largest cryptocurrency exchange has said.

Changpeng Zhao, the CEO and co-founder of Binance, added that the crypto sector should adopt some regulations from the traditional finance industry.

Zhao’s comments, during a speech to Abu Dhabi Finance Week on Wednesday, follow a turbulent few days for the industry and the collapse of crypto exchange FTX.

FTX, which had been one of the world’s largest exchanges, filed for bankruptcy on November 11 – the day after Binance pulled out of a plan to buy its struggling rival. Bahamas-based FTX has been accused of mishandling about $10 billion in customer funds.

Zhao told the Abu Dhabi Global Market event: “The industry really can copy from the traditional financial world and borrow the regulations – but there are some small differences, which are subtle but very important.

“Traditional banks run on fractional returns. Crypto exchanges should never do that. That’s something that we don’t want to borrow from traditional finance.”

In fractional reserve banking, only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done in order to free up capital for lending to expand the economy.

“It’s almost 100 percent of banks that run on fractional returns,” said the Binance boss, who is often known by his initials CZ. 

“So, when they talk about reserves, they look at the total investment value for the reserves and whether that covers the asset. You don’t look at the total investment on value. You look at 100 percent reserve for each asset. You don’t convert. That’s the wrong way to do it.” 

Crypto exchanges hold customer money one to one, which means if you deposit a coin with them, they keep the coin in reserve and do not use it on other investments.

FTX’s meltdown was partly triggered by the revelation that it had secretly loaned customer funds to a sister company called Alameda Research, resulting in the multi-billion-dollar hole in the books.

It was the latest shock for the cryptocurrency market, which has fallen by about two-thirds from its peak in November 2021 to $1.07 trillion.

“Confidence in the industry is shaken,” Zhao said. “Going forward regulators are going to scrutinise this industry a lot more.”

The Binance boss said he was working closely with regulators and auditors to create greater transparency in the industry.  

“I think we want to borrow quite a lot of the transparency, KYC [know your customer], AML [anti-money laundering]” regulations from traditional finance, he said.

“Regulations need to be adapted to this industry. Today, too many regulators have a traditional mindset. They need to have more of a crypto mindset. For the consumers, there’s a very strong education piece to it. We need to educate people on financial literacy. How to not chase super-high yields.

“I think communication and education both ways is very important.”

However, Zhao pointed out that regulation “doesn’t prevent scandal or fraud, it just reduces it”.

Pointing to the banking services available to crypto exchanges in the US, he said: “In the US there’s an ACH [automated clearing house] protocol… the level of integration is very, very good, whereas in other parts of the world we’re still trying to play catch-up on that front. But, at the same time, if you look at the US – one of the most well-regulated markets in the world – Madoff happened.”

A trade association for crypto

The Binance boss also told the Abu Dhabi audience that he is working to form a global association for industry players, including exchanges, wallets and blockchain developers.

“When we talk to regulators all around the world, the consistent feedback we get is that there is no common voice for the industry,” he said. 

“If we’ve got to talk to 200 regulators around the world, having an association and establishing best practices can be helpful on both sides. This is something we were planning even a few months back but now with everything that’s happened, we want to accelerate this. 

“I think the industry has got to come together, become tighter and become better. Short term there’s a lot of pain. Long term, it’s actually almost accelerated efforts to make this industry healthy.”

He also said he had already had “significant interest” in Binance’s recovery fund for the crypto industry, which he announced in a tweet on Monday and discussed at a gathering of business leaders in Bali, held alongside the G20 summit on Tuesday.

The fund will help crypto projects facing liquidity challenges following the collapse of FTX.

“I am already receiving messages from people who want to contribute as well as from people who need help,” Zhao said.

“Over the next couple of weeks or so, we’ll try to push that out. That’s not to say we can save everybody. If a company is mismanaging and things go wrong, then we won’t be able to help them anyway.”

Binance’s size – the exchange accounts for more than half the trading in the crypto market – also leads to close scrutiny from regulators. Some authorities have banned the platform from certain activities. Others have warned consumers that it is not licensed to operate in their jurisdictions.

Doing business in the GCC

It received its first provisional licence from a GCC country in March, when it was granted a crypto-asset service provider licence from Dubai’s Virtual Asset Regulatory Authority.

In September, the VARA issued Binance a minimal viable product licence. This allows the company to offer an approved range of virtual asset-related services to suitably qualified retail and institutional investors in Dubai.

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

Binance said in a statement on Wednesday that it had received a financial services permission from the Financial Services Regulatory Authority in the ADGM. This will enable Binance to provide custody services to professional clients, provided they meet the conditions outlined by the regulator.

AGBI reported last week that Binance is in talks with regulators in Saudi Arabia to expand into the kingdom.

Reflecting on doing business in the UAE, Zhao said: “Everything here moves faster. 

“They are very strict, but they embrace innovation. They understand that as much as this place produces oil, we cannot rely on oil forever and we’ve got to build new industry. And what’s the best new industry to grow? It’s the fintech industry. So, I think the leaders here are extremely aware and extremely smart about their strategy.”

The Emirates’ financial free zones are emerging as a global crypto hub. Companies including Kraken, Huobi and OKX, as well as Binance, are setting up in Dubai or Abu Dhabi.