Wall Street Journal: Binance’s crumbling crypto empire

After the FTX debacle, the crypto world’s largest exchange seemed to be Binance . But less than a year later, Binance is in trouble.

Under the threat of enforcement action by U.S. agencies, Binance's crypto empire is "crumbling." More than a dozen executives have left in the past three months, and the exchange has laid off at least 1,500 employees this year to cut costs and prepare for a decline in business. Although Binance still occupies an important position in the crypto space, its dominance is waning.

Binance currently handles about 50% of crypto trading volume, down from about 70% at the beginning of the year, according to data provider Kaiko .

The difficulties faced by Binance will have a huge impact on the cryptocurrency industry because the exchange is so large. Industry participants and observers say that if Binance goes out of business, other exchanges will fill the gap. But in the short term, market liquidity may evaporate, causing token prices to fall sharply.

One institutional trader told the Wall Street Journal that his firm had run risk drills to quickly withdraw assets from Binance in the event of a crash.

Binance co-founder and chief marketing officer He Yi vowed to overcome these difficulties in a letter to Binance employees last month.

She wrote: "Every battle is a life or death situation. The only one who can defeat us is ourselves. We have won countless times and we need to win this time too."

Binance is a frequent investor in third-party crypto projects and others. Binance invested in X (formerly Twitter), and Binance co-founder Changpeng Zhao is the most well-known figure in the crypto space.

“If Binance disappeared, you can’t quantify what would happen to the industry because it has been responsible for facilitating a lot of innovation and growth,” said Anthony Georgiades, general partner at Innovating Capital, which focuses on growth companies.

The U.S. Department of Justice has been conducting a year-long investigation that could lead to criminal charges and billions of dollars in fines for Binance and Changpeng Zhao ( CZ ), according to people familiar with the matter.

Binance also faces a lawsuit from the U.S. Securities and Exchange Commission ( SEC ) alleging that it and CZ operated illegally and misused customer funds in the U.S. The company has acknowledged past mistakes but said customer funds are safe and that it is committed to compliance.

"We work tirelessly not only to learn from the past but also to continue investing in the teams and systems that ensure user protection," a spokesperson said.

Binance was launched in China in 2017, although it claims to be headquartered nowhere and has employees scattered around the world. Its global website is accessible to traders from almost all over the world, but the number of users is declining as many countries ban its presence. In Europe, more and more countries are closing their doors to crypto exchanges.

Binance's U.S. exchange, Binance.US, has also seen a sharp drop in activity, with its CEO, legal chief, and risk chief recently leaving.

At a Binance.US virtual conference days before his departure earlier this month, Binance.US CEO Brian Shroder said the exchange’s revenue was down 70% so far this year and executives expressed frustration, according to a presentation reviewed by The Wall Street Journal.

CZ is a majority shareholder in Binance.US and Binance Global Exchange. Shroder told employees that CZ needs to address “regulatory issues, place his Binance.US shares in a blind trust, or sell his shares” in order for the U.S. platform to maintain its growth momentum. He said these steps would allow the company to smooth banking relationships and obtain licenses.

A Binance.US spokesperson declined to comment.

According to people familiar with the matter, Binance and the Department of Justice have been in discussion for several months, and Binance has been discussing whether CZ should step down from leadership.

The Wall Street Journal previously reported that CZ's insistence on staying in charge of the company has frustrated some executives who believe his departure will improve the company's chances of survival.

The company's turmoil also hit employee morale.

According to information seen by The Wall Street Journal, employees confronted and criticized CZ during summer meetings after the layoffs.

An anonymous employee asked CZ in the all-hands meeting chat: "Some people who were fired received 0 day notice and/or found out they were fired because they could no longer log into the system. How does this show respect for employees? Is two weeks of severance respectful enough ? " Nine other employees also voted in favor. This question was not answered.

Another stumbling block for Binance came in late August when the Wall Street Journal published an article about Binance customers using sanctioned Russian banks. The U.S. Department of Justice has also been investigating whether Binance may have violated U.S. sanctions against Russia, according to the WSJ.

After the Journal report, the Justice Department questioned Binance about its use of the bank, and Binance Chief Compliance Officer Noah Perlman met with Justice Department officials to discuss their concerns, said a person with direct knowledge of the matter.

This person said that pressure from the Justice Department was part of the reason why CZ decided to begin scaling back Binance’s operations in Russia, once one of Binance’s most important markets. In the following two weeks, Binance banned customers from using sanctioned banks and forced the executives who managed its Russian operations to leave, and it said it was considering a full “withdrawal” from Russia.

CZ remained positive in public, writing on X on the day the Russian executives left: “We are a community, keep building!”

But CZ has privately been hiring new lawyers to handle the Justice Department’s case, and he has been staying at his home in the United Arab Emirates, which does not have an extradition treaty with the United States, according to people familiar with the matter.