Stuck in a regulatory quagmire? Binance and CZ are waiting for the chaos to end

Changpeng Zhao (CZ), the CEO of Binance, has been avoiding the spotlight lately. However, following the stunning rise of Sam Bankman-Fried (SBF, founder of FTX), all eyes are on the mysterious tycoon of the crypto world.

The news was sudden and decisive: Binance Global, the international exchange led by Changpeng Zhao, announced plans to acquire its biggest competitor, FTX, led by the young American SBF, in what looked like a chess move of world historical significance. SBF didn’t just abandon his once thriving business, he actually capitulated, selling off whatever was left of the clearly weakened FTX for scrap.

However, just as the deal was announced, it disappeared again. Binance canceled the deal the next day, citing “issues beyond our control or ability to help.” On November 11, FTX collapsed, wiping out an estimated $1 trillion in the value of all cryptocurrencies worldwide and forever tarnishing the reputation of the crypto industry.

SBF, the afro-haired Silicon Valley wunderkind and dutiful son of two Stanford law scholars, has become one of the most notorious alleged criminals in financial history. The books, TV shows, and movies that continue to emerge about the FTX disaster will no doubt keep SBF in the culture forever. But if you don’t follow crypto, you may have never heard of CZ, even though his business empire and personal wealth surpass SBF’s. The mysterious Zhao Changpeng has always been a true crypto tycoon, and that mystery is no accident.

But now, as the head of the largest and most important exchange in an industry under intense scrutiny, Zhao Changpeng is more exposed than ever: In late March, Binance was sued by the U.S. Commodity Futures Trading Commission (CFTC), alleging a massive scheme to intentionally circumvent U.S. law. Binance is already under investigation by the U.S. Department of Justice, the Internal Revenue Service, the Securities and Exchange Commission (SEC), and other regulators around the world. After the SBF debacle, Zhao Changpeng had been avoiding the spotlight, but now regulation has come to him.

Senator Van Hollen, who has been following Binance, said: “Obviously, Zhao Changpeng has been lurking in the shadows, and it’s hard to say where they (Binance) are operating and what they are doing. This is very important as we are increasingly concerned about the stability of funds deposited. We just experienced the collapse of SVB, which is a regulated bank with at least a certain review process, and in the case of Binance, we know nothing. It’s a black box. So I’m worried that it may collapse and a lot of people may lose a lot of money.”

So, who is Zhao Changpeng and what is he hiding?

“Just a regular guy doing a job that needed to be done, that’s all,” Zhao wrote in a 2018 blog post.

What we do know is that Zhao Changpeng was born in Qingkou Town, Jiangsu Province, China, in the late 1970s. He and his family reportedly left the rural area for the city of Hefei when Zhao Changpeng was 12, and then immigrated to Vancouver.

Zhao Changpeng had many part-time jobs during his teenage years, the most famous of which was a two-year stint at McDonald's, where he reportedly earned $4.50 an hour. The McDonald's job is an important part of Zhao Changpeng's legend - the fast food chain has become a bit of a meme in the cryptocurrency world (just like failing in stock trading and cryptocurrency trading will lead to working for Meituan), symbolizing the fate of failed traders facing McDonald's.

He then followed in his academic father’s footsteps, studying computer science at McGill University in Montreal. After college, he worked as a software developer in the trading department of Bloomberg. Zhao Changpeng’s direct supervisor at Bloomberg described him to me as “a smart software technologist with excellent people skills,” but added that he was “not the typical Wall Street asshole” and “not the typical tech sociopath.”

After leaving Bloomberg, Zhao Changpeng moved to Shanghai and co-founded a financial software company called Fusion Systems. In 2013, a poker game introduced him to Bitcoin. Zhao Changpeng immediately sold his residence in Shanghai, bought Bitcoin with one million US dollars, and resigned from Fusion to enter the cryptocurrency industry. For the next four years, he worked in different cryptocurrency startups until he co-founded Binance in China in 2017, dreaming of building an international digital asset center.

The key to the platform’s success is that it serves as an on-ramp to the entire industry: if you want to own some Bitcoin or use any crypto-based web application, you need to convert your non-cryptocurrency into crypto. For tens of millions of users around the world, Binance is the place to do that, easy enough for newbies and sophisticated enough for professionals. It was an almost immediate success, attracting 120,000 users in its first 45 days of operation. Today, that number has grown to 120 million, and Binance is the largest exchange in the cryptocurrency space. Thanks to his holding in the company, Zhao Changpeng is now one of the 60 richest people in the world.

He Yi founded Binance with Zhao Changpeng in 2017

Zhao co-founded Binance with a woman named He Yi, who held different roles at the exchange. A former Chinese TV announcer, He was named head of Binance’s venture arm last year, managing $7.5 billion worth of funds. Now the company’s chief client services officer, she is one of a handful of women in leadership roles in the cryptocurrency space. “Forget about your gender and the fact that you’re in a male or female world. Instead, focus on how to be a good business leader, whether you’re a man or a woman,” she once said in an interview. She and Zhao are also emotionally connected: the two have two young children together, though little is known about their relationship.

It soon became clear that Binance’s leadership played by its own rules. A few months after Binance was founded, China began threatening a crackdown on the entire cryptocurrency industry, and Zhao chose to move operations to friendly jurisdictions — first moving the company’s headquarters to Japan and then to Malta. When even Malta’s regulatory requirements seemed too restrictive for Binance, the company left again.

During SBF’s rise, he fraternized with politicians and journalists, made strategic donations to both parties, provided funding to major media outlets such as ProPublica, Semafor, and The Intercept, and secretly supported a cryptocurrency news outlet called The Block.

Changpeng Zhao has taken a more direct approach. When Forbes published a story in 2020 about Binance’s alleged attempts to evade U.S. regulation, Binance sued Forbes for defamation; a year later, Binance announced plans to buy a $200 million stake in the soon-to-be-IPO media giant. Forbes confirmed to me that the investment never materialized, as plans to go public ultimately fell apart, but the announcement itself demonstrated Zhao’s actual purchasing power, which he always makes up for with sheer purchasing power, both in terms of influence in the courts and favors in traditional media. (No wonder Changpeng Zhao is reluctant to grant interviews to traditional media like Rolling Stone — through Binance representatives, he has declined multiple interview requests.)

However, Zhao Changpeng is not silent. He is very active on his blog and Twitter, where he feels comfortable with the core group of users who are addicted to high-risk cryptocurrency trading and communicate with memes that can only be understood after following for many years. When an anonymous YouTuber made a meme video suggesting that Binance’s website was down, Zhao Changpeng cited the meme in the official company policy, which shows that he is good at memes (which also means that he is good at marketing).

Zhao’s familiarity with cryptocurrency culture has given him a kind of credibility within the industry, though he refuses to reveal details about his business structure. Because Binance operates out of the United States, it has so far been exempt from the U.S. regulatory regime and has not been required to make rigorous disclosures about how it operates. Even though Coinbase claims to have “no headquarters,” it is still a public company registered in Delaware and is therefore legally responsible to its shareholders and customers. Binance, while having a U.S. presence, does not need to abide by the same set of regulations. While you can find Binance offices in places like Paris, Dubai, and Abu Dhabi, as of 2023, there is still no clear answer to the question of where Binance is actually headquartered. “[Crypto] has different rules in different places, so we’re not trying to bend the rules or even get around them, we’re just trying to find more favorable places,” Zhao told Fortune. (A Binance spokesperson told me, “We’re in the process of restructuring our company to provide regulators with more clarity about our organization.”)

Changpeng Zhao has no confirmed place of residence, though he said in a rare Crypto Wealth interview earlier this year that he splits his time between Paris and Dubai.

Rohan Gray, a law professor at William Hill University and a frequent commentator on cryptocurrencies, said: "Changpeng Zhao's greatest skill is that he is not committed to anywhere. This is because CZ needs the skills needed to be risk-averse, like a crypto prodigal son, who can play different roles in different places."

The implicit bet is that if customers can’t determine Binance’s actual corporate location, perhaps regulators can’t either. Although in a statement announcing charges against Binance in March, U.S. Commodity Futures Trading Commission Chairman Rothstein Benham specifically stated that “claims of no exact address will not prevent the CFTC from protecting U.S. investors.”

But now, the crypto prodigal has become a focus of the US government. In March, Maryland Senator Chris Van Hollen (D), Massachusetts Senator Elizabeth Warren (D), and Kansas Senator Roger Marshall (R) co-signed a letter expressing concern about "Binance's role in evading regulation, moving assets for criminals and sanctions evaders, and hiding basic financial information." Although the company quickly said the letter was based on "incorrect or incomplete" reports and "misunderstandings" about the company, it marked the most explicit attention lawmakers have paid to Binance since the SBF era.

With Changpeng Zhao and his businesses still dealing with the aftermath of that aborted 24-hour FTX trading, the crypto world has been thrown into disarray, losing much of the momentum that had supported it in 2021 and early 2022, with various asset prices falling. Businesses are abandoning crypto partnerships (remember Instagram’s NFTs?), and U.S. regulators have launched what some believe to be a targeted campaign to contain the damage done by FTX and the infamous SBF.

The blurred lines between Binance Global and Binance US are part of what has caused concern among regulators. For Binance’s first two years, all customers were directed to the same website, but in 2019, when Binance decided to more thoroughly vet U.S. customers, it established an entirely separate entity and banned U.S. traders from using the original Binance platform. The problem is that anyone can still theoretically access the Binance Global site (which has lower fees and more lax user identification) from the U.S., thanks to a relatively simple technical bypass known as a VPN.

Christie Goldsmith Romero, a commissioner at the U.S. Commodity Futures Trading Commission (CFTC), told me that she sees this pattern of international companies circumventing U.S. regulation, intentionally or unintentionally, developing across the industry, though she would not comment specifically on the ongoing case against Binance. “I see the same risks as crypto in 2008, plus some new ones. If you want the benefits of access to the U.S. market, then you have to go through the necessary steps to gain that access, and that requires regulation.” Zhao has consistently said that Binance is making every effort to comply with U.S. law. Regarding blocking U.S. VPN users from accessing Binance’s global trading service, Zhao wrote in a March blog post that he “doesn’t know of any other company that uses a more comprehensive or effective system than Binance.”

Not everyone agrees on why Binance seems to be the subject of such intense scrutiny from the U.S. government right now. For Hester Peirce, a Trump-appointed SEC commissioner and longtime crypto defender, regulatory ambiguity is actually more of a government responsibility than the private crypto sector. “We’re in a situation right now of our own making where we don’t have a registration path for entities that want to trade crypto assets,” she told me. “If we did, then a lot of questions about where different operations are headquartered would probably have to be answered.”

But for others, including lawmakers like Senators Warren and Van Hollen, Binance’s actions are a real cause for concern — actions that show a “blatant attempt to evade global financial regulators.”

At the beginning of this year, Zhao Changpeng tweeted: "Hope to keep 2023 simple, spend more time on fewer things, so that you know what to do and what not to do. 2023 will focus on four things: 1) Education; 2) Compliance; 3) Products and services; 4) Ignore FUD, fake news and attacks, etc. In addition, Zhao Changpeng said that there is no product without security in the encryption industry, and never aim for money.

Option 4 - "Ignore fear, fake news, attacks, etc." - When his business and personal life are criticized and questioned, he will tell everyone not to use FUD (which means panic, doubt, uncertainty), which means telling everyone: "Don't pay attention to anything they say."

May 4 be with you,” he wrote on Star Wars Day. “Ignore the FUD and keep building!” He tweeted this in December, during a period when blockchain regulators were raising alarms about traders suddenly withdrawing billions of dollars from platforms without explanation. (He also seemed to refer to Bloomberg’s report on the missing $1 billion as “fear, uncertainty and doubt.”) When a similar situation occurred again a few months later in response to the CFTC lawsuit, Zhao tweeted about “traditional media writing false narratives.”

Yet, as Zhao dodged and evaded questions, the industry held its breath. Not only did Zhao have a liability to Binance, the crypto industry could not afford the reputational blow that SBF took. “In a way, FTX’s bankruptcy so spectacularly helped to eliminate some of the worst corruption issues and took a hit that the rest of the ecosystem was unwilling to take and tried to avoid,” speculated Rohan Gray. “So Zhao bought a little more time on that front, but I see no reason to think the fundamental health of their business model is any better.”

Binance’s market share remains huge—two-thirds of all cryptocurrency trading occurs on its site—but for Gray and other commentators, the regulatory grace period may be coming to an end. In the face of mounting threats, CZ has hired white-collar defense attorneys Latham & Watkins to represent him personally and has added hundreds of employees to Binance’s compliance department. The company’s head of financial crimes compliance recently told the New York Times: “Binance considers itself a tech company, which may help explain its practices. They broke some of the rules, alluding to the tech world’s principle of “move fast and break all the rules.” All exchanges do this.