Bitcoin exchanges at a crossroads

Forced by the situation, there is no way to avoid it. After years of "empty shouting" slogans of embracing regulation, cryptocurrency trading platforms including Binance will eventually have to make a difficult choice... Right now, the wildly growing cryptocurrency trading platforms are at a crossroads in their lives, but if you look closely, there seems to be only one way.

In 2017, the sudden "94" regulation changed the historical trajectory of the cryptocurrency industry.

At that time, domestic exchanges chose to go overseas one after another, which made Binance, which was born at the forefront of the storm, determined to develop internationally. In the next four years, it quickly rose to become the world's largest cryptocurrency exchange.

However, at the moment, Binance, which is taking an international route and wants to do more decentralized things, has lowered its head under the "encirclement and suppression" of global regulators and chosen to actively embrace compliance.

Binance's transformation is not only based on its own future development considerations, but also reflects, to a certain extent, the change in the general direction of the entire cryptocurrency industry.

Forced by the situation, there is no way to avoid it. Cryptocurrency trading platforms, including Binance, have to make a difficult decision after years of "empty slogans" of embracing regulation...

At present, the wildly growing cryptocurrency trading platform is at a crossroads in its life, but if you look closely, there seems to be only one way.

1. Four-year cycle

A sudden outbreak of the new coronavirus has torn 2020, a year that the world had high hopes for, into pieces.

As the epidemic rages and the Federal Reserve prints massive amounts of money, the cryptocurrency market has experienced an enviable performance, with Bitcoin once rising to an all-time high of around US$65,000.

Tesla, Paypal and other traditional institutions have joined the game, the cryptocurrency exchange Coinbase has landed on Nasdaq, NFT has broken through the circle, and El Salvador has designated Bitcoin as the national legal currency...

Cryptocurrency is connected to the world in a variety of ways.

However, the turning point came on May 18th.

That night, the People's Bank of China issued a document and the three major financial industry associations spoke out: providing virtual currency trading services is suspected of engaging in illegal financial activities.

As soon as the news came out, Bitcoin fell. According to CoinMarketCap data, Bitcoin fell from around US$45,600 to a low of around US$30,000, a drop of 34%.

On May 21, the Financial Committee of the State Council further emphasized the need to strengthen supervision of platform financial activities and crack down on Bitcoin mining and trading.

After that, six provinces including Yunnan, Xinjiang, Qinghai, Sichuan, Anhui and Inner Mongolia successively launched strong crackdowns on cryptocurrency mining.

On June 21, the People's Bank of China summoned some banks and payment institutions and required them not to provide account opening, registration, trading, clearing, settlement and other products or services for virtual currency-related activities.

On the day this news reached the market, the overall crypto asset market fell, with Bitcoin falling from a high of $36,100 to a low of $31,700, and ETH falling from a high of $2,277 to a low of $1,891.

Soon after the central bank issued its statement, several banks and payment institutions, including China Construction Bank, Postal Savings Bank of China, Agricultural Bank of China, Industrial Bank of China, and Alipay, issued official statements, prohibiting the use of their own bank or institution services for virtual currency transactions.

A regulatory storm is sweeping across everything from cryptocurrency mining to cryptocurrency trading.

With increasing regulatory pressure, Bitcoin prices have hit record lows, and everyone in the cryptocurrency industry is in danger.

For a period of time thereafter, exchanges that were well-known to investors, including Huobi and BiKi, stopped providing contracts, leverage and other services to new users.

In addition, many small exchanges such as XMEX, BMEX, etc. chose to close.

The closure and expansion to overseas markets make the situation of the exchanges remind people of the “94” regulation in 2017.

At that time, in response to the chaos of ICO, the central bank and seven other ministries and commissions carried out a cleanup and rectification of ICO and virtual currency exchanges.

After the policy was issued, Huobi, OKCoin and other large and small exchanges chose to "go overseas".

Four years have passed and supervision has become increasingly stringent.

2. The good days of wild growth are over

Not only in China, but in fact all over the world, the regulation of cryptocurrency exchanges is being upgraded.

Last October, BitMEX faced criminal and civil charges from U.S. regulators, and BitMEX CTO Samuel Reed was arrested by relevant agencies.

After that, under pressure, BitMEX founder Arthur Hayes flew to Hawaii to surrender on April 6 this year.

Also in April, Kraken Exchange, which was originally ambitious and seeking to go public, publicly stated by its CEO Jesse Powell that it would not rule out abandoning the US market in the event of excessive regulation after the tightening of regulations.

It is worth noting that Binance, which was founded in July 2017, embarked on an internationalization journey during the wave of exchanges going overseas triggered by the "94" regulation in the same year. Through "wandering" and wild growth in countries around the world, it has become the world's largest cryptocurrency exchange.

But times are different now.

Well-known media figure Lan Xi recently wrote that the Internet is losing its immunity, and for the cryptocurrency industry, the good days of unfettered growth without regulatory constraints are gone forever.

On June 26, the UK Financial Conduct Authority issued a warning to Binance, stating that Binance's activities in the UK were unauthorized. Just the day before, the Japanese Financial Services Agency also issued a similar warning to Binance.

Over the past period of time, Binance has been investigated by regulatory agencies in the United States, Britain, Japan, Thailand, Singapore and other countries.

For Binance, now is a critical moment where the situation is forced and there is no way to avoid it.

On July 27, Zhao Changpeng sent several tweets in a row, explaining that Binance will embrace regulation and strengthen compliance.

“We just held a one-hour press conference to share Binance’s proactive measures and efforts to gain more recognition from local regulators for compliance.”

Just the day before yesterday, Binance also imposed restrictions on the maximum leverage that users on the platform can use.

At the same time, Binance also announced the launch of the tax filing tool API, which will help Binance users track the activities of digital currencies to ensure that they comply with the tax filing requirements specified by local regulators.

In addition to limiting leverage multiples and launching tax reporting tools, Zhao Changpeng even directly stated that he and Binance are very willing to hire a CEO with a strong compliance background to demonstrate their determination to make compliance the organization's primary goal.

Even the previous rhetoric of “no plans for IPO, plans to do more decentralization work” has changed to “once these structures are in place, it will be easier to IPO.”

In June 2019, Binance encountered US regulation and was forced to stop providing cryptocurrency services to US users. In September of the same year, Binance.US appeared in the public eye. Its appearance was a helpless move by Binance to cope with regulation and retain a large number of US users.

Now that the regulatory issues in the United States have been properly handled, Binance needs to do more in the face of regulation from countries around the world.

Embracing regulation and developing in compliance with regulations are implied.

3. DEX may not be immune

In fact, when regulation first began to emerge, many people believed that a series of regulations would be beneficial to DeFi, especially DEX.

Some people even think that complete decentralization is the best way to deal with regulation.

"In fact, this view makes sense. Either you are fully compliant with centralization, like Coinbase and Binance.US are currently doing, or you are absolutely decentralized and have DAO governance." Chang An, a cryptocurrency practitioner, told Deepchain Finance, "In the future, those caught in the middle will not have an easy time."

However, it is worth noting that decentralization does not mean that regulation can be completely circumvented.

In June this year, the FATF (Financial Action Task Force on Money Laundering), including China, the United States and other major countries in the world, passed a new regulatory draft. In the newly added content, FATF clearly stated: Most NFTs should be considered VAs. Stablecoins should be considered VAs. Digital currencies issued by central banks should not be considered VAs. Decentralized exchanges should be considered VASPs. Decentralized platforms or DAPPs are considered VASPs (so far, relevant smart contract developers are considered VASPs because the code they write to perform operations falls under the VASP definition stipulated in 2018) VA hosting services are all VASPs. Any platform that facilitates P2P transactions between individuals is a VASP.

In FATF, there are two important concepts: VA (virtual assets), which are virtual assets that are digitally traded or transferred and can be used for payment or investment purposes; and VASP (virtual asset service provider).

As an organization that brings together countries to combat money laundering and terrorist financing, FATF's regulatory requirements are often a reflection of the common will of its member states.

Fortunately, the FATF has only initially approved the draft, and the final version will be released in October this year. But we have reason to believe that if the draft is finally passed, it means that NFT, decentralized exchanges, decentralized platforms and Dapps will be included in the FATF's regulatory sequence, and it also means that countries will also regulate decentralized cryptocurrency activities in the future.

Not long ago, Uniswap announced that it would restrict access to 129 tokens including tokenized stocks, mirror stocks, options and derivatives by cutting off interfaces, citing the "changing regulatory environment."

As soon as the news came out, many users on Twitter accused Uniswap of violating the spirit of decentralization and no longer being a decentralized platform.

Despite the criticism, Uniswap founder Hayden Adams tweeted that decentralization does not mean that Uniswap Labs allows users to do whatever they want on its website.

Although the scale and number of users are still small, the gradually growing DeFi is attracting more and more attention from both inside and outside the industry. But at the same time, its feature of no identity authentication also makes it full of fraud, money laundering and other behaviors.

Previously, Gary Gensler, Chairman of the U.S. SEC, said that DeFi may bring new challenges to U.S. investors and regulators. Therefore, Gary suggested that a dedicated market regulator should provide new anti-fraud and operational protection measures.

On July 12, Japan's Financial Services Agency also hinted that it would introduce relevant regulations for DeFi supervision.

For centralized exchanges, the current regulatory situation is severe, and for decentralized exchanges or DeFi, future regulation may not be immune.

4. Crossroads

It is undeniable that the tightening of regulations has, to a certain extent, brought short-term negative impacts to the overall development of the cryptocurrency industry. Although it is harsh, it is also an option that the entire industry cannot avoid.

On July 15, Zhao Changpeng stated in an article titled "A Letter from Our CEO: Reflecting on Progress and the Road Ahead" that clear regulations are crucial to continued growth, and believes that compliance is a journey that means crypto security and sustainable development for everyone.

After all, with more than a decade of development in the cryptocurrency industry, Bitcoin, which was worthless, has grown into a trillion-dollar economy, and the experiments of niche geeks have broken through the circle and have been noticed and accepted by large companies and financial institutions. We have also witnessed the listing of mining company Canaan Creative, the listing of exchange Coinbase, and more and more companies such as Tesla and Paypal participating in cryptocurrency.

The boundaries between the cryptocurrency world and the traditional world are being broken and they are blending and penetrating each other.

For the cryptocurrency industry, compliance is an inevitable choice if it wants to continue to develop healthily, and this is especially true for cryptocurrency exchanges.

“I congratulate Coinbase on its IPO plan and thank it for being a trailblazer in the crypto industry. Binance currently has no plans for an IPO and we plan to do more decentralization work.”

In March 2021, Coinbase landed on Nasdaq. Zhao Changpeng congratulated Coinbase and also expressed his attitude: Coinbase chose to comply with regulations and stand under the spotlight, while Binance seemed to still insist on its own personality.

However, four months later, Zhao Changpeng changed his previous rhetoric and stated loudly that he hoped to obtain licenses in various places and cooperate with local regulatory authorities.

Binance took four years to grow into the largest cryptocurrency exchange, but the current regulatory situation is pressing, and Zhao Changpeng has to make a choice.

Embracing compliance is the price of maturity and an unavoidable pain that the industry must face as it grows.

However, although compliance and regulation are inevitable trends, they are currently full of contradictions.

"In fact, exchanges, whether large or small, face a common problem when it comes to regulation," Changan told Deepchain Finance. "There is an irreconcilable contradiction between the emerging business model of exchanges and the existing legal framework in the short term. This contradiction stems from the fact that cryptocurrency has gone ahead of existing laws and regulations."

Currently, in the United States, where the financial industry is well developed, the laws and regulations cited for cryptocurrency regulation still come from the Securities Act of 1933, which was written in the last century.

It is conceivable that there will be a lot of inadaptability when using laws and regulations before 1933 to forcibly regulate cryptocurrencies that were born in 2008. This is the current contradiction.

In China, which advocates "pragmatism and avoiding empty talk", cryptocurrency transactions are regulated on a "one-size-fits-all" basis. In the wider world, there are still legal and institutional issues regarding the supervision and compliance of cryptocurrency exchanges.

However, at the moment, cryptocurrency exchanges are at a crossroads, but there seems to be only one way to go far.