Binance CEO CZ Shares Insight on Crypto Market Turmoil

Yi He, a senior executive at Binance, has successfully avoided global attention for the past six years and continues to do so, despite the increasing efforts of governments worldwide to regulate cryptocurrencies.

As the founder of a cryptocurrency empire, he is one of the most powerful players in the $1.2 trillion industry. He also has a lot to lose as the regulatory onslaught deepens and creates an existential crisis for crypto’s largest exchange.

After successfully marketing Binance in its early days on various media platforms, Yi He – a former Chinese TV host – proved instrumental in its meteoric rise. Now he faces the most dangerous moment in the company’s history. He is a dominant force in everything from token trading and venture capital to digital art. Binance is accused in civil complaints of illegal activity, trading violations and non-compliance by U.S. financial regulators and is under scrutiny elsewhere from France to Australia.

With the company’s dominant market share now under pressure, top executives have billions at stake. CEO and co-founder Changpeng “CZ” Zhao is worth about $29 billion, according to the Bloomberg Billionaires Index, and Yi He also enjoys vast wealth as an early shareholder. (The amount of his contribution is not disclosed.) The couple’s fortunes are divided on many fronts: they have been partners in business and life, and they have children together.

Yi He aims to deliver two key messages in a series of interviews with Bloomberg, including one in Dubai just ahead of a new trial by the US Securities and Exchange Commission. First, Binance and the regulators may not be that far apart. Second, the company is far from the villain portrayed by critics.

“If they really took the time to understand our industry, they would see that if Binance is not compliant, then virtually no other global exchange or offshore company is,” he said last month at Address Fountain Views, a five-star hotel. In the center of Dubai.

While Binance famously claims to have no official headquarters — which theoretically makes it harder to sue and regulate — Yi He and Zhao have put down roots in the company’s adopted home in the Gulf city-state. He compares his relationship with the CEO of Binance to having a college roommate. Still, at first glance, the pairing and the governance issues it raises recalls Sam Bankman-Fried and Caroline Ellison’s former romance in the now doomed FTX. Yi He summarily dismisses the comparison. (More on that later.)

In response to the latest US accusations that mark the end of the free crypto era, Yi He struck a more conciliatory tone in a follow-up WhatsApp message.

“We respect the attitude of the regulators, support or oppose the development of crypto,” he said. “I understand that the overall purpose of regulation is good to protect investors.”

To be clear, Binance is hardly the only company feeling the heat. The SEC has also accused major platforms such as Coinbase Global Inc. and Kraken of violating securities rules. However, the allegations leveled against Binance are significant in scope and seriousness. US authorities say, among other things, that the company lacks adequate money laundering controls, has increased trading volumes and mishandled customer assets. The matter is also being investigated by the Department of Justice, Bloomberg News has reported, while Binance’s US platform has been disconnected from the banking system. Similar banking-related problems hit the company elsewhere. Investigations by US authorities do not always lead to charges against an individual or company. The Department of Justice has not announced any cases against Binance, Zhao or other executives. U.S. regulators have not alleged that Yi He violated the rules.

A Binance spokesperson referred Bloomberg News to the company’s response to the SEC complaint earlier this month. Binance has called the regulatory action “disappointing” and vowed to defend itself, saying customer funds were never at risk on its platforms.

Behind the scenes, Yi He wields enormous influence at the exchange, which accounts for about half of all crypto trading volume and has a global workforce of about 8,000. Among other duties, he oversees the multibillion-dollar venture capital fund Binance Labs, which has backed more than 200 projects, including the decentralized file-sharing platform BitTorrent and blockchain gaming leader Axie Infinity. He is credited with promoting the growth of the BNB chain launched by Binance. The SEC has recently called its initial token an unregistered security. He also helps oversee the institutional client business as well as acquisitions such as CoinMarketCap.

Yi He arrived for the interview in Dubai only accompanied by a security guard. According to him, his limited English is a big reason why he never became the face of Binance. It’s a vulnerability he acknowledged in interviews with Bloomberg, including a more than three-hour meeting in Mandarin. However, the company’s managers have tried to downplay the connections to China, where the ban on crypto trading is in effect.

“When I interact with Western journalists or give public speeches, people might see our company as a Chinese company, right?” he said.

Yi He’s involvement in Binance’s earlier days can be found in evidence collected by the SEC as part of its lawsuit against the exchange. In a translated transcript of the 2019 audio file released on June 6, the speaker, identified as Zhao, named him as part of the decision-making process on how Binance could work around restrictions to bring American users to its larger Binance.com site.

To critics, Binance still operates like its youthful days, with its governance and ownership structure shrouded in mystery, and its promises to millions of users essentially boil down to: You can trust us. Still, according to Yi Hei, Binance offers more transparency than its detractors claim and has cooperated with US regulators, a claim denied by Washington officials.

“The regulatory trend is inevitable worldwide,” he said. “It’s not something you can’t solve by yelling ‘fight’ a couple of times.”

Yi He did not respond to the SEC’s allegations that CZ-linked market makers traded on Binance, that those firms used so-called wash trading to increase volumes, and that clients’ funds were mixed and moved freely in and out of different accounts. . At the same time, he emphasizes that, contrary to the accusations leveled against FTX, Binance has not touched users’ funds for its own purposes or used its original BNB token as collateral for loans.

Speculation is mounting that a post-Zhao era is upon us. Although he has expressed no desire to relinquish power anytime soon, it now seems a distinct possibility. When asked about Binance without him and Zhao, Yi He said they each have vice presidents in training, but declined to name them. “I think we’ll be fine. We’re not single points of failure.”

Unlike Wall Street, where transactions are executed by a chain of middle men, centralized crypto exchanges do everything from matching orders to holding client funds — exposing investors to potential conflicts of interest and counterparty risk. As crypto business scrutiny grows, Binance has sought to revamp its image by strengthening its compliance staff. But there are signs that its loyal fan base is beginning to fracture in the wake of the US accusations. Its share of trading in both the derivatives and spot markets has declined from peaks earlier this year, according to industry expert CCData.

“Binance is on the back foot,” said Columbia Business School assistant professor Austin Campbell, who previously worked at Paxos, which launched the Binance-branded stablecoin BUSD. “In the West, regulators are coming into this business model – either you have a completely separate custodian or there are much stricter rules around custody, handling user funds and pooling responsibilities.”

When Yi He first broke into the crypto world on the OKCoin exchange in 2014, China was at its center. Already a well-known travel show host, he appeared as a judge on a reality TV show to promote the platform. That same year, Yi He recalls, he hired Zhao as CTO because of his background in systems engineering, including a stint at Bloomberg LP, the parent company of Bloomberg News.

By the time Zhao asked him to be a consultant for Binance in 2017, Yi He had left the virtual currency industry to become an executive at a streaming company. He helped rewrite parts of Binance’s $15 million initial coin offering white paper that summer and later agreed to join Binance. Unlike most founders, he wasn’t technically part of Binance when it started. But those familiar with its early history generally agree that his reputation in China’s crypto community was crucial to its immediate success at a time when the exchange was bullish compared to the likes of OKCoin and Huobi.

Fast-forward six years: the crypto industry is being punished for being a hotbed of alleged illegal activity — and Binance’s market share frenzy has put a target on its back. With its trading campaigns, it was sort of Robinhood before Robinhood. For example, until mid-2021, users will be able to withdraw up to two Bitcoins without providing proof of identity. It has also listed some tokens that have turned out to be duds, including the TerraUSD algorithmic stablecoin that imploded last year. To crypto critics, Binance has been making profits from retail players with coins they barely understand.

Then there’s the elephant in the room: Yi He and Zhao have children together—an open secret among the better-informed members of the crypto community. How would he describe their relationship? He objects.

“What do they call it in the entertainment industry? CP?” he said, referring to Chinese Internet slang for fans hoping two people, whether on screen or in real life, are in a romantic relationship. (It’s known in the West as “broadcasting”.)

He also called Zhao his comrade-in-arms, a college friend of sorts then. Their contact only started after he joined Binance, he said. Yi He drew a parallel with Amazon.com Inc., when Jeff Bezos’ ex-wife MacKenzie Scott served as an assistant in the company’s early years. He admits it’s not a “perfect” example, and for other reasons the analogy is questionable: Scott wasn’t deeply enmeshed in Amazon’s billion-dollar companies like Yi He at Binance.

As for the similarities with Bankman-Fried and Ellison, Yi He emphasizes the differences.

“There’s a significant difference here: Caroline was an employee, while I’m a partner,” he said. – The relationship between the founders requires much more than what a dating relationship requires. In a co-founder relationship, it’s about camaraderie, in a dating relationship, it’s about chemistry. The former is based on shared beliefs and transcends gender, the latter is based on physical attraction and selfish desires. “

Yi He also pointed out that his position as a crypto pioneer precedes that of CZ. “Even excluding personal relationships, I was the one who brought CZ into the cryptocurrency exchange business,” he said. CZ “is bringing me to Binance based on my achievements that I had already achieved,” he added.

But for regulators worried about blurred lines and concentration of power, the situation raises red flags. He heads both the Binance department that invests in crypto projects and the one that decides what gets listed. According to Binance CEO Vishal Sacheendran, the Binance token listing team he oversees is so secretive that few insiders even know its members. According to the company, it is part of an effort to reduce potential conflicts of interest. Yet such a business model sounds especially opaque after FTX’s collapse, which was partly due to the intertwined relationships between its exchange operations and its trading arm, Alameda Research.

To be clear, large crypto exchanges typically combine several financial services that are never under the same roof in traditional finance. But his diverse portfolio and transparency about who runs what suggests that Binance has a tight circle of control at its core. He downplays conflicts of interest. “Many of the projects we invest in are not on the list. There are different leaders and different teams, and those two teams are completely separate.

Nevertheless, US regulators seem determined to take the crypto giant to task, declaring much of the industry illegal. There may be something to give. It’s not clear what concrete concessions he and Zhao are willing to offer right now, though he acknowledges that the era of anything-goes crypto is over.

“If you can’t beat them, you have to surrender,” he said.