Crypto Craves a Game-Changing App: Binance Takes a Backseat

Few individuals will ever face the following dilemma: would you prefer to reside in the United Arab Emirates, where there is no extradition treaty with the US, with a staggering $23 billion, or would you be willing to relinquish a portion of your wealth and potentially endure a prison sentence of 18 months to resolve all legal matters with the US Department of Justice and Securities and Exchange Commission?

Binance Holdings Ltd CEO Changpeng Zhao seems to have opted for the latter. We don’t know all the details of the deal — most importantly, how long Zhao will have to spend in prison — but it appears to pave the way for Binance to continue as the world’s largest crypto exchange and for Zhao to continue. his top 100 position in the Bloomberg Billionaires Index.

I see a big risk that the trade itself and the enhanced checks it requires will spoil Binance among many of its customers, especially outside the US. People who want US-compatible crypto exchanges have found alternatives such as Coinbase Global Inc.

A bigger issue is the relationship between traditional and crypto financial systems. Almost all crypto news focuses on the frontier where people exchange fiat for cryptocurrencies, or trade cryptocurrencies to earn fiat currency profits, or raise fiat cash for crypto projects, or use crypto to buy conventional goods and services. This is undoubtedly due to tension and conflict and crimes and punishments and fortunes won and lost.

But that’s a skewed perspective because it misses the much larger story of the relatively calm and steady development of crypto-protocols that don’t require interaction with the traditional financial or legal system. The hot areas are Metaverse, Web 3.0, Layer 2, and Layer 3 projects, and they’re not counting DeFi out despite the setbacks of 2022. While all of these things have technical definitions, they are loosely thrown around as buzzwords that are more useful for marketing and hype than for categorizing and tracking actual projects. But there has been real progress on all of these issues and more. (Disclaimer: I am an active crypto investor and have VC and advisory relationships with crypto companies.)

Binance grew up on the border, navigating murky and inconsistent regulations in multiple jurisdictions, satisfying customers and angering regulators. It now seems to have decided to re-establish itself in civilized and known territory on the legal side of the border. US regulators seem ready to accept it as a legal immigrant. Along with other settlements this year and expected developments, such as the SEC approval of a Bitcoin ETF, this suggests a negotiated truce between regulators and people who want to move fiat currencies in and out of crypto. Financial watchdogs appear ready to allow transfers if effective safeguards against fraud, money laundering, tax evasion and sanctions violations are put in place.

Many old-time crypto purists – and I lean this way – are skeptical about this. In our opinion, the future of crypto is separated from traditional finance, that the protocols that revolutionize society are not financed with fiat cash, and their value is not easily converted to fiat. Many crypto trainees want to reduce the coercive power of government and big finance, not sleep with them and certainly not get into bed on their terms.

But there are many others in the crypto industry who welcome border peace with clear rules. One reason is that they believe this will reduce fraud and enable crimes from ransomware to terrorism. The second is that it lowers the cost of fiat capital to back crypto projects and increases the value of the fiat currency that can be obtained from successful projects. But perhaps the biggest reason is that honest people can follow safe harbor regulations to work in crypto without fear of prosecution.

On the regulatory side, there is a parallel division between people who want to bring crypto into the current legal system and those who want to isolate crypto from fiat money as much as possible. Zhao’s settlement with US regulators appears to be a win for the former group. If the deal satisfies both parties, we can expect gunmen from other crypto frontiers to come in from the cold.

The future of crypto is determined by technology, not by billionaires and lawyers negotiating foreclosures. If crypto invents a “killer app” that convinces hundreds of millions of people to learn real crypto – not just hold cryptocurrencies in portfolios or speculate on NFTs – it will take off on its own without having to ask permission from regulators. or traditional investors for capital. Without a killer app, crypto remains a useful technical tool for niche projects and true believers. It doesn’t have enough financial value to interest lawyers or most investors.