1 month ago
The success of Binance is well known. What is easy to forget is how many times the company faced – and mastered – challenges that could easily have spelled the end. We look at how CZ made Binance.
Today Binance is the world’s largest cryptocurrency exchange (by volume), with a user base of around 15 million (as of September 2019). A great deal of credit for Binance’s success goes to its founder and CEO, Changpeng Zhao, known as CZ by his 465k Twitter followers. The exchange’s rise and success story is nothing short of a Hollywood movie.
Zhao, before becoming one of “The Third Richest People in Cryptocurrency” in 2018 according to Forbes, wasn’t born into a life of luxury. He came to the world in Jiangsu province, China. In the late 1980s, he moved with his family to Vancouver, Canada. The reason for the move was that CZ’s father, a professor, was temporarily exiled from China after being labeled a “pro-bourgeoisie intellectual.” As a teenager, CZ supported the family by working shifts at McDonald’s and gas stations. Zhao studied computer science at McGill University in Montreal, Canada. His experience in the trading industry began when he started working for the Tokyo Stock Exchange and Bloomberg Tradebook, where he was a developer of futures trading software. In 2005, he moved to Shanghai, where he founded Fusion Systems, which was known for high-frequency trading systems for brokers.
Discovery of cryptocurrency
His transition to cryptos came as Bitcoin and other cryptocurrencies began gaining traction in the early 2010s. Beginning in 2013, he worked for various cryptocurrency projects including Blockchain.info, where he ended up becoming the Head of Business Development. Zhao left Blockchain in June 2014 and joined OKCoin as its new CTO, where he met Binance Co-Founder and CMO, Yi He. Zhao left OKCoin in February 2015 citing cultural differences. For two years, no one heard about Zhao in any news or social media. He returned with a company in July 2017, following a US$ 15m fundraising round during an initial coin offering (ICO). The name of this company came from a combination of “binary” and “finance,” to highlight the split between the two types of money in the world: crypto and fiat. And here, Binance was born.
In September 2017, the Chinese government decided to shut down all cryptocurrency exchanges. Beijing changed regulatory policies and demanded that all exchanges conducting ICOs return funds to investors. Zhao went a step beyond by refunding all Binance users their original assets at the original investment rate for the ICOs conducted on the platform. This act won Binance an extremely loyal following within the crypto community. Binance had more than 200 cloud-based servers hosted by the Chinese conglomerate Alibaba.
The decision cost the company about US$ 6m, but the trust dividend proved to be pure gold. Binance emerged as the most trusted platform within the Chinese crypto community, enabling it to grow exponentially over the months after the exchange moved operations out of China.
Binance predicted the move by the Chinese government based on rumors. On the night of August 29, the team shifted its entire database to Amazon Web Services (AWS), a cloud service provider. The company moved its headquarters to Tokyo, Japan, a country that had legalized crypto earlier that year. Zhao and the team decided to direct the exchange to handle crypto-to-crypto trading pairs only, circumventing the regulatory obstacles surrounding fiat pairing. The year 2017 was witnessing a boom in the ICO market, as thousands of customers as well as projects looked for trustworthy exchanges. Binance understood the market demand and constructed its image as an exchange that lists only valuable projects with a viable vision, with an experienced team and sufficient liquidity to help the exchange in return. Thousands of projects applied to list their tokens on the platform and barely 3% made it. Traders trusted Binance for its simplicity and transparency. Binance’s popularity and its customer base were on a breathtaking growth trajectory.
The project consistently displayed transparency with its actions and announcements. However, the world’s new largest cryptocurrency exchange also attracted malicious attackers. In March 2018, hackers attempted a large-scale attack that lasted only two minutes. Binance had security protocols in place to foil hackers. The risk management system disabled the attempted withdrawals and prevented the hackers from accessing any funds. Binance wasted no time in announcing an unprecedented hacker bounty program. The company offered a US$ 250,000 reward to the first person to provide information that led to the legal arrest of the hackers.
The hack and Binance’s response caught the attention of the entire world, including Japan’s top financial regulator, Financial Services Agency. FSA demanded that Binance get an exchange license and implement rigorous restrictions. This time, the vagabond Binance decided to finally settle – on the liberally regulated island of Malta. Malta’s Prime Minister himself, Joseph Muscat, welcomed Binance to the island.
Many people in the crypto space still vividly remember watching CZ, in Japan giving an interview on Bloomberg TV, when the Chinese crackdown took place. What happened next was the move from China to Japan, and then to more crypto-friendly jurisdictions – Singapore, Gibraltar and then Malta. Binance smartly utilized regulatory arbitrage.
In a recent podcast with Laura Shin, CZ also emphasized his approach to running a crypto business. “We want to work with people – regulators – that are willing to work with us,” He said. “We avoid countries that have too complex regulatory frameworks.” This was in reference to the US and China, particularly. “Larger countries are harder to navigate in terms of regulations. They are more complex. Our approach is to let someone else figure out first. We are not the most fit to take the initiatives in those jurisdictions. We are taking the leads in other jurisdictions, smaller ones such as Malta, Bermuda, other parts of Africa and Asia”
Binance consistently chooses countries that are small and could benefit from its presence. It also chooses regulators that are open-minded and supportive of the innovation.
“We are not focusing on the US,” CZ says. “We are focusing on everything else but the US. Smaller countries are easier to work with in term of regulations. We can meet with the very senior people and decision-makers. It is a very cooperative working relationship.”
Smart marketing and community building
Binance is one of the few companies that utilize their communities to promote their brands and products so effectively. The company has an extra arm of free promoters and brand ambassadors – dubbed Binance Angels – who support Binance without direct payment. Binance Angels do, however, get invited to exclusive events hosted by Binance and become part of the crypto “inner circle.” At the Binance Blockchain Week 2019 in Singapore, the enthusiasm of the Binance Angels about belonging to the group was omnipresent.
Binance knows its markets very well, and is active in regions lesser known to the mainstream crypto community such as Vietnam or Turkey. The exchange works very closely with the local players. The localization also applies to the products, with support of many local languages traders use. A larger part of localization involves local community and marketing teams, who work closely with stakeholders in a given region. While many big blockchain companies aim for China as the market to gain a foothold, Binance – which originated in China – is one step ahead. It already dominates many markets that are relatively easy to access and build brands.
At the same time, Binance is obviously not afraid of the big markets: it has now launched Binance US, specifically serving US customers.
Continuously improving the product
The product is the heart of every technology business, as Binance well knows. From user interface to speed, Binance clearly delivers another level of service compared to many exchanges. Verification process and customer service are smooth and seamless. Not surprisingly, Catherine Coley, who heads Binance US, spends a large share of her working hours interacting with the community to get the latest feedback on products.
The efforts have clearly paid off, with Binance becoming one of the most profitable companies in the blockchain space in 2019. It has over 400 employees worldwide and generates US$ 1bn in revenue – as much as the 200-year-old German financial institution Deutsche Bank.
But this appears to be not enough for Binance, and it is continuously branching out with new products. These range from a new set of staking products to derivatives and Binance Dex – the decentralized exchange of Binance, with Binance’s own blockchain to support the exchange.
On the centralized exchange front, Binance continuously adds local fiat to facilitate fair trading for Thai baht, Vietnam dong, yuan etc. CZ has a plan to add the euro and 180 or more other fiat currencies. Binance’s ambition knows no boundaries.
Binance IEOs are also the ones that top the markets in terms of return on investment.
From staking and derivatives to IEOs, Binance seems to always take the lead in the market with whatever initiatives it takes. CZ is a man who can smell where the money is coming from.
Hackers strike again – successfully
On May 7, 2019, Binance was hacked again, and this time the hackers succeeded in stealing 7,000 bitcoins (at the time, US$ 40m). In a fairly transparent blog post, Binance detailed the circumstances surrounding the attack. It mentioned that further withdrawals were immediately disabled after the hackers withdrew the funds, “The transaction is structured in a way that passed our existing security checks.” Zhao announced that Binance would close for an entire week. Anyone on the exchange could keep trading, but nobody would be able to bring new money onto the exchange – or take any out. Binance again won loyalty by covering the costs using its Secure Asset Fund instead of offloading the expense to its users. Even a hack of this magnitude proved to be a small bump in Binance’s dynamic trajectory.
Binance has outpaced all of its competitors over the past two years. The company launched more than 12 projects in Q3 2019 alone. It has left no stone unturned in its efforts to cover everything that the industry needs. Starting from a centralized spot trading exchange, Binance now has margin trading, derivatives trading and a decentralized exchange all running in parallel. The exchange now supports buying cryptos with 25 national currencies. Adding to this, Binance has launched an academy, a global non-profit donation platform called Binance Charity, a venture arm called Binance Labs, an R&D division called Binance Research and a token issuance platform called as Binance launchpad. Binance has acquired four companies to date: WazirX, TrustWallet, JEX and DappReview.
The exchange’s token BNB has of course been one reason why Binance has achieved the status of a billion-dollar company. Strategically positioned as an alternative token that traders can use as a base to reap discounts in fees, it also appeals to users seeking an appreciating asset. Changpeng Zhao and his team maintain a coin-burning program specifically designed to increase the value of BNB while tirelessly marketing the asset to their clients with the promise of cheap transactions. Binance had to launch a separate company for the US without BNB support due to SEC regulations.
The next chapter
But the exclusion of the Binance token from the US market is, yet again, at most a minor setback. To sum up, the exchange appears to have hit practically every nail on the head with its marketing and product infrastructure by finding opportunities, even in times of adversity. And due to limited VC funding, Binance has the freedom to set its own path, which is not the case with typical startup exit strategies. With a daily trading volume of more than US$ 3bn on the crypto statistics database Coinmarketcap, Binance is clearly in a strong position to advance to the next level. The crypto community can look forward to – and learn from – the next chapter of this extraordinary success story. As Jamie Burke, Founder and CEO of Outlier Ventures, put it, “CZ as an awesome founder, who hires well. Chinese work ethic mixed with a Blitzscaling ethos and good timing.” In the end, these virtues may be all that matter.