Zhao Changpeng believes that it would be bad if the industry did not have clear supervision, and supervision should intervene after the industry grows.

Moderator: Deng Chao, CEO of HashKey Capital

Guest: Changpeng Zhao, Founder of Binance

At the 2023 Hong Kong Web3 Carnival, HashKey Capital CEO Deng Chao and Binance founder Zhao Changpeng had a conversation to exchange their views on CeFi. The following is a summary of the conversation.

Deng Chao (Host): Good afternoon, everyone! I know today is a very long, but very exciting day. I am Deng Chao, CEO of HashKey Capital. We are the largest and earliest investor in the blockchain field. We are an institutional investor and have invested more than $1 billion in more than 500 global projects since 2015.

I am very honored to be able to have a fireside chat. Normally I would take a few minutes to introduce the guest, but today this guest needs no introduction. Ladies and gentlemen, let's welcome CZ together. Thank you for taking the time to join us. Would you like to say hello to the audience?

CZ: Hello everyone, I am the CEO of Binance. Due to time conflicts, I cannot go to the site. I have been to Hong Kong many times and I like it here very much. I also look forward to attending this conference next time.

Deng Chao (host): Today's topic is CeFi. I would like to ask some questions on behalf of the audience about the CeFi ecosystem. I want to hear your thoughts and insights.

First of all, let’s talk about security, which is what users care about the most. We have seen some security incidents recently. A few years ago, some people said that CeFi is not that safe because of its reliance on centralized infrastructure. How can we prevent infrastructure failures to ensure that users’ funds are safe?

CZ: CeFi and DeFi have different risks, and both need to take security into consideration. CeFi has its own risk characteristics, and it is not that one is safer than the other. You must take security measures into consideration. For CeFi, CeFi exchanges can also be very transparent, with good proof of reserves, which can be verified on the blockchain.

For example, Binance’s wallet address is actually very transparent, while FTX’s wallet address has never been made public. Therefore, if the CeFi platform is transparent, it can actually be more transparent than traditional financial service providers.

When it comes to DeFi, if you can properly protect your keys, keeping your own private keys will be a good way and you will have more control. But I think that most people today have no way to fully protect their security or keys. Even if you use a computer or hardware wallet, you still need to make a backup and protect the backup data, so there are many factors and different risk characteristics. Users must take all of these into consideration and cannot just unilaterally consider that one is better than the other. And when using DeFi, wallets may also be attacked. I encountered such an example yesterday. A user's wallet IP address was leaked, which caused him to lose funds.

Deng Chao (host): The second question is about trust related to security. After the internal collapse of some notorious CeFi platforms, the key factor of CeFi has been "trust/lack of trust" in the news and headlines. How can users trust CeFi companies? What can CeFi and Web3 companies do to rebuild trust among the user community, including other relevant stakeholders?

CZ: When we talk about trust, I usually consider three aspects:

The first level is the reliance on technology. In our trustless industry, technology can be used for verification, and technology can be effective to a certain extent. If you use Bitcoin or blockchain, you can verify whether your money is there, your key, etc.

On the second level, for a platform, you still have to trust the community when you provide any service or business, even if you use blockchain or Bitcoin. This trust takes time to verify, especially for centralized platforms. There have been thousands of failed exchanges in the past decade, so trust takes time to gain and must be proven through our actions. I believe that Binance has very strong user trust.

The third level is to educate yourself and manage risks. Everything you do has risks. Centralized platforms have risks, DeFi has risks, traditional financial service providers, banks have risks, and even countries have risks. You just need to learn how to manage risks. It is very important not to look at things in a naive way, in black and white, but to have a balanced perspective.

Deng Chao (host): After talking about the safe and reliable platform, the next question is about exchanges as a gateway for people to enter cryptocurrency or Web3. Many people enter the cryptocurrency and Web3 fields through Binance, but looking at the user experience, there is still an experience gap between Web2 and Web3 applications. What exactly prevents users from entering Web3 to some extent? Can you share what Binance has done to improve user experience? How do you think CeFi can further improve user experience and bring more users into the Web3 world?

CZ: That's true. Today, CeFi's experience in Web3 is not that good. From the user's perspective, they need to register, do 2FA authentication, get hardware keys, do KYC and proof of address. There are a lot of risk controls at different stages.

In Web2, most Web2 do not require KYC. Most social media, such as Google and WeChat, do not require KYC. Therefore, the user experience of Web3 is not as simple as using the Internet.

When it comes to DeFi, most DeFi does not have KYC and AML processes, and it is actually easier to use. But today, most people tend to use CeFi because they prefer to use email and customer service support, and if they lose their password, they can easily get it back after passing the verification.

In the Web3 world, because we are dealing with user assets, security is paramount. We have not yet achieved an optimal solution to make everything very secure and easy to use. Security and convenience are inversely proportional. We must use a lot of security measures. I hope that after the corresponding technology is improved, we can reduce these layers of measures.

Speaking of this, Binance has done a lot to improve the user experience. For example, in terms of KYC, we have local KYC processes by country and region, and use local government databases and local suppliers to propose professional and customized solutions. For example, we use local driver's licenses to conduct KYC and use localized solutions.

But overall, I am not very satisfied with my experience using Web3. There is a lot of room for improvement, but this also means there are many opportunities.

Deng Chao (host): Thank you CZ, you talked about the comparison between CeFi and DeFi at the beginning, and there was also a forum discussing this topic this afternoon. The conclusion is not that CeFi and DeFi are in confrontation. There may be a period of time when CeFi and DeFi coexist. Do you agree with this conclusion? Do you think DeFi and CeFi will coexist in the next year or a few years?

CZ: Indeed, CeFi is not against DeFi, and DeFi should not be against anyone. There should be no threshold in the decentralized world and decentralized industries, and anyone can participate. Any two people working together is centralized, and there is no cooperation in pure decentralization. When you form a company and a project team, this is centralization. There will always be some centralized elements in the decentralized world.

From the perspective of DeFi, we want to help more people from traditional industries enter the crypto assets and DeFi industries, build a "bridge" between the two places, and we are also actively promoting this conversion. So what we have to do now is to work together to fill the gaps in technology, products and services. Because there are too many gaps to fill, this has nothing to do with competition. Whether to use DeFi or CeFi is a matter of user choice. If more people use DeFi, more people will use CeFi. There are different user groups on both sides. We just need to work together to expand the industry.

Deng Chao (host): In terms of the comparison between CeFi and DeFi, what do you think about mass adoption? We have discussed this for several rounds. What do you think will trigger the mass adoption of crypto and blockchain? What will be the trigger point? Is it a killer application? Is it regulation? Or competition? Where is the progress now? What will be the next trigger point?

CZ: What will trigger the next mass adoption is a question that always varies over time. To be honest, I can’t predict it. In early 2013, I couldn’t guarantee that Bitcoin would take off on such a large scale like this; 2017 was the year of ICO, and everyone was doing ICO; DeFi took off in mid-2020, and then the hot spot in 2021 was NFT.

What is important now is that we provide an ecological environment so that people can try different things. Different things require different times. If you ask me this today, I would say that many governments are trying to control cryptocurrencies, but doing so may trigger the growth of cryptocurrencies. More restrictions on traditional financial markets will encourage more people to come to cryptocurrencies. market. If you want everyone to stay in traditional finance, the best way is to lower traditional market rates, make transactions easier, and better improve user experience. But the current lack of improvement within the traditional financial industry is what we see driving the industry now or in the future.

Deng Chao (host): Since you mentioned the government and the industry, I must ask you about your views on regulation before I end. Thank you very much to the Hong Kong government for its strong support for the Web3 industry, which is why we are able to gather in Hong Kong this week to attend the Web3 Carnival.

We all agree that regulators should participate in interaction and exchange to formulate good rules and good regulatory frameworks, and also need to be able to balance and encourage innovation and prevent illegal and criminal behavior. What advice would you give to regulators? How can we design a thoughtful and practical regulatory framework? At the same time, what advice would you give to industry practitioners? Many practitioners here are in dialogue with regulators, and this is indeed a very important topic.

CZ: This is a very important topic. I completely agree with what you said. The worst thing for the industry is that there is no regulatory clarity. Even a strict and restrictive regulatory system is better than this. Practitioners at least know what to do. For example, in 2017, Chinese regulators required exchanges to stop operating, so we left. Even with clear regulatory rules, there will still be some good or bad decisions. Every decision on the regulatory direction must be considered, and an ideal balance needs to be found. At the same time, the balance may change over time.

When the industry is still in its early stages, the main thing is to let the industry develop, because at that time you can't predict what will become a hot topic. For example, when NFT has not yet been promoted, there is no reason to set up supervision for it, or to set up supervision for a future field that we don't know yet. Now we need to let the industry develop and grow first. After the industry grows up, various lawless elements or people who damage other interests may appear. At this time, we need to isolate these people from supervision to prevent them from harming others.

There is also a natural tendency for regulators to try to apply the regulatory template of the traditional financial industry to the cryptocurrency field, but the two are different. And the types of crypto assets are also different. Some look more like securities, some look like commodities, some look like utility tokens, and some are a combination of the above characteristics.

Therefore, it is very necessary for regulators to have an in-depth understanding of the industry. I must say frankly that most regulators currently have no experience in the crypto industry, and most financial regulators only have banking experience, so communication between industries is very important; for practitioners, they must be very active in dealing with regulatory agencies. For example, we actively communicate with regulatory authorities in various countries. Some countries have a very high acceptance of government regulation, while others are skeptical. It doesn’t matter. All we have to do is continue to communicate patiently.

Usually the first version of the regulation will be overly restrictive. From the current limited regulatory framework to overly strict regulation, there must be adjustments, and it will take some time to find the best balance. This is my point of view. Binance is also very proactive in communicating and dealing with regulators in various countries around the world, and we are also happy to explore more possibilities in Hong Kong.

Deng Chao (host): Which Web3 field will make you very excited in the next two to three years?

CZ: Many aspects are good. My focus is mainly on basic applications, which I call experimental or early innovation. This is determined by my personality. Once the technology is proven to be feasible, I hope that hundreds of millions of people can benefit from it.

There are some very interesting experiments now, such as NFT, Bitcoin and other blockchain and cryptocurrency payments. In the end, we still have to solve the wallet problem. Today's wallets are not easy to use. I think this is the biggest obstacle to the adoption of cryptocurrency. For Binance, as a platform service provider, we need to make it possible for people to access cryptocurrency and for projects to build a cryptocurrency ecosystem. This is our perspective, but I personally find many things very interesting.

Deng Chao (host): There is a lot to look forward to, but time is limited, so this conversation ends here. Thank you very much, CZ, for sharing your very candid and insightful thoughts with us. Thank you, CZ!