Recently, Binance reached an agreement with the U.S. Department of Justice and others to pay a $4.3 billion fine, and Zhao Changpeng stepped down as CEO. Which businesses of Binance will be affected? Has the last negative news before the bull market finally come to an end? On November 23, Golden Finance held Twitter Space and invited Zhang Li, founder of LiShuo, and Director Zhao of Jude to share.
Please allow the two guests to give a brief self-introduction.
Zhang Li: Hello everyone, I am Zhang Li, and I run a public account called “Li Shuo”, which you can search for on WeChat public accounts.
Director Zhao: Hello everyone, I am Director Zhao, I like to write short essays. The topic of Binance has caused great disagreement in the market. Some people say that the bad news has been exhausted, so they choose to buy the bottom after the decline, but I think everyone underestimates the possibility of derivatives to a certain extent. Now we only see the butterfly flapping its wings, and the butterfly effect in the future has not yet fully unfolded. I hope to see if we can talk about something new through Space.
The market’s reaction to the Binance incident was not intense...
Zhang Li: It was not a sudden event. If it was, we would not have this reaction. In fact, as early as half a year ago, Zhao Changpeng's resignation and the selection of his successor were all within everyone's expectations. This matter has been brewing for too long, so the market is not panicking. The difference is that everyone thought it was a settlement by paying money, just like the SEC and Ripple, but Binance's situation this time is more complicated, different from Ripple and Bitmex before. Although the media used the word "confession", the punishment given by the US government is still much milder than expected.
Of course, I don’t think the shoe has dropped. There should be detailed laws to be formulated later. Referring to the regulations recently proposed by Singapore, which prohibit individual investors from borrowing money for trading, the United States must also have more detailed regulations.
Binance’s innovation and investment businesses will be discontinued, as will its cooperation projects with traditional institutions. It was previously keen on cooperating with Mastercard and Visa to issue cards, but these should be gradually discontinued in the next two years.
Which businesses of Binance will be most affected?
Zhang Li: The U.S. Treasury Department will retain access to Binance’s books, records, and systems for five years, which means that as long as the U.S. government wants to see it, the Binance government must cooperate unconditionally. The flow of money in Binance accounts can be seen, and there is no transaction privacy. Binance has many institutional users. If institutional users realize this, everyone should see a large amount of capital outflow soon. Binance’s public relations is very good. It sent emails to all users, emphasizing that first, there was no misappropriation of customer funds, and second, there was no market manipulation, but many details were not disclosed. Once the regulations discussed with the U.S. government are disclosed, the outflow of funds is inevitable.
The second impact is the reduction in market share. This is not a bad thing for Binance. Binance's trading volume accounts for more than 50% of global cryptocurrency transactions, and it has monopolized the market, so it faces great pressure, especially regulatory pressure. The reduction in market share has also alleviated the pressure to a certain extent. Coinbase and Binance chose different paths in the early days. Coinbase strictly complies with the US anti-money laundering regulations, so it has been on a steady path, but Binance chose to develop rapidly, so now it needs this $4.3 billion fine as compensation.
Director Zhao: The United States is not a monolithic entity. Neither the SEC, the CFTC, nor Binance is one, so we need to look at it at a more micro level.
As soon as the incident happened yesterday, Binance had a capital outflow of 1 billion US dollars. Although it was not a run, the trend of capital outflow will continue. The United States has the right to review all accounts and transaction records of Binance for 5 years, which makes everyone panic.
First of all, those funds involved in US sanctions against other countries, stolen funds, hacker funds, money laundering funds, and gambling funds previously used Binance as an asset custodian, but their accounts could not withstand inspections, so they had to be transferred away.
Secondly, Binance has obtained a short-term free pass, but the project parties on Binance are not exempted from responsibility. The regulatory authorities can check whether each project party has manipulated the market or committed any illegal acts.
Thirdly, there are trading institutions such as market makers, those traders who often cause turbulence in the secondary market. Although everyone knows it, no one has the authority to view transaction records and review these things. Now that the US government has the authority to look at it, everyone realizes that they cannot pump or dump the market on Binance. A new liquidity platform is needed, but it has not been found yet, so everyone has not withdrawn the money.
Will it have any impact on the projects that Binance has invested in?
Zhang Li: The impact is not significant. This is not Binance’s mainstream business. There is nothing wrong with focusing on trading. Investment business is just icing on the cake and is not very important.
Director Zhao: The investment cuts started in the first half of the year, and the revenue share of this business line is low, so there will not be any major impact.
One thing to note is that before, everyone thought that the tokens of the projects invested by Binance Labs would be listed on Binance, but after this incident, the coin listing team may have become a very cautious department, and even more cautious than the Hong Kong compliant exchanges. At least before Zhao Changpeng was sentenced, Binance's coin listing and new asset issuance could not be too aggressive. So some projects used to regard Binance as a channel to realize liquidity, but now this road is blocked. It will be more difficult for first-level project parties to realize liquidity, and the tokens may not be issued. Financing and coin listing plans must be adjusted.
The United States fired the first regulatory shot at Binance. Will other countries follow suit?
Zhang Li: The United States was not the first to fire. In more mature financial countries, especially those with mature anti-money laundering regulations, such as European countries, Binance has also encountered many setbacks in developing its business. Belgium once asked Binance to withdraw, but the impact was relatively small, so people did not take it very seriously. Other countries have always regulated Binance in accordance with their own regulations. Only in countries and regions with immature laws and financial regulations can Binance run wild. At present, for Binance, compliance is not a choice, but a necessity. Binance's business in various countries will inevitably be tightened.
Director Zhao: Binance opened in Japan in 2017/2018, then in Singapore, Dubai, and Paris. In recent years, it has been running around. Previously, regulators in various countries asked Binance not to conduct business in their own countries. Even though it has a good relationship with France, there has been no statement that it can base itself in Paris for global business. The global anti-money laundering and anti-terrorist funding regulations are led by the United States, so everyone is watching the results of the United States.
Therefore, the US fine is a symbolic act, which actually brings the possibility that Binance can carry out activities in various countries. If Binance can really settle down Binance US in the United States in the future, and comply with the US framework, if it gets the approval of the United States, then it may have a certain degree of pass in doing business in Europe. Although it may be expensive, at least there is a basis for compliance. Perhaps Binance will also introduce shareholders from traditional financial institutions, whether it is Binance US or Binance Global, to see if this method can open the door to compliance.
Zhang Li: Director Zhao’s reply gave me a hint about what will happen after paying the fine. If Binance Global can conduct business in the United States in line with Coinbase, it will be a great benefit. But so far, I don’t know if this is an achievable result. I only saw the fine, but not the cooperation with the US government.
Director Zhao: The 4.3 billion is to resolve the previous incident. Without the 4.3 billion, there would be no chance to negotiate. Hashkey has to spend more than 20 million US dollars to comply with the regulations in Hong Kong, so Binance must have other compliance costs to pay in addition to the 4.3 billion.
Next, we have to see whether Binance’s strategy is to radiate the world from the United States, or to abandon the United States and move to other countries and regions. Previously, Binance was quite rebellious, and its contact with traditional finance was not particularly smooth, but it is hard to say whether it will open the door to compliance by introducing strategic shareholders in the future. If it can do so, it will be very good news, which is equivalent to getting a global passport.
Bitcoin spot ETF may be approved. Is it related to the Binance incident?
Zhang Li: There is no necessary connection. The US financial system is quite mature and has been developed for one or two hundred years. The big framework will not make mistakes. It does not reject financial innovation and even supports what we call financial innovation on the right track. ETF is a compliant and reasonable thing under their legal framework, which is different from the Binance case. Many people think that there is a 90% chance that the Bitcoin spot ETF will be approved. At that time, a large amount of institutional compliant money will flow into the market, which is good for our industry, but at the same time, this industry has also lost a lot of innovation. After all, chaos is fertile ground for innovation.
Director Zhao: Financial regulation in the United States is very complicated and the compliance cost is very high. The cycle of making an index fund product is about three months, but all compliance takes six to eight months, and all the time cost is spent on compliance. When I was young, I had a lot of small ideas, and my boss at the time said that anything that you do is innovative in finance is freaking illegal. So don't delve too much into the Binance timeline and ETF timeline, which will generate a lot of conspiracy theories.
In fact, the connection between Bitcoin spot ETF and Binance will become more and more obvious later, that is, where is the end point of Crypto's global liquidity in the future? Just now, Mr. Li said that more than 50% of Crypto's trading volume is on Binance. What you may not know is that it can be said that all exchanges in the market have insufficient liquidity to eat up the large orders on their own platforms, so they actually have corresponding deposits on Binance to hedge. Binance is now the end point of Crypto's liquidity. However, ETFs bring a large amount of incremental funds, and the trading venues of these funds may be Nasdaq and NYSE, which will move a certain pricing power from Binance to the traditional financial market. This is in line with the main interests of US regulators. If Binance can obtain US approval, it may participate in the pricing power of digital assets in the future. If it does not obtain it, a large amount of ETF funds will enter Nasdaq in the future, and the pricing power will be transferred to a certain extent. Previously, other exchanges hedged on Binance, and will move to Nasdaq in the future.
Everyone says that the resolution of the Binance incident is the last negative news before the bull market. Is the bull market next year really inevitable?
Zhang Li: The bull market is coming, which is simply a politically correct thing. I don’t know what to say.
Director Zhao: It is always politically correct to be bullish on predictive things. But the future cycle will definitely be affected. We can compare it with other financial assets. For example, pork prices used to have a 4-5 year cycle, but the pig cycle has also been broken recently because the capital concentration of large livestock companies has increased, breaking the decentralized market structure. The same is true for the cryptocurrency circle. After the ETF is approved, the capital and fund structure will be different, which will change the asset attributes to a certain extent.
Crypto had great safe-haven properties in 2013, but in 2020, technology funds such as MicroStrategy and Tesla were introduced. It is like there was only 100 yuan in the circle before, 70 yuan of which was used for hedging, but now the total amount of funds in the circle has increased to 10,000, 80% of which is used for hype in technology startups, leaving only 2,000 for hedging. Although the hedging funds have increased a lot, the proportion has become smaller.
Bitcoin spot ETF will attract many public funds, and these public funds are pure longs, so they will maintain long positions for a long time. The transition to the bull market in the cryptocurrency circle may not be a 4-year cycle, and may bring about a slow bull and a long bull.
The recent optimism is a bit heavy, but the entry effect of funds is not particularly strong. The gains are all in the marginal areas such as BRC and Inscription, while there is not much progress in technological innovation and large-scale adoption represented by Ethereum. Therefore, although sentiment is valuable, everyone should pay attention to the risks. The possibility of a pullback is increasing recently.
Where are the main risk points that will cause a pullback next?
Zhang Li: On the one hand, we should pay attention to the detailed management regulations issued by the US government. They will definitely be issued, but we don’t know when. The regulations will not only affect Binance, but also other exchanges, and even decentralized exchanges, because they manage the entire market. Moreover, the global market is watching the United States. As long as the United States issues more detailed regulations for the entire industry, the risks in the short term are self-evident.
Another thing to pay attention to is Binance’s own business transformation. If (I mean if) it loses the lawsuit with the SEC, what punishment will Binance receive? These are unresolved issues.
Director Zhao: First, I am more worried about market liquidity. Although many retail investors feel that all the negative factors have been eliminated, they are now entering Binance, buying, and providing liquidity to the market. However, in fact, the project parties, market makers, and small exchanges on the opposite side of retail investors are all planning to withdraw their money, and liquidity may be squeezed to a certain extent in the future. There are also some projects that should make markets and then cooperate with some fundamental benefits to increase the price of the currency, but now the bosses of these project parties think that they should slow down before the Binance matter is clarified, and not be so aggressive, so the entire market will return to the period of shrinking liquidity at the beginning of this year.
The second concern is that if Binance cannot take on new innovations in the industry in the future, who will? Binance has been at the forefront of the industry in the past few years, and has been innovating, and other exchanges followed suit, but this year everyone will find that the action may not be as fast as before. OKX Wallet has been very fast this time and has begun to reverse some trends.
The third concern is who will take over the assets and liquidity lost by Binance? Will everyone transfer their coins to decentralized exchanges, or will there be a new centralized exchange? This is something that everyone needs to pay attention to, because in our industry, where the funds are deposited and where the liquidity is, there is the future.
Zhang Li: Let me add that there is no need to worry about mainstream coins, but Binance is the world's largest altcoin liquidity market and the exchange with the best liquidity. Many altcoins only have liquidity in Binance and not in other places, so everyone needs to be vigilant about this matter.
Coinbase Chief Legal Officer: The US approach to law enforcement and regulation will only increase consumer risks and drive customers and innovation out of the US. What is your opinion on this...?
Zhang Li: From Coinbase's perspective, its compliance costs and customer acquisition costs are so high, so of course they think the US government's law is not OK and will drive away innovation. We all know that the first bonus of this industry is the bonus of non-compliance. Coinbase has suffered a loss in this regard and has given up a lot of non-compliant profits.
But now it is inevitable to comply with regulations. The proportion of high-net-worth users in Coinbase and Binance in the United States is very high, so there is no need to worry about financial innovation. Moreover, if things go wrong in the east, there will always be light in the west. In addition to the US government, we also have the Mediterranean and Hong Kong.
Director Zhao: The entire industry actually has two cycles. Most people look at the so-called four-year capital cycle and credit cycle. In fact, the other is the industrial cycle, which is a positive spiral. Many people who just entered the industry this year said that Web3 is useless, but in fact, the current Web3 is completely different from that in 2017/2018. Who would have thought that you could play games on the chain back then? So this technological innovation has done very well in the past period of time.
Under the influence of the capital cycle, or the expansion and contraction of the credit cycle, people will project their expectations for the next ten years onto it during a bull market, but during a bear market they will completely think it is a scam. The credit cycle regulates your emotions and makes you feel that the market has no development.
If you are a builder, there is actually no problem in entering this industry and continuing to build in the form of building blocks. Of course, there will be hard days in the middle, but you can really do many things that may be unexpected.
If you are a pure cryptocurrency trader, you need to reconsider your future prospects. Firstly, the model of going it alone may no longer be feasible. Secondly, the market's requirements for the size of funds have also increased. Now those who can sit at the table to play the game even have to represent a certain degree of stakeholders. For example, Hong Kong's compliance and the recent blast were obviously a setup by paradigm. It was only because it had Lido that it could do this. The threshold is getting higher and higher.
The Binance incident has brought another revelation to project owners and entrepreneurs. It has really opened a door for recruitment, and it is really possible to make a breakthrough. Everyone can find a good organization to work for, and the return from work may be higher than the return from cryptocurrency speculation in the future.
