Estranged lovers: Why Binance is finally willing to walk the U.S. regulatory tightrope

Markets•June 14, 2019, 2:15PM EDT
UPDATED: September 29, 2019, 7:51AM EDT
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Estranged lovers: Why Binance is finally willing to walk the U.S. regulatory tightrope
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Quick Take

  • Binance has decided to withdraw its main services from U.S. – despite having its single biggest user-base there (excluding VPN connections). This is a major U-turn for the firm
  • The Block unpacks some of the underlying factors that preceded this move – including the firm’s long-term growth plans and executives’ personal fear of arrest
  • Binance.com’s retreat from the U.S. also hints at the tension between a “decentralised web” and unavoidable regulatory dogmas

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The announcement went live this morning, artfully while most of the U.S. was still asleep: Binance.com will withdraw its services from the country by fall.

It's likely one of the biggest news stories of the year and could have major implications for thousands of local users and for Binance itself, which gets 42.45 million visitors worldwide each month. While the company announced it had partnered with a FinCen-registered U.S. exchange to fill the void, it will be a very different model than the unregulated, crypto-to-crypto platform to which we are bidding farewell.

But forget what's going to happen next - what prompted the move? As one shrewd observer asked, what could the U.S. really do to hurt Binance from afar? The company is HQ'ed in Malta, and most of its execs are scattered around the tiny European island or Shanghai - a safe distance from the U.S. regulators.

To answer that, it's worth going over the context behind this rather extraordinary move. We also assess what it says about Binance's business model and indeed the state of "crypto anarchy."

A big hit and an end of an era

Firstly, Binance is a household name among crypto circles in the US. 

According to SimilarWeb, U.S. visitors made up nearly 14% of Binance's website visits last month. What's more, the U.S. has consistently topped Binance's visitor list over the last three months, during which the exchange saw 110 million visitors worldwide; almost 1.4 million of whom were American. On pure viewer metrics, that makes it one of the most competitive exchanges in the U.S. Over the same three-month period, Coinbase topped the board with 3.9 million U.S. visitors, while Bittrex had 325,000 and Kraken had 196,000.

This does not take into consideration that users typically use VPNs to bypass various restrictions, and doesn't account for multiple visits by the same people, but it's interesting nonetheless that the U.S. tops the leaderboard.


Image: Worldwide traffic for Binance.com between March and May 2019, Source: SimilarWeb

There's a logic to these numbers. U.S. based-exchanges can't risk listing tokens sold in ICOs because of the regulatory uncertainty around whether or not they are securities. So while Coinbase lists fewer than 10 tokens, Binance currently lists over 150, making it the giant of altcoin trading. It also recently scooped up an even greater share of the market after U.S.-based Bittrex and Poloniex gave in to regulators' concerns and delisted tens of tokens.

Indeed, Binance has built its entire business on filling these unique gaps, offering an "unrestricted" but security-obsessed exchange. Over the years, Binance has become adept at dodging regulatory punches, relocating twice and providing users a series of identification loopholes. The exchange is often chastised by its peers at crypto conferences for falling below regulatory KYC benchmarks, securities trading, and partaking in volume pumping. 

But while it may have mastered the art of regulatory arbitrage, Binance has been building its business on shaky legal ground and running from regulators - not exactly a solid foundation for its goal of global domination. 

Bigger dreams

There are three reasons Binance has succumbed to regulatory pressure (despite not being based in the U.S.).

The first links to commentators' predictions that crypto will eventually see the same crackdown retail FX brokers experienced. Only a handful were left to operate, and if the same is true of crypto, Binance is likely shuffling in to get onto the playing field early. In other words, increasing pressure from regulators has become an irreconcilable long-term business risk, with Bittrex's recent legal battles serving as the writing on the wall. So despite CZ' s claims to Unchained last September that Binance was happy to leave the U.S. alone, he's clearly had a change of heart.

The second links to Binance's plan to start margin trading. Such trading is heavily regulated in the U.S., an effort to protect consumers from the risks of lending borrowed assets. As such, in 2018, BitMEX, the largest margin trading platform for Bitcoin, was forced to close North American users' accounts following a letter from Canadian regulators informing the company it was in breach as an unlicensed entity. Still, it could be lucrative platform, making regulatory compliance ultimately worth it for Binance. Margin trading is also one of Binance's only remaining revenue sources in the country after announcing it would block U.S. users from accessing its decentralised trading platform's main client a fortnight ago. That ruled the U.S. out of its heavy investment in building functional decentralised exchanges.

Finally, Binance is now doing IEOs, which means they are directly distributing tokens. This is different from selling ICO tokens, as the companies organised the first sales themselves. Now it’s the exchanges doing the selling, which is more in line with how IPOs are conducted; another heavily regulated space in the U.S. That means if there is any risk the token could be a security, Binance is playing with fire. Tellingly, fellow IEO platform Bittrex also recently geofenced assets in the U.S.

"[Even] if they stay outside the U.S. then it is a cat-and-mouse game. The key is whether American investors are the target of [IEO] marketing from the organisation," said former Autonomous researcher Lex Sokolin. 

Another side factor to consider is that regulatory approval would also allow Binance to legally promote its services in the U.S. That would open it up to the masses; allowing it to torture subway riders with countless crypto ads just like Gemini.

Still, there are some questions outstanding. While it makes sense for Binance to launch fiat on-ramps in regions where they are sparse, the U.S. already has plenty. That means Binance.US's much-diminished "regulated exchange" won't be unique. It's also unlikely to smooth sailing - Huobi was forced to limit its services on HBUS, and it's also been slow progress for OKCoin, which has edged into the U.S. state by state.

Tired of running

Multiple sources confirm that Binance's top executive group, which includes CEO Changpeng "CZ" Zhao, avoid visiting the US. Binance did not respond to comment, but CZ has publicly dodged explaining his reason for being absent in the States.

"It's just very risky," said one source familiar with CZ, noting concerns about the legality of Binance's US trading operations were likely at the root.

“There are always tricky questions about the ability to enforce that law, but generally speaking, if a company without a money transmitter license is permitting persons in the U.S. to transmit money, that company is going to be in violation,” Jared Paul Marx, a partner at law firm Harris, Wiltshire & Grannis LLP told The Block last year.

Although rare to arrest foreign businesspeople, Binance's fear is not totally unfounded. In 2006, Scottish businessman and CEO of an online gambling company David Carruthers was arrested in transit in Texas for taking wagers from U.S. citizens. Huawei's Meng Wanzhou was also recently arrested in neighbouring Canada, although the specific charges remain unclear.
 
A step back for crypto-kind?
 
There's no doubt that having customers in the U.S. has been a juggling act. But Binance succumbing to regulators' demands could also be the start of a slippery slope for anti-establishment crypto optimists (which CZ has repeatedly identified as).
 
"One of cryptocurrencies' original appeal was that no one controlled it and it was free from government intervention or regulation. One of Binance's strengths that contributed to its growth was as a pure crypto to crypto exchange, it operated outside jurisdiction and could focus on its business," said Reuben Yap, COO of privacy token ZCoin. "

"The reality is that although cryptocurrencies are technically independent, today they still rely greatly on regulated fiat ramps... [and are] still firmly within the grip of governments and financial institutions. Ironically, we are also starting to see the rise of cryptocurrency projects such as Facebook's Libra who are controlled by the very institutions we were wanted to be free from."


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