Cryptocurrency offers new avenues for investment and financial inclusion. However, its meteoric rise is marred by regulatory challenges, especially in countries where authorities grapple with its potential risks and opportunities. One such nation is China, which took a decisive step in 2021 by making cryptocurrency trading illegal. Yet, amidst this sweeping ban, an unexpected and intriguing phenomenon emerged – Binance, the world’s largest crypto exchange, continued to thrive in China’s underground crypto market.
Binance’s Resilience in China’s Crypto Market
Despite China’s stringent ban on cryptocurrency trading in 2021, Binance’s operations displayed remarkable resilience. After the ban, Binance’s China business initially declined, but Binance’s presence in China surged again in 2022, and since then, it has maintained high levels of activity.
The figures were nothing short of astonishing, with China-based customers trading a staggering $90 billion worth of cryptocurrency transactions in May 2023, according to an internal platform known as “Mission Control.” Notably, most of these transactions were in futures contracts tied to cryptocurrencies, a type of trading explicitly banned in the United States.
China’s position as Binance’s most prominent market was now undeniable. The transactions accounted for an impressive 20% of the exchange’s global trading volume, excluding trades by a select group of large-scale traders. The fact that a substantial portion of Binance’s business emanated from a country where cryptocurrency trading was officially outlawed posed a unique challenge to both the company and regulators alike.
As the ban took effect, questions arose about how Binance managed to sustain such robust operations in China.
In June, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance and its founder, Changpeng Zhao (CZ), accusing them of illegal operations and misusing customer funds.
The significance of Binance’s China business extended beyond just trading volume. According to information provided by the WSJ, approximately 100,000 Chinese users at Binance were “politically exposed persons” (PEPs), a designation typically used by banks and regulators to mark individuals associated with higher risks of involvement in corruption, bribery, or money laundering due to their roles in government or close affiliations. Such a substantial number of PEPs among Chinese users at Binance added another layer of complexity to the exchange’s operations. It underscored the need for robust compliance and due diligence measures.
Despite facing regulatory headwinds and legal challenges, Binance’s ability to sustain a thriving business in China, the fourth-largest market for cryptocurrency trading globally, signified the exchange’s adaptability to succeed in a highly contested space.
Binance’s Strategy and Operations in China
Internally, Binance acknowledged the significance of the Chinese market despite the ban on cryptocurrency trading. Current and former employees revealed to the WSJ that China’s crypto landscape remained a key focus of discussion within the company. Despite the regulatory hurdles, the allure of a vast pool of potential users and traders in China made it an essential market for Binance to maintain a foothold.
Surprisingly, despite the ban, Binance’s investigations team reportedly worked closely with Chinese law enforcement agencies. The collaborative efforts aimed to identify and tackle criminal activities among China’s 900,000 active users. This cooperation might have been motivated by Binance’s commitment to safeguarding the integrity of its platform and adhering to global anti-money laundering (AML) and counter-terrorism financing (CTF) standards.
Beyond the SEC’s lawsuit, the U.S. Justice Department launched an ongoing investigation into Binance, further exacerbating the pressure on the exchange. Additionally, Binance’s market share among U.S. users had dwindled significantly, and the company resorted to cutting over 1,000 jobs globally as it grappled with the repercussions of the regulatory crackdown.
The Complex Relationship Between Binance and China
Changpeng Zhao (CZ), the founder of Binance, has a Chinese heritage, and this aspect of his identity has influenced the perception of Binance’s relationship with China. Critics have seized upon CZ’s background to paint a close association between Binance and the country, despite the exchange’s efforts to position itself as a global entity with no specific national affiliation. CZ’s ties to China have led to some challenges in navigating the complex geopolitical landscape surrounding cryptocurrencies, as both proponents and detractors try to interpret Binance’s actions through the lens of CZ’s heritage.
Binance’s origins can be traced back to Shanghai, where it was founded in 2017. However, within months of its establishment, the Chinese government initiated a series of regulatory attacks on crypto exchanges, leading to uncertainties and challenges for Binance’s operations within the country. In response to the tightening regulatory environment, CZ strategically moved Binance’s operations to Japan, which offered a more welcoming environment for crypto businesses.
The move to Japan marked a turning point for Binance, positioning it as an international exchange with a global reach.
Binance’s China staff raised concerns about data control and the potential influence of the Chinese government on the exchange’s operations. Executives at Binance’s U.S. arm expressed worries about this arrangement, as developers in China could access user data from U.S.-based customers. This issue of data control added complexity to Binance’s operations. It fueled debates about the exchange’s independence and ability to safeguard user information in compliance with international data protection standards.
Binance’s Expansion Efforts in Other Countries
As Binance vied to maintain its strong presence in China, it faced competition from its rival, Huobi. Huobi adopted an innovative approach by prompting users to apply for “digital citizenship” offered by the Commonwealth of Dominica. This program allowed users to obtain a digital identity in Dominica, effectively granting them access to Huobi’s platform despite the ban on cryptocurrency trading in China.
Some saw the digital citizenship initiative by Huobi as a direct challenge to Binance’s strategy of directing more Chinese users to access its global exchange through intermediary websites. Both exchanges sought to navigate the restrictions imposed by governments, employing unique approaches to attract and retain more users, further intensifying the rivalry between the two giants in the Chinese crypto market.
Binance’s interest in the Palau residency card program
Binance also explored opportunities to assist its international user base through an interest in the Palau residency card program. This program offered residency cards to foreigners, and Binance was allegedly interested in participating to aid Chinese users. The precise nature of Binance’s involvement and intentions in the Palau plan was kept a secret. Still, the initiative highlighted the exchange’s dedication to supporting its Chinese user community, despite the regulatory challenges in the region.
The Palau residency card program indicated Binance’s willingness to explore unconventional avenues to facilitate crypto trading for its user base, underscoring its commitment to providing services to users in regions where cryptocurrencies faced legal hurdles.
The use of VPNs by crypto traders to access banned exchanges:
In addition to the efforts made by Binance and other exchanges to maintain a presence in regions with crypto bans, individual crypto traders employed Virtual Private Networks (VPNs) as a workaround to access banned exchanges. VPNs enable users to mask their locations, allowing them to sign up and use blocked exchanges in their countries.
While VPNs enabled some traders to continue participating in the crypto market, they also raised concerns about regulatory compliance and the potential for illegal activities. Regulators have been vigilant in addressing the use of VPNs, as they can facilitate unregulated and anonymous transactions, making monitoring and regulating crypto-related activities challenging.
The use of VPNs by crypto traders underscored the demand and appetite for cryptocurrencies in countries with stringent regulations. It also brought attention to the evolving landscape of global crypto markets, where participants sought creative solutions to navigate regulatory restrictions.
Post-Ban Performance and Compliance
In the aftermath of China’s cryptocurrency trading ban in 2021, Binance experienced a notable drop in its China business. Internal data viewed by a former employee revealed to WSJ that the exchange’s China trading volume declined to 17% of its overall volume by the end of 2021, down from 24% earlier in the year. This dip was a direct consequence of the ban’s regulatory impact on the crypto market.
According to ‘Mission Control,’ Binance boasted approximately 5.6 million China-based users, indicating a robust demand for cryptocurrencies in the region. Among these users, a notable 911,650 remained active participants in the crypto market, underscoring the enduring popularity of Binance’s platform despite regulatory restrictions.
Internal documents and former employees revealed to WSJ that less than half of the China-based registered users had undergone proper KYC checks in the months following the ban. This lax approach to verification raises questions about Binance’s commitment to robust compliance measures and adherence to international AML and CTF standards.
Around 100,000 Chinese users on the Binance platform were PEPs as of January. This revelation raised concerns about the potential implications of catering to many users with potentially higher risks. It highlighted the need for Binance to implement enhanced due diligence and monitoring processes to address the inherent risks associated with PEPs.
Implications for Binance and the Cryptocurrency Market
China’s cryptocurrency market remains formidable, with healthy transaction volumes across centralized and decentralized services. According to Chainalysis, China ranks as the fourth-largest market for crypto trading globally, even after the ban on cryptocurrency-related transactions. The sheer volume of trading activity within China showcases the country’s resilience and continued demand for cryptocurrencies.
This significant market presence underscores the ongoing interest of Chinese users in digital assets, despite the regulatory restrictions. As cryptocurrencies gain mainstream adoption and recognition, the potential for growth in China’s crypto market remains a crucial consideration for global exchanges like Binance. However, navigating this landscape requires a deep understanding of Chinese regulations and a commitment to compliance to mitigate potential risks.
Challenges and prospects for Binance’s future
Binance’s global operations have come under increased legal scrutiny, with the U.S. SEC’s lawsuit and the ongoing Justice Department investigation adding complexity to its prospects. The regulatory onslaught has led to a decline in market share among U.S. users and workforce reduction, creating uncertainties about the exchange’s growth trajectory.
Binance’s ability to navigate the legal challenges and regulatory landscape will be pivotal in shaping its future trajectory. The exchange must demonstrate transparency, robust compliance practices, and willingness to work with regulators to address concerns effectively. Resolving the legal issues and regaining the trust of global users will be critical to securing its position as the world’s leading crypto exchange.
Moreover, Binance’s experience highlights broader implications for the cryptocurrency market. Regulatory crackdowns and legal challenges faced by major exchanges may prompt the industry to reevaluate compliance practices and risk management strategies. As global regulators seek to establish more precise frameworks for cryptocurrencies, exchanges must adapt and adhere to evolving regulatory standards to ensure the long-term sustainability of the crypto market.
Conclusion
Binance’s resilience in China’s crypto market is a testament to the spirit of innovation and determination within the cryptocurrency industry. As we witness the next chapter in the crypto revolution, Binance’s experience navigating regulatory challenges provides valuable insights and lessons for exchanges and enthusiasts alike. The future of cryptocurrencies remains bright, with Binance at the forefront, steering the industry towards a new era of decentralized finance and digital empowerment.
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