Binance’s Rapid Rise w/ CEO Changpeng Zhao (CZ) & CFO Wei Zhou

This post was last updated on October 28th, 2019 at 05:12 pm

Binance CEO CZ: Story Behind Their Rapid Growth w/ Changpeng Zhao

Part 1 w/ Changpeng Zhao (CZ), Founder & CEO of Binance

Binance's Fiat Businesses (e.g. Binance US) w/ CFO Wei Zhou

Part 2 w/ Wei Zhou, CFO of Binance

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Table Of Contents

Description

Welcome to our two-part series on Binance. Binance is the world’s biggest crypto exchange based on (real) trading volume. Binance is our highest ranked exchange and on most days, they are the #1 ranked exchange on Nomics.com.

We believe Binance is one of the two most important companies in crypto and there’s a good chance they will go on to become one of the most important companies in all of finance.

In part one, we have a conversation with Binance CEO and founder, Changpeng Zhao (CZ). CZ gives us a “behind the scenes” look at how Binance grew to become the #1 crypto exchange only a few months after launching.

In part two, we continue our exploration of Binance by talking with Wei Zhou, CFO of Binance. Before joining Binance in 2018, Wei was CFO of several startups, including two companies that IPOed in the US. Wei was also instrumental in the 2018 Grindr acquisition.

Part 1 with CZ is broken up into 5 chapters:

Chapter 1: The state of Binance when it launched (and the pre-conditions that led to its rapid rise)
Chapter 2: The current state of Binance and Binance Coin / $BNB
Chapter 3: What CZ would do if he were to start a company from scratch
Chapter 4: Binance’s growth hacking strategies
Chapter 5: An exploration of value-added custody

Part 2 with Wei Zhou is broken up into 8 chapters:

Chapter 1: How Binance accounts for its revenue
Chapter 2: Binance’s fiat businesses (like Binance US, Binance Uganda, Binance Singapore, Binance Jersey, etc.)
Chapter 3: IEOs and the disruption of investment banking
Chapter 4: How Binance generates revenue (other than collecting trading fees)
Chapter 5: The Burning Schedule For BNB
Chapter 6: Stablecoins and pegged tokens
Chapter 7: Binance’s general operations
Chapter 8: Wei’s thoughts on the future

Topics Discussed In These Episodes

Part 1

How the work CZ did before Binance prevented some operational headaches that new exchange operators often face
The lawsuit Sequoia Capital lodged against Binance over a “no-shop clause” in a term sheet
Why Binance transitioned from “employees” to “team members”
Binance’s revenue numbers
The relationship between Binance Uganda, Binance Jersey, Binance Singapore, and Binance US with Binance.com
How centralized Binance is bootstrapping Binance DEX
The plans for Binace DEX to be open source
The biggest opportunities in crypto right now (according to CZ)
CZ’s thoughts on the role of equity over time
The succession plans for different sectors of the Binance ecosystem
Growth hacking strategies that helped Binance grow so quickly
Why CZ spends so much time interacting with people on Twitter
Why crypto exchanges will overtake custodial and staking businesses

Part 2

How Wei became the CFO of Binance (there was none before him)
Whether Binance is more of a B2B or B2C company
How Binance uses equity to recruit talent
The relationship between Binance and its fiat businesses
What Binance looks for in a partner
What the IEO process looks like with Binance
Binance’s plans for security tokens
Where the bulk of Binance’s revenue comes from
When Binance burns $BNB
Why stablecoins and pegged tokens are crucial for traders
The difference between a stablecoin and a pegged token
How living in a country with a stable baking system can be a disadvantage
Whether decentralized exchanges need CFOs
What Wei would do if he could make anything happen in the crypto space

Links Relevant To These Episodes

P.S. This series on Binance is part of a series of interviews I’m doing with exchange operators. We’ve already interviewed Alex Wearn from IDEX, the largest decentralized exchange, and Ivan Poon from Switcheo, the first multi-chain decentralized exchange. (Side note: If you run a top 50 exchange by volume, I want to speak with you as part of this series. Please contact us to set that up.)

Quotes

"I wouldn't start a crypto-to-crypto exchange right now, because that space is very saturated. There are thousands of these exchanges. There's more money to be made with fiat to crypto on-ramps." @cz_binance Click To Tweet "I'm usually not an extremist, but when it comes to equity, I do think it will become more and more irrelevant over time." @cz_binance Click To Tweet "Ideas are not that precious, because most people have ideas. It's the execution that's really hard." @cz_binance Click To Tweet "Binance Uganda, Binance US, etc. are separate entities from binance.com. @binance provides the technology and branding for those exchanges but they're run by local partners." @cz_binance Click To Tweet "We think there's going to be a lot more companies like Binance in the future where the founders get to execute on their vision with as little outside noise as possible.” @weizhouBinance Click To Tweet "IEOs are basically the next iteration from the previous ICOs which were a bit like the wild wild west.” @weizhouBinance Click To Tweet "To be a crypto exchange CFO, you basically have to learn a new language. There are some very antiquated financial and accounting methods like annual reports. By the time it's published, it's already out of date.” @weizhouBinance Click To Tweet

CZ / Binance – Transcript

Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do [00:00:30] not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

Welcome to this conversation with Binance CEO and founder, CZ. Binance is the world’s biggest crypto exchange based on real trading volume and on most days, they are the number one ranked exchange on nomics.com. Nomics has given Binance A exchange transparency rating, which means that [00:01:00] Binance provides highly audible and granular data about trading activities with complete history.

This interview is part of a series of interviews I’m doing with exchange operators. As part of these series we’ve already interviewed Alex Wearn from IDEX, the largest decentralized exchange and Ivan Poon from Switcheo, the first multi-chain decentralized exchange. And as a side note, if you run a top 50 exchange by volume, I want to speak with you as part of this series. So please reach out to set that up.

Now for some background on this interview. CZ is one of [00:01:30] my entrepreneurial heroes and if I had to choose between interviewing Warren Buffet or CZ, I’d choose CZ every single time. In preparation for this interview, I listened to every single CZ podcast that had been published to date. My goal was that through meticulous preparation, upfront communication with the Binance PR team, and editing that we’d co-create the best and most revealing CZ interview to date. Hit me on Twitter and let me know if we’ve succeeded or not.

Now, I know that Binance and CZ need no introduction, [00:02:00] but I’m going to do one anyway. Because of his general availability through media appearances and Twitter, it can be easy to take for granted what Binance has accomplished. Nonetheless, Binance has done what most companies could only dream of and is possibly the fastest growing private company in history.

Let’s run through Binance’s auspicious startup timeline. CZ purportedly heard about ICOs at a potluck in June of 2017. Three days after that, he had a white paper written in both Chinese and English. [00:02:30] Nine days after that, the ICO began. One week later he wrapped up the ICO and Binance has raised $15 million. Within five months, Binance was the world’s number one crypto exchange by volume. According to Laura Shin’s interview with CZ, it took Binance three months to get to 120,000 users, another three months to get to one million users, and then one more week to get to two million users. CZ, who is by all credible estimates a billionaire, did not [00:03:00] dispute these figures.

From these beginnings, Binance went on to start Binance DEX, Binance Uganda, Binance Jersey, Binance Singapore, and Binance US is on the way. They offer staking, OTC desk trading, and have announced that futures contracts and margin products are on the way. They have about 500 employees.

At the time this is being recording, Binance’s token, BNB, has a market cap of roughly $4.3 billion on nomics.com and is the sixth ranked crypto asset [00:03:30] by market cap. BNB is the top-ranked exchange token on Nomics as well. I believe Binance is one of the two most important companies in crypto and that there’s a good chance they will go on to become one of the most important companies in all of finance.

This conversation is broken up into 4 chapters. In chapter 1, we discuss the state of Binance when it launched, and the pre-conditions that led to its rapid rise. In chapter 2, we discuss the current state of Binance, where it is right now. In chapter 3, CZ shares what he would do if he were to start a company from [00:04:00] scratch with no personal grant, with no funding, et cetera. In chapter 4, we talk about Binance’s growth hacking strategies. In chapter 5, we close our conversation by exploring value-added custody.

In this conversation, we cover: (1) How binance.com launched with about 30 team members using the fifth generation of a trading system that CZ had been iterating on over several years. (2) Why having a mature trading system and matching engine upon launch gave Binance a leg up over competitors because it allowed them to focus on scaling human and [00:04:30] market systems while others in the space were just trying to ensure their software didn’t break under pressure. (3) How Binance Uganda, Binance Jersey, Binance Singapore, and Binance US are run by local partners, and are separate from Binance.com. That is, Binance.com provides the technology and branding, and partner companies operate those exchanges day to day, run the fiat onramps and KYC/AML processes. (4) How Binance created Binance DEX to disrupt itself. (5) Why Binance will eventually open-source Binance DEX. [00:05:00] (6) Why CZ believes equity will become more and more irrelevant over time. (7) What CZ would do if he were starting a crypto business from scratch, with no personal brand, no money, and no connections in the space. (8) Growth hacking strategies that helped Binance grow so quickly. (9) The importance of fiat onramps. (10) How exchanges of the future will handle staking, custody, voting, interest-earning accounts, and why exchanges will consolidate a lot of these separate services and provide them under one roof. [00:05:30] And finally, (11) We close out by discussing the one thing CZ would do if he could wave a magic wand and make something instantly happen for the crypto sphere.

We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the folks at nexo.io. Here’s a word from them. Nexo is the only lender offering instant crypto credit lines, which let you use digital assets as collateral to let you get cash in 45 fiat currencies [00:06:00] and stablecoins. As of this week, the company has integrated the Binance Chain so you can instantly access cash without selling your BNB. This is very new and quite cool, considering how much BNB has grown recently.

Nexo is also a strategic partner of exchanges, OTC desks, and crypto funds through its portfolio of structured financial products. Institutional counterparties can earn up to 8% annually on their idle stablecoins, enter into asset swap agreements, or directly borrow crypto. [00:06:30] If you are looking to borrow, lend, or swap digital assets, Nexo is your go-to partner. Definitely explore nexo.io or reach them on institutions@nexo.io.

On a personal note, I love nexo.io. I endorse them and if you are in any way, shape, or form, debating between selling some of your crypto assets to fund your day-to-day activities versus borrowing against them, I highly encourage you [00:07:00] to explore borrowing against them, especially if you believe those assets are going to go up over time. We talk about this quite a bit in our interview with Tuur Demeester about bitcoin accumulation and some of the strategies for doing that.

This episode is also brought to you by the Nomics API and CSV Data Export Service. If you need an Enterprise-Grade Crypto Market Data API For Your Fund, Smart Contract, or App, or if you need historical CSV dumps of trading data from top exchanges, or even obscure ones, then consider trying out the Nomics API or our historical data [00:07:30] export service. Our API enables programmatic access to clean, normalized, and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with multiple exchange APIs of varying quality, you can get everything through one screaming fast fire hose. And if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com.

OK, back to our regularly scheduled program. Here’s my conversation with CZ from Binance. Enjoy. [00:08:00]

I’m wondering if you can share, just for the cliff notes version, of your origin story prior to Binance.

CZ: I was born in China, grew up in Canada, went to high school and university in Canada. Then, worked in Tokyo, New York, Shanghai, and Hong Kong. In Tokyo, [00:08:30] I was working for an outsource consulting company for the Tokyo stock exchange. I was writing some code related to the matching engine. I was always a developer on the tech side, and working on the trading systems. I’ve been in the trading systems base for about 20 years now.

I got into crypto in about 2013, when I was running a start-up in Shanghai together with a few other partners. I learned about crypto, and then I left the startup I started for eight years, and jumped head-in to crypto. I left without having a job. [00:09:00] Then, bumping into Roger Ver, got into blockchain.info. Didn’t stay there for very long, because my technical skill wasn’t such fitted for a wallet business. Then, I went to OKCoin for briefly. There were some issues there. I won’t go into the details there Then, I left soon.

Then, I started assembling a team on my own. Providing technology for exchanges from 2015. Then, 2017 was when we decided to do Binance. The idea has been in my head for quite a while, but 2017 [00:09:30] we saw the market opportunity was ready, and we took a shot and it worked out. Oh well, we lucked out, basically.

Clay Collins: Let’s kick-off chapter one, which is about where Binance was at, as a company, as an organization, and a team at the time of your initial launch, and what resources you had at your disposal. There’s a lot of people that have speculated about the rapid rise of Binance. People have pointed to everything from regulatory arbitrage, to just [00:10:00] out-executing everyone else. I think there’s something that’s really interesting here in your background. That is, your history, you know, building trading systems. Then, also being a cloud provider of what is like a white label crypto exchange, done for a use system provider to other exchanges. It sounds like you had dealt with a lot of the scaling issues that a lot of exchanges don’t even encounter until year two or three, before you even started Binance. [00:10:30] Is that somewhat accurate?

CZ: Yes, I think that’s very accurate. Binance is probably the fifth-generation exchange system that I was involved in. Each iteration is a five-year project. It’s not just another upgrade. When we built Binance, we were very familiar with scaling issues, performance issues, et cetera with Binance. We designed the system from scratch to be very high performance, very low latency. When we first launched, I think the user experience, even today if you go to Binance, [00:11:00] the user experience is very obvious. When you place the order to when you get the trades and acknowledgments back, visually, with eyeballs you can feel the difference. I think people like that a lot.

There’s a few other things that I think we have improved for the overall industry, like customer support. Even today it’s not great, but it’s much better than when we first started. A lot of the ethos that we use to make decisions are very user-centric. We protect users very heavily. I think a lot of those things have actually [00:11:30] changed. Even for the industry. We did a lot of things first, and then the other exchanges copied us now. When doing that first, you get a lot of users.

Clay Collins: It’s interesting, the narrative around Binance as an overnight success. It’s probably impossible to perfectly peg the date that you launched version one of the trading system that would become Binance. If you could, what year do you think you did launch the father, or the grandfather to the trading system that would become Binance [00:12:00] when you launched it on day one?

CZ: I think, for this current iteration it’s somewhere 2016-ish. Early 2016, we launched our version that had some similar codebase to binance.com today. That’s in the previous company that we owned a hundred percent. We disintegrated that company already. That’s based on the codebase. Based on the design, there’s an earlier version of design which resembles some of the ideas we had for Binance. Some of the implementation wasn’t done well, so the performance [00:12:30] of that system still is very different. Even then, it has a five or six-year history in terms of the design architecture. Codebase, maybe a year-and-a-half before Binance was even launched back then that we still use today.

Clay Collins: When you went to launch Binance, and then do the ICO and all that, it sounds like you didn’t have to be preoccupied with a lot of the operational headaches that a lot of new exchange owners are preoccupied with, because you had version two, or three or whatever [00:13:00] of this trading system. You, perhaps, could be more present to growth, marketing, scaling, customer support, affiliate programs, or even being fully focused on an ICO versus just trying to keep the wheels on the bus. Is that more or less right, or not?

CZ: I think it’s half right. When we started doing the ICO, we had a team of about 30 people. Most of them are tech-related developers. We had 80% of the system already, but even [00:13:30] that 20% is still quite a lot to cover because of the new design, the new user referral programs, new user account systems. There’s still quite a lot of work, so it wasn’t like we were relaxed on the technology side. We were still scrambling.

We didn’t have a customer support team, so I had to borrow a customer support team from one of my friend’s companies, which used to be one of our clients. They run a different kind of exchange, but they were familiar with that. We also didn’t have a marketing department. We used to have a sales department, because we were doing B2B sales. Luckily, [00:14:00] I got my business partner […] to lead the marketing department, because she was also my partner in OKCoin back in 2014.

There’s a lot of networks that I did over the years that I’ve leveraged for Binance. It was still a scramble. It wasn’t like we were coasting. It was always a scramble, but we did have those resources that other people probably did not. I don’t want to offend anybody, but say, a fresh university grad may not have those kind of resources.

Clay Collins: It sounds like there were some things that needed to be done on the technology side, [00:14:30] like bolt-on or at least integrate an affiliate system, integrate some kind of ticketing system. You weren’t 30 days into this and deciding you had to throw out the matching engine, and restarting with that. The fundamentals were down.

CZ: Right, right. The matching engine was very heavily tested, so that part of it, we’re rock solid. There was nothing on a core technology side. It wasn’t like we just decided to build something new, and we had to start from absolute scratch. You can’t do that with an exchange. If you do that, then you would release your system a year later instead of 12 days later. [00:15:00] We launched Binance.com 12 days after the ICO, which helped with reducing the anxiety, or the waiting period for our investors.

Clay Collins: You mentioned luck, but it sounds like perhaps the luck was that you had been preparing for the genesis of Binance for a long time, and history collided with your interests, and the foundation of a new financial system all in one point, you know?

CZ: I think, in order to be lucky you have to be prepared. [00:15:30] Even though you feel very prepared, you still need luck. We were very lucky with our market timing. The Bitcoin price started going up around March 2017, so ideally, if we’re starting in March it would be better. If we started three months earlier. Three months later wasn’t too late, so we were very lucky with the timing.

Clay Collins: One of the most badass things that I’ve ever heard about Binance, there’s some really cool user growth stats, and all kinds of numbers that can blow people away. I recall seeing a story about [00:16:00] Sequoia suing you guys over the no shop clause in a term sheet.

My understanding is, when VCs hand out term sheets there’s a no shop clause, and there’s a confidentiality clause. I have never heard of a VC ever trying to enforce either of those. It just wouldn’t benefit them. It wouldn’t seem very pro-founder. If you sue someone over one of these, you’re never going to receive an investment from them in the first place. It seemed absolutely absurd. Is that story true? [00:16:30]

CZ: Yeah, that story is accurate. What happened is, when they made the proposal for the term sheet we explicitly asked to remove the exclusivity clauses. Then, once the term sheet was agreed on, basically they were making […] to seal the deal. In the original, there was another agreement which has an exclusivity clause, which we missed, so they sneakily put that clause in. Then, we started talking to Sequoia around August. The full press about this story is online, actually, now, so it’s 150 pages.

We started talking [00:17:00] to them in August 2017. September, China issued a ban on crypto exchanges, and they got cold feet. We continued on, moved out of China, et cetera. By December, we became the number one crypto currency exchange. It was so quick, they still wanted to invest at our original valuation. We were like, “No. That’s not how it works anymore.” We had a very brief back-and-forth negotiation, and they just went to court. Then, we were asking ourselves, “What happens if they win?” If they win, what they will get is, [00:17:30] we will come back to the negotiation table to negotiate the deal again.

Clay Collins: In that time, more time elapsed and you guys have grown more, and the valuation has gone up. There’s no win for them here, or it didn’t seem like there was.

CZ: We probably went up in value 10 or 20 times already, right? They wanted to invest at original valuation, and preventing us from talking with any other investor, which hurts us badly. Neither side wants to back down, so we went to court and we won everything. What’s interesting, Sequoia paid $2.4-million on their own for the legal fees. [00:18:00] I had to pay about $800-thousand myself just from the legal fees. Then, my $800-thousand was eventually covered by Sequoia because they lost. Sequoia paid about $3.2-million of legal fees, and won nothing.

Clay Collins: I’d never heard of them doing that before. Do you know if they’ve ever done that in the history of Sequoia? Is that the very first time that they’ve attempted these kinds of shenanigans?

CZ: I really have no idea, but I would imagine we were probably the first ones that fought back this hard. [00:18:30] I’m stubborn in that way. I’m mission-driven. Even though it hurt our ability to raise more money for the duration of that lawsuit, which took about a year. Luckily, Binance survived regardless of that, which is very lucky. I think most entrepreneurs, 99.9% of the case they will just cave in. They’ll just say, “Okay, no. We’ll come back and talk again. We’ll probably take some investment at the lower valuation just to remove the lawsuit.”

No startup can handle a year-and-a-half without investments from VC investors, et cetera. [00:19:00] Also, the reputational damage. Not the reputational, the sort of proceed to risk with a lawsuit pending on your head. I think this probably happened a lot more often than we know, but in almost all of those other cases the entrepreneur probably had to cave in, which is totally not fair. It is how most of the current world works.

Clay Collins: I love that story.

Let’s kick-off chapter two. In the previous chapter, we discussed where Binance and a lot of your systems were at the time of launch. Now let’s talk about your current state. [00:19:30] You guys are growing by leaps and bounds. Every time I hear metrics, they seem to be going up. What are you able to share about the latest in terms of employee count, users, revenue, that kind of thing?

CZ: We don’t share user numbers anymore, because as the exchanges grow, or exchanges develop the total number of users is less meaningful than the number of active users. On any given day we’re seeing a couple million of active users, and the number fluctuates quite heavily, depending on the market condition. For example, yesterday [00:20:00] it’s quite low because most of the prices are going sideways. When you have prices going up and down, then the active numbers multiply very quickly.

We are about 500 people now in terms of team size. We don’t really call it employee headcount, because we’re moving away from a company concept, and more into a just pure team concept. With 500 people we are already seeing a lot of different issues now; internal communication, internal management issues. We’re having some teething problems as well. [00:20:30] That’s the growth within.

Clay Collins: You mentioned you try not to use the term employee. That was actually one of the questions that I wanted to ask you going into this. What does it mean to be a member of a team there? You guys are running a grand experiment. Is there legal paperwork involved? What formalities exist there around being a team member?

CZ: Being a team member, there is an agreement on paper that’s involved saying what we expect you to do, what your compensations are, so you do get a sense of salary. [00:21:00] We do issue bonuses, so those are sort of short term compensation. We have a very similar concept to ESOP that’s allocated to team members and that’s tied to the future value of Binance, the centralized organization.

We borrowed those concepts, but the term of the company is quite weak in our concept, because we also have a BNB token, which is used in our ecosystem. Most people do take a portion of their pay in BNB. Most people choose a very large portion of BNB as their bonus. They grow in value with the market, [00:21:30] or drop in value with the market. Then, it’s in their interest to continue to push the ecosystem.

In our case, given that there’s a BNB token, which is a utility token used by many, there’s now more than 100 use cases. I think last time we counted 112. It’s no longer just about growing the company value, it’s about growing the ecosystem value. The more people who use BNB, the higher value for BNB is, and that’s beneficial for everyone that’s involved. Not just our team members, our angels, who does not get paid a salary, our [00:22:00] community members, our investors. There’s a different type of dynamic that’s involved once there’s a token issued. You actually want to grow the ecosystem value. It’s quite a bit different.

Clay Collins: What about revenue are you able to share, or do you not share revenue numbers?

CZ: Our revenue numbers are actually quite transparent. If you base it on the Fiat values at each quarter, last year, 2018 we probably made somewhere around US$450 million equivalent in crypto. The trick there is, because [00:22:30] we hold the crypto, when the crypto prices change our revenues actually change, even for historic income. I think the first half of this year has been better than last year. I actually don’t have the numbers on top of my head right now, but it has been better than last year. I think we have gone 60%, or 50% increase over last year in the first two quarters. Then, the next two quarters we just have to see what the market does.

Clay Collins: I think when Binance first came out I was able to wrap my head around all of it, [00:23:00] and I still think I do a fairly good job, but there’s a lot to contend with. You’ve got a token, you’ve got the DEX, you’ve got a variety of exchanges now, you’ve got an OTC desk, you’ve got Stablecoin. There’s a lot going on.

Maybe we could start with an overview of the various exchanges. We’ve got the Binance that everyone has heard of, you know, just Binance. There’s the decentralized exchange. There’s Binance Uganda, Binance Jersey, Binance Singapore, [00:23:30] Binance US that’s coming. Is there anything I’ve missed there in terms of exchanges?

CZ: Yeah, I think those are the ones. Yeah, I don’t think you missed anything. Those are the ones that’s public announced.

Clay Collins: When I look at sort of all these exchanges, which of these can be lumped together, and which of these is not like the others? So obviously, Binance DEX is not like the others. When it comes to Uganda, Jersey, Singapore, US, are those essentially more or less forks of the same code base [00:24:00] with the shared liquidity pools that are adapted to the regulations of various jurisdictions? Is that a good way to think of those or is it different?

CZ: That’s a pretty close way. There’s one minor clarification or changes. They don’t share liquidity. They’re pretty much the same code base. There’s some code that’s different because in each region the banking interface and the Fiat interface is a little bit different. The KYC procedure is a little bit different due to local regulations, but the main bulk [00:24:30] of the exchange is the same, and the UI is very similar. And so they’re all Fiat to crypto exchanges for those four.

Also, most of them are run by our local partners, which is a separate entity from binance.com. binance.com just provides the technology for those exchanges, but we also learn the branding. We also lend our security practices, et cetera. So, that’s what those are.

Clay Collins: So this is very similar to the business model that predates Binance, in other words. So are all of these Uganda, Jersey, [00:25:00] Singapore, US, this is licensed software, licensed branding, but run by a separate centralized entity that you have some kind of arrangement with around potentially profit sharing or maybe it’s just a flat fee, but that would make sense. Is that more or less right?

CZ: Yes, that’s pretty much right. So we have a business relationship with the local partner. There’s a fee structure in place. It’s a little bit more complex than just revenue sharing or just a flat fee. But there is a business relationship, but the local entity belongs [00:25:30] to the local entity.

Clay Collins: So is this like an open source software where there’s some kind of code repository and there’s a fork and there’s pull requests and you’re pushing updates and they can adopt them or not. How does that model look like in terms of you guys iterating on the trading platform and having these changes get pushed to various locations that all have their different nuances and different implementations when it comes to Fiat on-ramps and on and on and on. [00:26:00]

CZ: The matching engine is pretty much handled by one team, and this is the same code base for everyone. There’s not much forking or differences, and you can handle different symbols, different Fiat, et cetera. So that’s just one code base. The local banking integration, the payment channels, the deposit withdrawals are modularized and they’re different per geographic location. The KYC procedures is the same, so they are modularized per geographic location. So the tech team is pretty much [00:26:30] centralized and there’s a tech service level agreement with most of the local partners, and the local partners, mostly for regulatory compliance, marketing, local support, et cetera.

You mentioned open source. The binance.com, the centralized exchange’s code base is not open source. Binance DEX will be open source later. We haven’t open source that because we still want to maintain very fast development speed, but at a certain point, we’ll open source that.

Clay Collins: Watching a lot of this unfold from afar, it feels like centralized [00:27:00] Binance is bootstrapping decentralized Binance, and that eventually the decentralized Binance will potentially, I mean it feels like you want it to cannibalize centralized Binance. Is that correct or am I pretty far afield?

CZ: I think that’s pretty correct. We want to disrupt ourselves. I think in the future, in the far future, in the longer future, decentralized exchange is the way to go. So basically, I think in the future there will be a decentralized exchange that’s really fast, [00:27:30] that has a really good user experience, that’s very easy for people to keep their coins secure on their own devices. That’s anonymous privacy, strong privacy, et cetera. There’ll be interoperability between the blockchains so that different coins can trade on that same decentralized exchange. When we reach that stage, the competitive advantage for a centralized exchange will be weakened. But today, I don’t know if that’s 10 years away or five years away or one year away or two months away. So we don’t know. [00:28:00] So we do try in both.

Today, the centralized exchanges are by far larger and more popular because it’s easier to use. There’s a customer support. There are apps, et cetera. And also today, most of the money is in Fiat, so we need to get the Fiat on-ramps, the Fiat exchanges are working so that we can get the Fiat into crypto, because right now, there’s a lot of friction in that part. Exactly when are we going to go fully decentralized, I don’t really know, but we want to push the innovation there at least from the technology front. [00:28:30] Also we want to try from the business front. That’s why we launched Binance DEX, and we’ll just see how it goes.

Clay Collins: It does seem like in the event that you disrupt yourself or create your evil twin that potentially ends up winning. It seems like the incentives are aligned, employees own BNB, centralized finance owns BNB, and you’ve got a whole bunch of stakeholders that are also participating in the ecosystem.

You mentioned that Binance DEX is going to be open source. So in that scenario, I take it that you are very [00:29:00] open to having competitors to Binance DEX. So I don’t know if they’d be called relayers or just decentralized exchanges that allow for the swapping of tokens on Binance Chain. But do you foresee a future where others can facilitate trades in addition to Binance DEX?

CZ: There’s two points there. On the Binance DEX side, on the open source part, we do want open source and have other people be able to fork it or make improvements on it. One of the reasons to be very [00:29:30] transparent, right now, we have not open source data is that I do believe many other centralized exchanges are trying to stab into the decentralized exchange world. Many of them would attempt to copy us. I want to see them make their own innovation first before we open source ours, because if we open source ours, many of them may just make a fork of ours, and there’s no innovation. That might help the industry and that might help us.

So that’s a key reason why we haven’t open-sourced it. And from an incentive side, [00:30:00] which you mentioned earlier, given that there’s a BNB token, everyone is incentivized. So, for example, if the Binance DEX does really well, it doesn’t hurt us. If the Binance DEX kills binance.com, we’ll still do well because we hold BNB. And if Binance DEX does well, then BNB’s value will be high. So even though the binance.com equity value may be destroyed, but the token value will stay. So we’re okay in that. We’re incentivized to make both successful and make Binance DEX successful. [00:30:30] We’re not hurting anyway.

Clay Collins: Will Binance DEX have a monopoly on the exchange of tokens on Binance Chain?

CZ: I certainly hope that you will have a larger share because if you don’t have a larger share, then when the liquidity spread out among many different exchanges, then the user experience is poor. So that’s why exchanges have a strong network effect because the larger liquidity attracts more liquidity. So I think naturally there will be one that’s high liquidity and [00:31:00] that attracts everyone. And I hope that will be the Binance DEX.

Clay Collins: But others will be permitted to run exchanges that allow for swaps on by Binance Chain.

CZ: Once we open source it, and people can develop whatever they want. Even today, people can develop whatever they want. We actually don’t have a lot of control over that.

Clay Collins: Oh, got it.

CZ: We don’t even have a way to say no.

Clay Collins: I totally hear your point on it’s good to have deeper order books and all of that. So it does seem like there’s some really important network effects [00:31:30] around liquidity there that are important.

Looking into the future a little bit, I think traditional founders and CEOs of traditional companies do all kinds of succession planning that involves legal contracts and discussions of equity and what happens around various kinds of investment activities or transfers in power. And actually, it feels like with what you guys are doing, equity is becoming more and more [00:32:00] irrelevant over time. BNB is not turning out to be like just a fake proxy for equity.

It sounds like the long term plan is actually that it would represent a stake in this ecosystem in a much more meaningful way and it perhaps is that now. What are your thoughts about the role of equity over time? I have no idea if you have children, but if you do have children or if you do have them now, do you foresee yourself transferring [00:32:30] Binance equity to them as part of their inheritance or is it all BNB and the equity is irrelevant a hundred years down the road.

CZ: I think I’m of the extreme camp there. I’m usually not extremist, but when it comes to equity, I do think equity will become more and more irrelevant. Equity is a virtual concept, right? So equity doesn’t really exist anywhere other than the concept in somebody’s head. I mean, yes, you can have a piece of paper that says equity, and you can sign it, but it’s a virtual concept. It’s not a physical thing. And even company [00:33:00] is a virtual concept and not a physical thing.

Clay Collins: Hey! I wanted to pause for a second to let you know that this episode of the Flippening podcast is brought to you by nexo.io, the only lender offering instant crypto credit lines, which let you use digital assets as collateral to get cash in 45 fiat currencies and stablecoins.

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This episode is also brought to you by the Nomics API and CSV Data Export Service. If you like to learn more, we do a webinar every weekday called Crypto Market Data 101: Fake Volume, Exchange Spam, and How The Seedy Market Data Underworld Actually Works. To attend that webinar, just go to nomicswebinar.com.

OK, back to the show.

CZ: I think given that there’s now a token economics that’s working now, [00:35:00] I think the company concept will slowly get phased out. It will take some time because there’s a lot of historic buildup around the concept of companies, equity, shareholders, IPOs, et cetera, and all the security laws involved with that. I think there’s a $20 trillion market cap in the States alone. I don’t know what the number in the world, but I think that’s going to slowly diminish.

This new way of having a token is much better. It does not make your token a security. [00:35:30] It’s more of a utility. So the more people use it, the better. And I think that’s a much better way to do things because now you can incentivize your users to hold your coins. That has a very strong attractive locking feature for your future users. So for example, many people who think they will trade a lot of Binance, they will buy Binance coin right now. And when the coin price goes up because more and more people join, not only they make money on their trades, [00:36:00] but the holding of the Binance coin also increase in value.

So they’re more incentivized to give us good feedback, help us improve the platform, tell us where we’re weak, and go out, get their friends to join the platform. So that’s something that equity doesn’t really work in that kind of situation. So, I think, historically, the equity is working in the sense that you have a bunch of VC investors who makes all the money that your user pays you or you sell the user’s data to make money for your VC investors, which are three separate groups of people.

So you have the VC investors, [00:36:30] yourself, and then the users. And the users are constantly paying one way or another. But now, we can let go of the VC investors. Now, the users are your investors. And that’s a very different dynamic now. So I think that’s the future. So to answer your question, if I leave anything for my heirs, it will be crypto. It will not be any equity on paper.

Clay Collins: I think those were well-made points in terms of how you parse that out. Steve Jobs [00:37:00] CEO of Apple left the helm of that business to Tim Cook. Bill Gates left it to Steve Ballmer, and then we have a new CEO at Microsoft. Same with Google. Do you think you’ll, at whatever point you decide you’ve had enough of all this crypto and whatnot, do you foresee yourself handing the ropes to another person or do you see yourself handing this off to the cryptosphere? Does it get handed off to the community in a true decentralized autonomous organization fashion or do you think [00:37:30] you’re passing the baton to a person?

CZ: That’s a good question. So there’s different parts in Binance ecosystem now. For binance.com, I think it will be more like a baton passing to some guy because binance.com is a centralized service. And with centralized service, you typically have a chain of command in a hierarchy, that makes sense. And I actively want to pass that on. Honestly, most people are jealous of people running a successful exchange, [00:38:00] but if you actually run your successful exchange, you know how much headache is involved. There’s just so much stuff going on. So many issues, so many problems you have to deal with.

So I would very much welcome a professional CEO, manager, a leader type of person to take this on. But I think it will take a couple of years because we’re still quite new and there’s still a lot of things in flux. And we’re not organized in such a way like a well established big company kind of thing.

On the other parts of the [00:38:30] Binance ecosystem, like the DEX is a prime example of just letting the community handle it. Very soon in the future, we’ll open source it, and later on, there’ll be more validator nodes, and then there’ll be community voting on the next directions, next steps for the DEX development, which upgrades to do, which upgrades not to do. And then I think that will be very natural for it to evolve into a community decentralized-driven project.

There are other parts like the NGOs and stuff like that. Each one [00:39:00] of them came spawn on their own later on. So the Binance ecosystem is now managed from top down like a centralized organization. The ecosystem itself will each become independent and go their own ways. That’s in my head how this thing will play out. And for me, I’m happy to retire and find something else to do. I’m pretty sure I’ll find something else pretty interesting to do and that’s less stressful than running exchange.

Clay Collins: Let’s move on to chapter three which is about what you would do if you were starting from scratch. [00:39:30] I’m sure while you’re doing all this stuff with Binance, you’re looking at a lot of other things that are happening in areas of decentralized finance, tokenization of debt, security tokenization, on and on and on, non-fungibles, I mean the opportunities are really endless.

If you were starting today from scratch in either creating an exchange or creating some kind of other crypto company, [00:40:00] and let’s say you didn’t have any of the followers you have on Twitter, you didn’t have a personal brand, none of those things existed, and you were starting today, what do you think you’d do?

CZ: If I was in that situation right now, for most people, I would highly recommend not starting the exchange. It’s just one of the worst businesses to run, one of the most stressful. Yes, if you’re successful, you make some money, but there’s more exchanges that loses money quickly than making money. But if you have to start an exchange, [00:40:30] I would not go to crypto-to-crypto right now, because that space is very saturated. There’s probably thousands of exchange that wants to do crypto-to-crypto right now. There’s more money to be made for Fiat to crypto on-ramps right now.

Clay Collins: Hey, this is Clay cutting in to define what fiat to crypto on-ramps are. A fiat to crypto on-ramp is an exchange that provides a service to convert fiat like US dollars, or Euros, et cetera, to a crypto asset. An example of a fiat to crypto on-ramp is Coinbase [00:41:00] or any other exchange that allows you to purchase crypto assets with funds in your traditional bank account. Okay, back to the show.

CZ: And that requires a slightly different skillset, more dealing with regulatory issues, opening bank accounts, ensuring those bank accounts do not get shut down, doing KYC, AML, so that’s a slightly different skill set that’s required, or slightly different mentality or focus that’s required for that. And on the other extreme, DEX, if you have a longer horizon, if you’re not hungry to make [00:41:30] money very quickly, if you can commit for like 5–10 years, then I would say DEX is a good place to start. And that would also be a good place for people who are very technology-driven, who are good developers, who are good coders.

So on the exchange side, that’s that. I actually really wouldn’t recommend doing an exchange because a lot of the opportunities that Binance started, we had, are now much less available. For example, when we first started, most of the exchanges do not have, [00:42:00] even have a mobile app. Most of the crypto-to-crypto exchanges are in English only and web only, and the interface is not very great. But now, that’s changed. There’s thousands of crypto-to-crypto exchanges available in every language in mobile apps, et cetera.

Customer support has improved dramatically as well. Two years ago, it used to be that you submit a ticket and you wait for two months for a reply. But today, on Binance and most other exchanges, you will receive a reply within one day. So the industry has changed [00:42:30] a little bit. I would say there are more opportunities elsewhere.

I think gaming is prime for crypto adoption. I did participate in the charity poker tournament, and the experience was super smooth. You open a browser, You can deposit money through the blockchain very quickly. It takes a couple of seconds because the blockchains now are fast. And then you can play on four tables in the browser, no software installed. You close the browser, and also the deposit money is through a [00:43:00] web extension plugin wallet. So everything happens in the browser. You shut down a browser, everything stops. So that experience is so much better than the historic experience of bank transfers, credit cards for payments and stuff like that. I think e-commerce is probably a bit later.

Number one, given that I think Amazon does a pretty good job in a lot of places in the world with e-commerce, making the user experience very fluid. So it’s kind of hard to compete with that user experience using crypto, but I think eventually that will come. There’s many other fields, [00:43:30] but I think gaming is probably one of those really interesting ones that people should look into. If you have a traditional gaming experience, building popular games, adding crypto is very easy. Once you add crypto, then you have a token economy associated with your game or your gaming ecosystem. Most game developers develop multiple games. That’s very powerful. So I think that’s a really interesting area people should look at.

Clay Collins: I think that’s a really fascinating point. It seems like the people that have done the best work [00:44:00] or grown the fastest in crypto are people who have kind of prior domain knowledge and then added crypto to the mix to really accelerate things. There’s a lot of people that seem like they came to crypto because they liked crypto, and they lack real world experience of domain knowledge, things like that. So I think that’s a good point about courting existing game developers to add crypto and take all these virtual assets that they’re selling for money in their app, [00:44:30] put them on the blockchain and create secondary markets, and perhaps do something that no one has ever done before. It does seem like a great opportunity.

Let’s move on to chapter four which is about Binance’s growth hacking strategies. Whenever I hear anyone talk about Binance in these spaces, it seems like there is an insatiable kind of desire to unpack their success. No matter how many interviews you do, no matter how transparent you are on [00:45:00] Twitter or speaking at various events, people, they still want to know the real reason why you grew so quickly. I think what we talked about at the beginning of this interview, I think does a pretty good job of hitting on that. There was just an incredible amount of preparedness that started even before you were focused on crypto exchanges in this kind of trade execution and exchange space.

That, combined with an incredible amount of conviction and hard work [00:45:30] and a whole bunch of other things and timing. But I think I’d be doing a disservice to some of these people if we didn’t talk a little bit about exchange growth hacking. I think it’s a fun topic and it’s something that a lot of people are curious about, and I think there isn’t a lot of content that really serves that curiosity. So now that you guys have a pretty large moat and it’s not like you can tell someone, “Hey, have an affiliate program,” and now they’re going to overtake you, I would like to talk [00:46:00] a little bit about the growth levers that you feel exist for exchanges and opportunities that exist out there.

Marketing, at least online, there’s sort of the checklist, right? You should do SEO. You should focus on branding. Maybe have some kind of referral program. You can build a community around a token and asset. You attract liquidity providers and market makers. There’s so much to potentially do. [00:46:30] What do you think, other than executing better than anyone else or as well as anyone else has executed in this space? What do you think about exchange growth hacking? What has worked for Binance, I guess, historically, and what do you think is working now, that you’d be willing to share?

CZ: Ideas are not that expensive or not that precious, because most people have those ideas. It’s the execution that’s really hard. We have affiliate programs. We’re actually not the earlier ones to have the affiliate programs, [00:47:00] but we’re very generous with the affiliate programs. We give like somewhere between 20-50% off our rebates, when you refer somebody. We do many things very innovatively, now other people are copying. For example, we do exchange based staking. We’re the first exchange to do that. So when you hold neo in your wallet, you will get gas, but when you’re hold neo on the exchange, typically you don’t get it, until we came along. So we said, “Well, if you hold neo in your exchange account, we’ll calculate it, [00:47:30] and we’ll prorate it, whatever gas that’s generated to you.”

We do that now with, I think, five or six coins now, and we continue to add. So I would encourage other exchanges to do that, too, because that will make our industry a little bit better. We have a large selection of coins, and selection of coins is very tricky. Some exchanges added thousands of coins, but then the majority of them are bad, and that actually is a bad experience. So there’s a fine line to be drawn somewhere that you want to have the good coins, you want to have a large selection [00:48:00] of coins, but you don’t want to have all the really bad coins. I think so far, we’ve done okay in that space. You’re never going to get perfect.

Then I think you’ve got to have a mission that you’re really believing, and every decision, you have to reflect that. One of the key things, we want to promote the freedom of money and we want to protect users. Throughout our short history, our decisions reflect our mission, and people can understand that and people can relate to that. I think that’s really important in today’s startups, [00:48:30] because it’s not just about the best user experience, the best customer support. That’s important, but they also want to know why you’re doing that. Are you just looking for more money, or are you trying to do something that’s bigger? This is why Binance have a few hundred volunteers, we call them Binance Angels, working for us, and they are actually a very strong voice in the community.

The other things we do, for example, we also have charity, so social impact work, even [00:49:00] for a two year old startup. That’s really important as well, because people see that you’re doing the right thing. It’s not just you’re doing something to make money. Yes, it’s okay to make money, but you also want to make it very properly and you also want to do the right thing. There are other things I do, which I still don’t see a lot of other people do.

I spend a lot of time interacting with the community. I think I’m one of the few exchange CEOs who are on Twitter fairly constantly, and I think people like that. I think people today don’t want a big organization, big CEO sitting in the [00:49:30] top of a building that’s never reachable. I think people, especially people in Crypto, they like people who are down to down to earth that you can interact with, et cetera. So I think that’s kind of important as well.

There are many other different techniques we try. Many of them don’t work, but we just keep trying new things and eventually we figure them out. The last thing I want to add is, I would highly encourage other people to focus on fiat on-ramps. I think that’s where the big market is going to be in the next little while, because right [00:50:00] now all the money’s stuck in fiat. We need to have an easy way for that money to cover the crypto and back. So anything that’s kind of focused in that area would help this industry a lot.

Clay Collins: I think there’s a whole discussion to be had about value added custody, all the things that you can actually do for people once they’ve deposited their funds with you. There’s a lot to unpack there. Around Twitter, I think it’s true. I think people want to do business with a person, they don’t want to do business with a business. I know when I [00:50:30] deposited funds into Binance, my thinking was that, “I want to do business with CZ. I like what he’s saying on Twitter and I resonate with that.”

Why do you think more exchange CEOs don’t do that? It seems like it’s fairly inexpensive. It can be kind of a pain in the ass. It doesn’t seem like super hard, hard work. Are they worried about saying the wrong thing and then regulatory bodies clamping down on them? Is it fear? [00:51:00] Why don’t you think that’s more common practice?

CZ: I think there’s two larger sort of group of reasons. The bigger one’s probably time commitment. It is a large time commitment that feels like just playing around and not real work. The other bigger side is Twitter has a lot of trolls. There’s a lot of guys saying random […] and then very offensive people. Sometimes the experience is not all positive. And a lot of tricky questions. It’s quite easy to get dragged into a debate, stuff like that. The more [00:51:30] you appear on Twitter, the more people expect you to appear on Twitter. They’ll be asking stupid questions and then say, “Why don’t you answer that?” So basically, you have to have a pretty thick skin and be able to roll with the punches.

My personality works with that, I don’t know why. When people say some offensive stuff with me, I just ignore, or like when people make a joke, I usually laugh with them. SAFU is a word that came from a joke, from a video.

Clay Collins: Hey, this is Clay cutting in to shed some light on what SAFU means. [00:52:00] SAFU stands for Secure Asset Fund for Users. This is an emergency insurance fund created by Binance for its users in the case of exchange hacks. The term SAFU originated when a YouTuber uploaded a video accidentally titled Funds are Safu. It became a meme and spread virally. Okay, back to the show.

CZ: One guy described my mentality quite well, which is, you want to take work seriously, but you don’t want to take yourself too seriously. So you’ve got to relax a little bit about yourself, so you’ve [00:52:30] got to let that go a little bit.

I think both of those reasons are there, but I think interacting with the community is a key requirement if you’re going to issue a token. Because if you don’t issue a token, yes, okay, the customers can pay you for your service and then they can leave. But you have to talk to investors, which are mostly VC investors or friends and families. But if you issue a token, then you have a community. You’ve got to talk to a community. That’s kind of my philosophy. That’s why I do spend a large amount [00:53:00] of time on Twitter.

Clay Collins: You have mentioned fiat on-ramps a few times, and you mentioned that it’s important that we get this flow of money, we need to convert it to crypto to make this new vision for the world a reality. In terms of the business opportunity side of that, it does seem like it can be laborious. If you were going to focus on that as an exchange, would you pick a niche jurisdiction that may be underserved in terms fiat on-ramps and just focus there? [00:53:30] It feels like the US market is pretty saturated, but there’s lots of places in the world that would love exposure to crypto and don’t have good fiat on-ramps. Do you think there’s niche vertical opportunities that exist there, or not?

CZ: I think right now, almost no market is saturated in terms of crypto market. I think even in the US, or anywhere in the world, there’s probably less than 0.1% of people who actually have crypto. Probably less than that. So there’s [00:54:00] probably 1000X to grow. Also, the crypto market is going to be bigger than the fiat market. This is similar to Uber’s market is bigger than a taxi market. There’s more things you can do in crypto than just fiat money. So I think in crypto, you can combine the currency aspect, the equity aspect, the utility aspects. We can combine a lot of real estate projects. There’s a lot more things you can do with crypto.

I think the market is not saturated anywhere. [00:54:30] There are jurisdictions with clear regulations and some of them are more favorable than others. Those are probably easier to do, but then the competition will be higher, as well. For example, Malta, there’s probably a lot of companies in Malta now, all of them having bank accounts, are able to provide fiat to crypto services. There are places with less clear regulations and there are places with more negative regulations. Those are tougher to crack, but it depends on everybody’s skillset. In some countries, [00:55:00] if you’re the son of the prime minister, then you probably could do something like that, crack a very difficult regulatory landscape, which is actually your advantage.

So there’s different guys with different resources and different skill sets. But I do think that that’s a pretty big market around the world, and the competition is segregated by countries naturally, so you’re not competing globally. Whereas today, if you want to start a crypto-to-crypto exchange, you’re competing with a thousand other crypto-to-crypto exchanges, including Binance globally, and there’s [00:55:30] only going to be a few winners. So, I do think that’s a pretty important market to crack, and that requires many different players in many different parts of the world working on their own to crack each local jurisdiction.

Clay Collins: I was talking to someone the other day who, just working evenings and weekends, created the first fiat on-ramp in New Zealand, I believe, and he’s crushing it. He’s the only one that really provides that service, it’s hard to come by, and he’s doing a good job [00:56:00] of it. It’s not even a two-sided marketplace. He’s just filling orders himself, kind of like an OTC desk. It does seem like there’s some cool opportunities there.

Let’s move on to chapter five which is about value-added custody. It seems like there’s a lot of businesses in the crypto space that are just kind of versions of value added custody. So someone will custody your funds and give you a loan, or someone will custody your funds do staking for you, staking as a service, voting, things [00:56:30] like that. Do you foresee that the future of these services is really consolidation? Down the road, someone like Binance will allow you to earn interest, staking you’re already doing, voting, all that stuff? Or do you think crypto exchanges are going to stay fairly focused on just doing one thing and one thing well?

CZ: I think the crypto exchanges will take over most of those businesses, especially around custody, staking, voting and a lot of those things. Basically, today, [00:57:00] most of the phones are already sitting with crypto exchanges instead of a user wallet, especially for the average user. Having a separate staking service that charges a fee to do your staking usually, then if the user get less of the staking that they get. Whereas, for Binance, when we do staking, we give 100% of the rewards to the user. We just distribute that completely. We don’t need to make money on that. We do make money on the trading fees already, so we can basically provide that additional service for free, [00:57:30] and for the users who they have funds with us.

Custody is kind of like that already, and also for both custody and especially for staking, the technology barrier is not that high, because the official wallets pretty much have to support staking anyway. So it’s not something that you have to develop separately that’s really hard to do, et cetera. So there’s no technical barrier for exchanges to do it. The cost is quite low, as well. For custody, there may be legal [00:58:00] requirements in certain jurisdictions that require a separate custody service, but in larger parts of the world, that requirement probably is not very strong.

Exchanges already must have the technology to do custody of funds securely anyway, so there’s no additional cost to them, and having a separate party doing that, in my head, I don’t see the business model. I don’t see how they competed with the exchanges, because exchanges will provide the custody service for free, whereas, [00:58:30] if you have a separate custody service, that’s holding less money potentially, meaning that they probably have less money to invest on the security side of it, that’s actually charging more. So I don’t see how that business works.

To answer your question, Binance will provide custody, staking, all of that for free, 100% free, because we just view that that is our responsibility to provide that for users. We’ll continue to add more in those areas, and there’s really no reason for people moving funds to a separate place [00:59:00] just for staking or just for custody.

Clay Collins: In the traditional financial world, people have bank accounts with a host of banking services that come with that bank, and then they move their money off that to an exchange if they want to buy stocks or do trading. It’s kind of cool that a lot of this is being consolidated in the world of crypto and perhaps Binance. Perhaps at some point the term “exchange” will be a little bit outdated. Maybe it’s just kind of the modern bank, for crypto.

CZ: That’s where the [00:59:30] name Binance comes in, right? It’s binary finance. It’s not “by exchange” or something. So it’s not an exchange.

Clay Collins: If you could wave a magic wand and make something instantly happen purely altruistically for the crypto sphere, what do you think you would change or make happen?

CZ: Oh, that’s simple. I would say, if I could swing a magic wand, then I would say immediately [01:00:00] for every country to drop their own currencies and adopt crypto currency. That would be much better for everybody, including the countries themselves.

Clay Collins: Well, that concludes our conversation with CZ from Binance. I hope you enjoyed it. Before you go, I want to mention that since we’ve started producing episodes at a much higher rate, we now have room for a few more sponsors. [01:00:30] If you like the work we do and would like to support this show, then a sponsorship might be a good fit for you.

I can say from our own experience that Flippening sponsorships work. Each and every time we put out an episode of this podcast, we mention our own API. And to date, every single one of those advertisements has resulted in at least one customer. In fact, we would do these shows even if nobody else sponsored because of the business it brings to us. And over 80% of paying customers mention that they heard of us through our podcast. If you’re interested in sponsoring the show, please hit us up [01:01:00] at support@nomics.com.

Alright, that wraps up things for this week. Stay tuned for next week’s episode. Until then, take care.

That’s it for this week. To sign-up for our free crypto investing newsletter, listen to other episodes, or get the show notes from this episode, please visit flippening.com. I also invite you to check out the startup that funds this podcast, Nomics at nomics.com. Finally, if you get value from the show, the biggest thing you can do to help us out [01:01:30] is to leave a five-star review with some comments and feedback on iTunes, Stitcher, or wherever you listen to podcast. Thanks for listening, and see you next week.

Wei Zhou / Binance – Transcript

Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the crypto currency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do not [00:00:30] reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

Welcome to this two-part series on Binance. Today I’m joined by Binance’s CFO, Wei Zhou. Binance is the world’s biggest crypto exchange based on real trading volume and on most days, they are the #1 ranked exchange on nomics.com. Nomics has given Binance an A exchange transparency [00:01:00] rating, which means that Binance provides highly auditable and granular data about trading activities with complete history.

In the previous episode, which was episode number 52, I had the honor and privilege of interviewing CZ, who is the CEO and founder of Binance. If you haven’t taken a listen yet, I recommend you start there. In that conversation, CZ gives us a behind the scenes look at how Binance grew to become the number one crypto exchange, only a few months after launching.

In this episode, we continue our exploration [00:01:30] of Binance by talking with Wei Zhou. Before joining Binance in 2018, Wei was CFO of several startups, including two companies that IPOed in the US. Wei was also instrumental in the 2018 Grindr acquisition.

This conversation is broken up into eight chapters. In Chapter 1, we discuss how Binance accounts for its revenue. In Chapter 2, we explore Binance’s fiat businesses, like Binance US, Binance Uganda, Binance Singapore, Binance Jersey, et cetera. In Chapter 3, we dig into IEOs [00:02:00] and the disruption of investment banking. In Chapter 4, we cover how Binance generates revenue other than collecting trading fees. In Chapter 5, we discuss The Burning Schedule For BNB. In Chapter 6, we delve into stablecoins and pegged tokens. In Chapter 7, we examine Binance’s general operations. Finally, in Chapter 8, we close our conversation by peering into the future.

We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by nexo.io. [00:02:30] Here’s a word from them.

Nexo.io is the only lender offering instant crypto credit lines, which let you use digital assets as collateral to get cash in 45 fiat currencies and stablecoins. As of recently, the company has integrated the Binance Chain so you can instantly access cash without selling your BNB. Nexo is also a strategic partner of exchanges, OTC desks, and crypto funds through its portfolio of structured financial products for institutions. Institutional counterparties can earn up to 8% annually [00:03:00] on their idle stablecoins, enter into swap agreements, or directly borrow crypto. So if you are looking to borrow, lend, or swap digital assets, Nexo is your go-to partner. Definitely explore nexo.io or reach them on institutions@nexo.io.

And as a side note, I’m a huge fan of what this company is doing, and in general, I’m also an advocate for borrowing against your crypto assets if you do need to take out cash to cover [00:03:30] day-to-day expenses, get a mortgage, or get a car. In general, if you believe that crypto assets are going to go up over time, there is no reason not to at least consider as one of your options taking out a loan against your crypto assets or your crypto wealth, benefit from an extra 12 months, potentially have gain to the market. Again, that might not happen at all, but this is something you should definitely look at and something that I’m an advocate [00:04:00] for. But again, this is not financial advice. Consult an expert, look at this closely, but this should be within the realm of things that you look at when considering financial planning and the future.

This episode is also brought to you by the Nomics API and CSV Data Export Service. If you need an Enterprise-Grade Crypto Market Data API For Your Fund, Smart Contract, or App, or if you need historical CSV dumps of trading data from top exchanges or even obscure ones, then consider trying out the Nomics API or our historical data export service. Our API [00:04:30] enables programmatic access to clean, normalized, and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with multiple exchange APIs of varying quality, you can get everything through one screaming fast fire hose. And if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com.

OK, back to our regularly scheduled program. Here’s my conversation with Wei Zhou from Binance. Enjoy. [00:05:00]

Clay: What was your background prior to joining Binance?

Wei: I’ve been with Binance officially coming about a year. Prior to Binance I’ve been, I would say, probably just a financial professional. I started off my career as a banker with Goldman Sachs in Hong Kong. So basically doing M&A work, corporate finance work, [00:05:30] and then distressed investing.

In about mid-2000s, I moved from Hong Kong to Beijing where I basically joined a startup there. Over 10 years, I’ve been a professional CFO for various startups and pre IPO companies, based both in the US and in China. Two companies I’ve worked with, both gone public in the US.

I was a public company CFO for about four years. Just prior to Binance, I was actually doing a little bit of a cross border M&A, [00:06:00] and one of the interesting companies we acquired is actually Grindr.

Clay: You’re on the acquisition side of the Grindr deal?

Wei: That’s correct. I basically raised capital from a Chinese company that ultimately ended up buying Grindr.

Clay: How did you first come in contact with the Binance team? What was the genesis of that relationship?

Wei: I’ve met the founders of Binance, CZ and He Yi, when they were colleagues at Okay coin, which as you remember, was one of the [00:06:30] top exchanges in China at that time. I was a CFO for a separate company in Beijing, and then I met them and then had an opportunity to learn about Bitcoin and everything crypto. That was when the personal relationship started.

When they launched Binance in 2017, I was following them through various social media platforms and was actually very, very excited about the growth of the business. And then I connected with them first half of 2018, and basically [00:07:00] begged for a job.

Clay: So you started out in the CFO role at Binance. Is that correct?

Wei: Correct.

Clay: And had they not had a CFO prior to that?

Wei: That’s correct. the company is very young. Even today, it is barely over two years old, like two years and one month. When I joined, at least, there wasn’t really any financial function. There was basically some accounting stuff, but a lot of the, I’ll say, traditional financial management structure didn’t really exist. [00:07:30] At that point it was mostly a technology- and product-driven growth trajectory.

For me, this is my fifth, early stage startup, but this is probably the most explosive growthI’ve ever seen or I’ve ever experienced. It’s not just a regional focus. It’s not a US thing or an Asia thing, but it’s actually a global phenomenon that took place. At the same time, the company grew without having any banking services, [00:08:00] mostly out of not really having had that choice. I think there’s a lot of things that were done basically on the blockchain. And then also the decentralized nature of the teams, distributed in multiple locations around the world, presented a whole new set of challenges. From my perspective, I had to take off the traditional financial manager hat and basically put on my growth hat and do everything that will help the business to grow in a sustainable and continuous fashion. [00:08:30]

Clay: What do you think in its heart and soul, you think Binance is a B2B company? Is it a B2C company? Do you think of yourself as a consumer business?

Wei: I see us as a Fintech company that serves both institutional and retail clients. I think at the end of the day we’re a service company, and just so it happens that our services are delivered through the technology and the products that we have. The ultimate beneficiaries of some of these services, they could be retail, [00:09:00] but they could also be institutions.

Clay: What do you think makes Binance different from other startups?

Wei: There’s two very unique things about Binance that is very different from traditional startups. One, the company raised capital through our ICO in July of 2017 and we raised only about $15 million equivalent. So the company never raised any outside venture capital. The way that the company is run in a decentralized fashion [00:09:30] is that we don’t really have a board or we don’t really have shareholders.

The shareholders are BNB holders but then also a combination of the original founders of the business. It’s not really short-term focused in terms of what’s your quarterly performance review, what’s your books. All of us are long-term holders of digital currency. We don’t really let the daily, or the monthly, or even the quarterly annual fluctuations in price.

[00:10:00] During the crypto winter, there’s a lot of crap that fell on some of the companies that held onto digital assets because from an asset valuation perspective, they lost XXX amount of money, and because they had to file annual reports or quarterly reports to the shareholders. But if you take a really long-term view of bitcoin and of BNB, which was sort of our core holdings, we don’t really care about the daily or the monthly fluctuation of prices. And that takes a lot of “financial asset management” or risk management out of the roles [00:10:30] of the job. We think there’s going to be a lot more companies like Binance in the future, where the founders get to execute on their vision with as little outside noise as possible.

Clay: What parts of the org report into you? Does corp dev report into you or is that set go to the COO function?

Wei: We have a chief strategy officer, Jin. He does more of the corp dev work specifically. For me, my primary functions in addition to finance, [00:11:00] are more on legal compliance in all of our fiat businesses and then maybe some specific M&A work in specific areas that’s under fiat.

Clay: When you refer to your fiat businesses, are you referring to the partnerships like Binance US, Binance Uganda though? Are those the fiat businesses?

Wei: That’s correct.

Clay: Let’s kick off chapter one which is about Binance’s accounting, reporting, and revenue recognition.

You’re not beholden to [00:11:30] board members who are requesting ridiculous ad hoc financial reporting and analytics at quarterly board meetings. It’s a very pragmatic approach and at the same time you have this incredibly high transaction volume business. You’ve got orders and then you’ve got a whole bunch of trades that happen under each of those orders. Some of the orders are partially filled, some of them are completely filled, some of them are canceled. On each of those trades you’re generating, you’re generating trading fees. It seems like [00:12:00] there’s a lot that might go into understanding exactly how your business works in terms of where the money’s coming from, what’s driving revenue, how institutional versus consumer your business really is. I think the traditional CFO came up through accounting, knows Excel really well.

It does seem like there’s a new kind of, Binance team that is a bit more big data driven [00:12:30] that might be a good fit for what you guys are doing. Is the task of understanding what’s happening and where your revenue is coming from, does that fall under your team or is that a separate data science team that maybe is on a growth team somewhere else in the org?

Wei: There’s different aspects of the business. I think the revenue aspects is actually the easy part because we book trading fees based on trades. For each trade, there’s a transaction fee. [00:13:00]

Clay: But there’s millions of trades. In the last 24 hours, it looks like there’s 1,581,000 trades just on binance.com.

Wei: For each trade, there’s going to be positive revenue for some trades. There could be no revenue. It depends.

Clay: It’s conceptually simple, but in terms of trying to figure out these trades coming from new trading pairs that we’ve added, are they coming from bread and butter? [00:13:30] Are these large block trades that are coming from institutions? Just understanding the sources of revenue, when you dig just a few layers below it, it seems like it’d be pretty difficult to do.

Wei: There’s a lot of post facto analysis we can do in terms of trading patterns, depending on whichever alts are mooning, there’s different trade, transaction arms that come through. Then we also have in our API. A significant amount of volume comes from the API traders, but also not [00:14:00] a small portion comes from outside your general retail traders.

It’s all automated. I think that’s the point that I’m trying to get to and that will have the matching engine that matches it. And then at books, depending on the clients, you book different and then depending on whatever activities we have or whether they choose to pay in BNB or not. One of the use cases for BNB is that you can use it to pay for trading fees and then you get a discount right now. So, just depending on whatever you’re using or choosing, [00:14:30] all of that stuff is automated. From my perspective, you basically see a report.

Clay: So that means you’ve got a good team.

Wei: It’s no different than any other exchange or digital marketplace.

Clay: When I think about all the different acquisition channels, is this coming through an affiliate program? Is this coming through SEO? And then looking at the lifetime value, the customer, and how that changes, there’s a lot that can be there.

Wei: There’s a lot of post facto analysis you can do and then there’s a lot of performers you can set before [00:15:00] to be quite selective in terms of looking low, what kind of patterns you’re trying to look for.

Clay: You mentioned that, for quite some time Binance was an organization that operated without traditional banking services. Is that still somewhat the case now? do you have bank accounts and banking arrangements here and there? But largely, is Binance an organization that pays people in crypto and operates mostly within the cryptosphere and in a crypto native way? [00:15:30]

Wei: Yeah. I would say we’re a crypto-native organization that have necessary fiat services when it’s absolutely necessary.

Clay: Like a necessary evil. When you’re going to recruit A players, are there equity grants? Or is that primarily handled, again, thinking of you guys as a crypto native organization, is that primarily done through BNB that vests over time? Is there a traditional cliff and then some kind of vesting schedule in BNB? [00:16:00] Or is there equity?

Wei: It’s a combination. Given that BNB is traded there’s price going up and down on a daily basis, BNB is one form that is used. Equity is used as well, but the equity is a much longer term. And then also given some of the regulatory uncertainties in terms of the various businesses, the equity is a much more longer-term compensation product. [00:16:30]

Clay: Got it. So just longer vesting periods than the traditional three to four years.

Wei: Correct.

Clay: Let’s transition to chapter two which is about your fiat businesses. Thinking about Binance US, Binance Uganda, Binance Jersey, and Binance Singapore, what is the specific relationship of these partner companies with binance.com? In other words, what kind of agreements do you have in place with the companies who operate these fiat exchanges day to day?

Wei: I can’t get into the specific details, but in general, [00:17:00] Binance licenses its product, technology, and brand to these local partners to operate the fiat businesses there. There is a wall of separation, from just a pure, traditional ownership perspective, between the main binance.com business, and those fiat businesses. A lot of that has to do with the regulations that you have to follow in those jurisdictions.

Clay: Would you say it’s more or less [00:17:30] accurate that there’s some kind of upfront licensing fee that’s paid and then sort of sharing of the upside if things go well?

Wei: There’s two aspects of it. One is that, generally we’ll have local partners, so we want them to thrive as well, so there’s some flexibility in terms of some of the terms because we want those fiat businesses to be leaders in the fiat-to-crypto space. The underlying vision behind [00:18:00] going into fiat is that 99.99% of the money in the world are still in fiat and it’s actually much harder today, depending on whatever jurisdiction you’re in, to convert a fiat into crypto and vice versa. So I think it’s really important for us to invest and to build these bridges, to make it as frictionless but also as compliant as possible.

Clay: In other words, there’s some wiggle room there based on your understanding [00:18:30] of the incredible amount of upfront resources that a partner might have to expend, securing baking arrangements, getting regulatory approval, et cetera, so that the goal is to not be necessarily as mercenary as you probably could be up front and instead, lay the foundation for a long-term partnership where this thing could actually take off, thrive, and work long term.

When these partnerships come together, is it usually the companies reaching out to you [00:19:00] or you going out to them? What does that look like and what do you look for in a solid partner, both in terms of the characteristics of the location where they might be located and also the operating entities as well?

Wei: There’s a strategic level of thinking behind. This is one of the top currencies in the world, and that’s obviously US dollars, British pounds, Euros, some of the major [00:19:30] Asian currencies, and Aussie dollars. Those make up probably the top ten currencies in the world. For us, it’s very natural to expand into these are currency regions.

Clay: So prioritizing based on volume.

Wei: Yeah. It’s based on a sort of concentration. Then if there are good partners in these regions, we will work with them. A lot of it is first time. It’s the first time for us and it’s the first time for them as well. There has to be a level of inherent trust [00:20:00] that goes into some of these partnerships, but now what we’re seeing is regional governments that are actively reaching out to us, which was the case in terms of New Jersey where we signed an MOU initially with digital jersey, which is basically trying to bring blockchain technology into the channel islands. The same with Malta where we were welcomed by the prime minister there.

Clay: Oh, that’s so cool.

Wei: Yeah. And then similar cases, Singapore where a joint venture is actually with the venture capital funds that’s under the sovereign wealth fund. [00:20:30] A similar case, I think, in Australia as well where we were working with the government of South Australia to basically use blockchain to promote growth and innovation in these regions.

These are the regions that had a banking network that access some of these major currencies. I think that’s why they’re the first ones that we entered into from the commercial for these partnerships.

Clay: All of these partnerships are relatively new in the scheme of things, even relatively new compared to the lifespan of Binance. [00:21:00] But part of this business sounds similar to what CZ was doing prior to starting Binance, having these white label clouds exchange system that third parties could license and then use to run their exchanges. What are some of the lessons you’ve learned thus far about what works and doesn’t with these kinds of partnerships?

Wei: I think seeing their previous track record is really important, having the support [00:21:30] of the governing authorities of these regions are important. Given they are the lawmakers, they are the regulators, the attitude is very important. Having supportive banking partnerships is critical. All of these are going to play.

Clay: Let’s transition to chapter 3 which is about IEOs, the disruption of investment banking, and the process of “going public.”

You mentioned you’ve taken companies public before. You’ve been a public company [00:22:00] CFO. What are your thoughts on IEOs? Are exchanges kind of the new investment banking or are there investment banking type services that you guys provide to crypto projects that are looking to launch an IEO? How do you think about how this is unfolding?

Wei: I think it’s the bigger trends for decentralized finance. I guess right now, IEOs are basically the next iteration from the previous ICOs which is a little bit of the wild, wild west. [00:22:30] Now you basically have trusted entities or known entities that have done the work on both the team, the projects, and their validity, and then basically have provided a seal of approval. Those are the roles that are done. I think some of the work are done by basically investment banks in terms of vetting who they’re bringing to market and then providing both marketing support and trading support.

Clay: Hey! I wanted to pause for a second to let you know that this episode of the Flippening podcast [00:23:00] is brought to you by the good folks at nexo.io. Here’s a word from them.

Nexo is the only lender offering instant crypto credit lines, which let you use digital assets as collateral to get cash in 45 fiat currencies and stablecoins. As of recently, the company has integrated the Binance Chain so you can instantly access cash without selling your BNB. Nexo is also a strategic partner of exchanges, OTC desks, and crypto funds through its portfolio of structured financial products. Institutional counterparties can earn up to 8% [00:23:30] annually on their idle stablecoins, enter into asset swap agreements, or directly borrow crypto. So if you are looking to borrow, lend, or swap digital assets, Nexo is your go-to partner. Definitely explore nexo.io or reach them on institutions@nexo.io.

Remember, this is a company that not only serve consumers but also really dedicated themselves to building out a suite of products for institutions, funds, and institutional investors, family offices, et cetera. [00:24:00] So, please note that.

This episode is also brought to you by the Nomics API and CSV Data Export Service. And as a sponsor and producer of this podcast, I wanted to give you an announcement that I’m doing a webinar every week day, on crypto data and how it works. You should join me, if you’re so inclined. This webinar is called Crypto Market Data 101: Fake Volume, Exchange Spam, and How The Seedy Market Data Underworld Actually Works.

On the webinar we discuss, (1) How exchanges use exchange volume spamming and ticker stuffing to spam CoinMarketCap and other aggregators, (2) What everyone [00:24:30] is getting wrong about transparency and fake volume, (3) Why most price aggregators are displaying bad data, (4) The three types of pricing data and why everyone is using the wrong one, and finally the two transitions you must make in order to move from inaccurate crypto data to good crypto data, and much much more. To join me on a webinar, go to nomicswebinar.com. Okay, back to the show.

Wei: All of those exist [00:25:00] in the capital markets. For me personally, I participated in that, but in this case the authorities, now decentralized into smaller actors. I think that’s probably something that is really interesting because, at the core of it is basically fundraising through blockchain. Fundraising through communities for early stage businesses. All of that basically means that now, [00:25:30] that funding authority, what I call the king maker in power doesn’t exist in traditional institutions anymore because if you’re an early stage business and then you’re not in Beijing and you’re not in Silicon Valley, you’re not in these sort of traditional VC centers, how do you raise capital? You literally have to move. Look at Zuckerberg. He moved from Boston to Silicon Valley. Specifically, he rented a house for the summer so he can be next to the capital to fund his business.

The next iteration [00:26:00] of engineers or builders don’t have to do that anymore. That’s something that is very, very different from what I see in terms of moving, I would say, the evolution of fundraising. I do think there’s two things that do exist in the traditional capital markets that I think should exist in our space and that’s basically disclosure, accountability, and a certain level of enforcement. That’s where regulations come into play. If you look at a lot of the traditional financial markets, the laws when they came out [00:26:30] in the 30s or 40s, serve those purposes in terms of disclosure requirements, in terms of continuing reporting requirements, as well as enforcement activities if there are fraudulent activities or scammers.

Now, basically these early stage companies, their builders are their CEOs and their CTOs are out there on social media, like they’ve never been out there, more so than any other, big company. Sometimes, you don’t even know who your CEO is [00:27:00] because we never see his or her face in public. Whereas now, this thing exists. From an investor’s perspective or buyer where basically you have a chance to basically interact directly with some of these people and you can make a judgment on your own.

Given that these are early stage companies, the way you assess them is basically you assess them based on their prototypes, based on the product they’re building, and the community they’re building. Right now, there’s not really any financial metric [00:27:30] that you go after, but I think ultimately the market will mature and there’s going to be, more advanced analytical work that you can do that go beyond can you build your prototype in time? Can you deliver the product?

That’s sort of the big picture and I think the role that the exchange plays ultimately is going to get decentralized out of the exchanges. I think there are going to be service providers and ecosystems that’s going to develop. I think same for exchange. There’s going to be different exchanges that [00:28:00] maybe specialize in different things. What we’re doing is we’re hoping to, through our rigorous vetting process, we think that we hope to set some of the standards that the rest of the industry can follow, so that people do get access to high quality teams.

That’s just the biggest difference is that before, normal people never don’t have access to high quality teams and high quality projects. Now they do and I think that’s probably, [00:28:30] I would say, the biggest difference from what exists today versus what did not exist five years ago.

Clay: Let’s say a team comes to Binance to do an IEO or they fill out an application, you guys say you can do it. What does the process look like from there? What services are provided and come with that?

Wei: We actually do a lot of advisory work for the projects, in terms of helping them to set their deliverable [00:29:00] or their timelines. Obviously, that is an iterative process as well. The first one is probably less advice, but now that we’ve done, five or six now, now we know for the seventh or the eighth company, now we know exactly what are some of the good things that happened, what are some of the bad things that happen. So, the number eight, we’ll be able to leverage on the cumulative experiences of the previous seven. That’s institutional knowledge that only Binance has. That’s [00:29:30] the first one.

Some are more generic services marketing. we will help the company to get to know or allow our community to get to know them better through AMAs, through in-depth research analysis, as well as, maybe even a miniature roadshow in terms of attending some of the meetups that we have. All of these things exist, depending on timing. I think more importantly, [00:30:00] what we do,versus some of the other exchanges is the access to the existing global Binance community. That’s probably the most important piece.

Clay: It looks like you’re using Binance research to perform some of the disclosure functions that might traditionally happen through like Edgar or some of the more traditional portals. Is that somewhat correct?

Wei: We have Binance info, which is basically the disclosure section [00:30:30] in terms of getting more information on the projects, their founders, and their products.

Clay: Will you guys take on projects that are generating and token explicitly and only for the purposes of raising funding versus teams that are generating a token that’s maybe more like a utility token or serve some function on the network? So, if someone comes in and let’s say they’re outside the United States, or like this is a security [00:31:00] token and we are using this as a proxy for shares in the company, will you take those on or are you only doing kind of more traditional, currency or utility token type sales?

Wei: We are not servicing security tokens right now.

Clay: But you’ll plan to do that in the future?

Wei: For that, the quick answer is yes, but there’s a different set of challenges mainly because there’s two things. One, [00:31:30] there’s tokenized security. That’s one bucket, because if it’s just a share and then you tokenize it, that’s pretty much a security. That’s a tokenized security format. The second one is that it’s a native token but on sort of the slide of utility versus security. At that point in time, it looks more like a security, but it may evolve into a utility. I think that that space is much more murky. I think there needs to be more clarity [00:32:00] on that. The obvious security answer is we don’t service that right now.

Clay: Let’s move to chapter 4 which is an exploration of how Binance generates revenue other than collecting trading fees.

What strikes me that one of them is just sort of the increase in the value of BNB is likely a huge revenue stream. I understand that you do have an OTC desk, you’ve got margin products coming, controversial [00:32:30] topic, but probably worth mentioning, listing fees or cuts of IEOs. You’ve got regional partnerships, so the fiat businesses. I don’t know if you guys have anything like a lending businesses or prime brokerage or anything like that. Anything that I missed or that I should include here?

Wei: I think you name pretty much all of them. Primarily, I would say, more than a bulk of is basically still traditional [00:33:00] trading fees. Everything else pales. I think for BNB, the growth in token doesn’t really get booked as revenue or profit or anything like that. In a traditional financial sense, it’s a utility token that is owned by our community, so it doesn’t really have any existing relationship over the Binance corporate. So I think that’s the general rule of thumb behind the BNB token.

In terms of other businesses for listing fees, I’m not sure if you remember, but I think [00:33:30] last year we announced that you are selected for listing first, and then once you’re qualified, then you name your listing fee and then that fee is sent to charity. We don’t really book that as revenue for Binance.

Given the controversial nature of the listing fees, we don’t really charge listing fees as a source of revenue for the business. In terms of OTC desk trading or trading solutions, that essentially is not [00:34:00] a fee-driven business, but I would say more of a spread-driven business. In terms of, as you mentioned before, doing a large size trades that are off exchange, a higher level financial service products like margins, lending, I think, all of that is coming. Those are things that the existing traders on Binance have asked for. For example, we have margin for selected tokens right now and then obviously, we will generate some revenue.

Clay: So in terms of [00:34:30] institutional products that exist right now, it’s just the OTC desk. Is that correct? Or is there anything else?

Wei: Yeah, it’s just that right now. Then there’s also the sort of the API-enabled trading. Those are the two primary products.

Clay: So, for the OTC business, are you guys facilitating trades between parties or are you guys taking one side of each of those trades? [00:35:00]

Wei: Yeah, we are facilitating trading between parties.

Clay: You’re just taking a trading fee for matching people?

Wei: Essentially.

Clay: Is it considered unethical? Because I know Coinbase operates in roughly the same manner. They’re not taking one side of the trades there. They’re just matching people up. I believe I have that correct. Is it considered unethical for exchanges to operate an OTC desk where they are taking one side of the trade? Is that murky territory or not? [00:35:30]

Wei: It’s murky. It’s like Goldman taking position against their clients. When they’re seeing the market and then they’re also betting into the same market. But the thing is, it’s less so here, given that it’s highly liquid. I think for a lot of the liquided positions there’s not that much you can do, but I think for some of the illiquid positions then, it does get a very murky and potentially unethical.

Clay: You mentioned that you can’t apply [00:36:00] growth of the BNB token to your books. Why would that be the case? I mean, if you hold this asset and it goes up in value, you have a basis and then you distribute it to an employee as a bonus, wouldn’t the difference between your basis in BNB and what it’s distributed to your employees, what it’s valued at the time of distribution, wouldn’t that be considered growth of that asset?

Wei: There you go asking accounting questions again. [00:36:30] No, I’m just saying that’s not a metric. That’s not a revenue metric.

Clay: That’s not revenue, got it.

Wei: Yeah. And then also for BNB, we want it to be and we hope it to be in the community holding rather than any individual corporate holding.

Clay: But Binance holds a great deal of BNB, correct?

Wei: You have to go back to looking at the white paper in terms of… because some of it is basically it’s held on behalf of certain individuals that [00:37:00] have allocated it. It goes back into the corporate amount of tokens, I think, that the corporate holds and controls, but is actually not that much.

Clay: Let’s kick off chapter 5 which is about the burning schedule for BNB.

When does Binance burn BNB? I read somewhere Binance talked about when the investment arm of Binance generates upside, they’ll take that profit and burn some BNB, things like that. [00:37:30]

Wei: If you go look at our update on white papers, basically the burning mechanism takes place every quarter, after we basically calculate our performance for the quarter. So, it’s correlated basically to the cumulative trading volume on binance.com for the quarter.

So, typically if you look at the historical dates, basically about a month into the new quarter is when we announce the results. Generally, people can calculate and work backwards. That’s when [00:38:00] the “burning mechanism” happens.

Clay: Let’s transition to chapter 6 which is about stablecoins and pegged tokens.

What are the roles of the stablecoins and the pegged tokens? For example, you’ve got Binance BGBP and pegged tokens like BTCB. What was the impetus for creating these?

Wei: For, BGBP, it’s pretty easy. Three-top four currency in the world, and there’s not a significant stablecoin [00:38:30] behind it.

Clay: Hey this is Clay cutting in to give a bit more information about BGBP. BGBP is a stablecoin with the price pegged to the British Pound. According to Binance, BGBP is 100% backed by the same amount of GBP held by Binance in a bank account at all times. Ok, back to the show.

Wei: We believe stablecoins are very important to the cryptocurrency ecosystem and that they provide the function of a lot of the fiat [00:39:00] currency without having to hold fiat currency. As a result, for a lot of traders, they can go into stablecoins as a hedge in a bear market. So, I think it’s really important to have stablecoins and to have as many as possible.

Secondly, just purely from a trading perspective, if you look at the FX market, it’s probably the most traded market in the world. So I think stablecoins, if maturely develops, could get into some [00:39:30] of that trading market for FX. That’s one of the key primary reasons why we want to encourage the growth of stablecoins in general, or basically fiat-backed currency coins.

For the peg token, the BTCB is basically, we issue that on the Binance chain and made it a base currency for the Binance for the DEX. That’s just basically have a BTC product on the DEX. Prior to this BNB [00:40:00] was the base currency that people traded against. So, I think it’s really important to have alternatives and BTC is something that if you’re trading the DEX, you can exit into a pegged BTC.

Clay: What’s the difference between a stablecoin and a pegged token?

Wei: I would say a stablecoin is a form of a pegged token. I mean, a stablecoin is basically fiat-backed cryptocurrency, for every BGPB that’s backed [00:40:30] by one BGP that stored in a bank. And then for the BTCB, that’s backed by one bitcoin that’s been allocated.

Clay: So, BGBP and your bitcoin pegged tokens on Binance chain are fully collateralized.

Wei: Fully collateralized. That’s correct.

Clay: Were the fiat businesses, at all responsible for making BGBP happen? Was there an unmet need there that was kind of unique to the fiat businesses that sort of called [00:41:00] for this? Or is this something you think you’d be doing even if you didn’t have the fiat businesses?

Wei: I think it’s a combination. I think because we have a fiat business that deals with GBP and Euros, then we saw an opportunity to create it.

Clay: Let’s move on to chapter 7 which is about Binance’s general operations.

Where is your home base? Where do you operate out of?

Wei: For me personally, I spend most of my time outside of Singapore, [00:41:30] but I do travel quite a bit. For example, early half of this year, I spent a lot of time in Europe building up our Binance Jersey operations. And then last year, I was in Malta quite a bit, building up our operations there. But I’m spending more time in Asia now.

Clay: It seems like recently, a lot of US-based crypto businesses have been somewhat limited in their ability to grow, compared to organizations with founders [00:42:00] that are willing to domicile in multiple places and take advantage of this global marketplace for different regulations, rules, and things like that. Do you think it’s a disadvantage to have grown up in a place like the United States where we take for granted the stability of the baking system?

If you start a company, especially a crypto business, and just say, “Yeah, I’m gonna create a Delaware C Corp. [00:42:30] I’m gonna use Silicon Valley Bank and create a bank account.” Do you think that’s a liability, long-term? Versus maybe growing up in a place like China or a variety of places where you’re constantly having to scan for exit strategies, contingency plans, and you’re willing to live on a plane half the year.

Wei: I would say extremely more and more so. There are habits. Habits develop over time. [00:43:00] There’s a lot of institutional habits that have evolved into the US where there’s a certain path that you can follow, whereas I think for cryptocurrency, there’s no set path for any individual or any organization to follow. You basically have to go out and chop everything down on your own, and then you learn as you go. And then you iterate along the way.

A lot of times, there are no rules for what you’re trying to do. So, you’re basically working with the people [00:43:30] who are overlooking you hand-in-hand to develop the rules, to figure out what’s really important. That goes back into the practical nature like that you mentioned, how we’re operating, and then what we’re looking for in terms of partners.

So I think that’s really, really important. Focus on, and then staying focused on what’s really, really important in terms of what to protect. For Binance, our initial goal is basically we want to protect our customers. I think that’s still our core, core value. Whatever is right [00:44:00] for the customer, we always err on that side because once you go into the financial services industry, people vote with their money. I mean, essentially, you don’t vote. You vote by giving your money to somebody else. The moment your customers lose trust in you, they vote by taking their money from your institution.

Clay: Indeed.

Wei: So, I think that level of trust is what’s really, really important. That’s true on a global basis. [00:44:30] That’s a fundamental. What we’re trying to do is basically, we’re looking at this as a global business. I wouldn’t wanna use the word bound, but we’re not tied, I would say, to any single region or location. Our customers sit in over 150 countries. For us, what we have to figure out is basically what’s really, really important and the really, really important thing is our customers. Make sure they’re serviced correctly. That’s the most important thing. [00:45:00] Where they are, as long as you have a connection, you’re connected. So, you could be anywhere.

There is a huge group of what we call digital nomads that pretty much can pop down with a laptop and WiFi connection and work or trade. I think that’s the challenge. Going back to what you said, in terms of the entrepreneur spirit and sort of the crypto spirit, people are innovative and entrepreneurial around the world. That’s the global spirit of this business. [00:45:30] That’s sort of the decentralized nature of bitcoin and the community that you can build.

Clay: We were talking about Zuckerberg earlier. He moved to Silicon Valley to be close to finding resources and business-dev opportunities and all that. It sounds […]

Wei: It’s money and people. There’s a concentration of money, but then there’s also a concentration of people. […] hire engineers and, I don’t know, Boston at that time, it’s impossible [00:46:00] or less likely.

Clay: Whereas, being willing to move here is often, in many cases, moving actually away from regulation, or moving to a place where circumstances are a bit more favorable. It’s almost boring what you do when you start a start-up in the United States. The Silicon Valley Bank bank accounts, the Delaware C Corp, you raise money with the staff or if it’s a series A, you use the National Association [00:46:30] of Venture Capital docks.

Wei: I’ll play devil’s advocate to that. For example, if you’re an entrepreneur, that’s the last thing you worry about. You’re like, “Can I just get that over with as soon as possible?”

Clay: Oh, totally. No, it’s convenient.

Wei: Right. That’s why they establish that infrastructure in the first place. You have one law firm that can do all of that work for you, you just pay them, and then you don’t have to worry about it. The problem is, now there is a level of uncertainty [00:47:00] in terms of fundraising on the blockchain. I think that’s the key thing in the US that’s unclear. It’s like, “Can I fundraise through blockchain technology?”

You have this amazing technology that allows for tokenization, that allows for decentralized fundraising on the blockchain from people around the world, and that’s a way for me to build my first users, for a way for me to build my initial community, and I can’t do that. I have to physically move. That’s a huge hurdle [00:47:30] to overcome for an entrepreneur.

But what I’ve said before, that’s one of the key things that for us, we operate it for about a year-and-a-half almost, without any normal “bank accounts.” It takes a lot of guts to do that. Like I mentioned, that’s why I think one of the things that bring all of this together at Binance, why we believe in crypto native as a company, as an organization for everyone here. So, we’re okay taking [00:48:00] cryptocurrency. That has given us, say, some edge in terms of execution speed, in terms of mind-sharing resources.

Clay: We talked about the traditional US Delaware C Corp all that stuff. I’ve seen a lot of crypto funds, they’re domiciled in the Cayman’s, then they’ve got this feeder corporation in the US, and there’s a specific set of docs they use. Is there something similar that’s emerging for exchange? [00:48:30] For some of these fiat businesses? Is everyone establishing in Malta and bank here? Is there a pattern that’s emerging?

Wei: There are a few jurisdictions that a lot of companies are setting up as where their foundation is based, and then where the tokenized takes place.

Clay: Where are those?

Wei: I think Singapore is becoming a major hub.

Clay: Singapore and Malta is the configuration of each of your [00:49:00] partner entities with the fiat business side of the house, are they all different and based on where they’re located? Or, do they all have a similar configuration?

Wei: Correct. They’re all local entities that are regulated in their local jurisdictions. They’re local entities that are regulated and they’re regulated in corresponding jurisdictions.

Clay: Got it. So, you don’t go to them all and say, “Hey, you should all set up in Malta, and then just…

Wei: No.

Clay: Let’s transition to chapter 8, [00:49:30] which is about the future. The future of Binance, the future of CFO Education, and things like that?

Wei: I think it’s gonna be a wild ride. I feel like you basically have to learn a new language. There’s some very antiquated financial and accounting methods, like annual reports. By the time it’s [00:50:00] published, it’s already out of date. Even organizational management, how do you manage an organization from a financial function.

As organizations move from a rule-based management to a culture and value-based systems, you really, really have to be that way, especially if you have people working not in a central location, where you can set rules and have everyone follow the same set of rules. If you have people in different areas, what’s your budget [00:50:30] allowance for travel?

Once you have local budgets, then people are gonna be like, “Hey, how come when that person travels, that person gets to fly to that and do that?” It comes down to, basically, value-based, or let people make their own decisions, and trust them.

Clay: When it comes to doing basic accounting, are there tools you can use? You’re not using, QuickBooks, right?

Wei: No. If there’s a crypto book that we can use, great. [00:51:00] I think ultimately, any organization, you can keep your accounts and balances as you can’t really deviate that much. It’s the way you tally things on the left-hand side of the ledger with the right-hand side of the ledger. The double ledger accounting system doesn’t really change. Instead of holding Dollars and Yen in RMB, now I’m holding 30, or 40, or 50, or 60 different types of things.

The value of that holding [00:51:30] is just a snapshot in time. We can automate it and link it to the real-time prices, but even then, it’s just a snapshot. You basically get a snapshot picture. That’s why the dynamic nature of this business is, it’s gonna be very challenging for financial professionals.

Clay: I know that Binance is attempting or at least trying to plan for a scenario where it disrupts itself with the DEX or the decentralized exchange. Obviously, that wouldn’t [00:52:00] disrupt the fiat businesses and we still need this huge exodus of fiat dollars to crypto in order to make this version of the future happen. The DEX probably wouldn’t handle a lot of the OTC scenarios, or prime brokerage, or lending, at least maybe any time really soon. There’s still, I’m sure, a lot of the things that you do, kind of maybe as a traditional exchange [00:52:30] CFO that are gonna persist into the future. Do you think a DEX needs a CFO?

Wei: Probably not. No.

Clay: And why is that? Is that because it’s self-managing? Or at least managed by a […]?

Wei: It’s a community-driven, organization. Maybe you need someone to sort of help to manage the community. Probably need community managers rather than a CFO.

Clay: Right. Accounting’s all on the blockchain. Final question. If you could wave [00:53:00] a magic wand and instantly make anything happen for the crypto space, what would it be?

Wei: I would make fiat-to-crypto as seamless and frictionless as possible.

Clay: Well, that concludes our conversation with Wei Zhou from Binance. I hope you enjoyed it. Before you go, I want to [00:53:30] mention that since we’ve started producing episodes at a much higher rate, we now have room for a few more sponsors. If you like the work we do and would like to support this show, then a sponsorship might be a good fit for you.

I can say from our own experience that Flippening sponsorships work. Each and every time we put out an episode of this podcast, we mention our own API. And to date, every single one of those advertisements has resulted in at least one customer. In fact, we would do these shows even if nobody else sponsored because of the business it brings to us and over 80% of paying customers mention [00:54:00] that they heard of us through our podcast. If you’re interested in sponsoring the show, please hit us up at support@nomics.com.

That wraps up things for this week. Stay tuned for next week’s episode. Until then, take care.

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