If financial markets were boats, the stock market would be as big as the Titanic while cryptocurrency exchanges might be like sailboats in comparison, according to billionaire “CZ” Zhao Changpeng.
“The market cap for crypto markets is probably 1,000 times smaller than the stock market,” said the 43-year-old founder and chief executive of Binance, the world’s biggest cryptocurrency exchange by trading volume. If a ship as large as the Titanic sinks, a small boat in its vicinity would probably get sucked down with it, Zhao said in a video interview with the Post.
Still, the cryptocurrency market appears to have benefited from the outflow in capital from traditional financial markets, at least in the short term.
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While traditional financial markets crashed during the coronavirus pandemic, Binance estimated its earnings at US$262.5 million in the first quarter, mainly from transaction fees, according to a spokeswoman. It also saw a 47.4 per cent rise in the number of new institutional investors in the first quarter of this year compared to the previous quarter, she said.
Prices of bitcoin, the world’s largest cryptocurrency, crashed from about US$7,900 to just under US$5,000 in mid-March, when the US stock market was hit hard. Bitcoin prices had recovered to about US$9,200 as of Monday, far below its peak of more than US$19,000 in December 2017 but still up from US$7,200 on the first day of the year. Meanwhile, global stock markets have also rebounded somewhat since the worst of the pandemic’s impact.
“I think Covid-19 has probably been a net positive for cryptocurrencies,” said Zhao. “Covid-19 has overall caused a lot of stress in the traditional financial markets, and some of the measures that people have taken are actually pushing people into cryptocurrencies.”
But Zhao said that until the cryptocurrency market grows significantly, it will always correlate to an extent with stock market performance. “When people are hurting financially in one market, they will get cash from other markets” including by liquidating their cryptocurrency investments, he explained.
The coronavirus pandemic and resulting containment measures have had a huge impact on retailers, restaurants and tourism globally. The US economy contracted at a 4.8 per cent annualised rate in the first quarter, its sharpest decline since the Great Recession between 2007 and 2009. Meanwhile, China’s economy contracted by 6.8 per cent in the first quarter of 2020 compared to a year earlier.
Binance, however, does not have all of its eggs in one basket. No country contributes more than 10 per cent to its revenue, Zhao told the Post, and it has plans to further spread out its operations globally. The company applied to operate in Singapore in February and announced in June that it will launch a UK trading platform this summer.
This expansion is not without challenges though. For instance, Binance currently provides services to users in 180 countries but only in 20 languages, and it is a “big challenge” to add support for languages used in all countries it operates in, Zhao said.
In many countries, unclear regulation regarding cryptocurrency is also a major problem, according to Zhao, who said that when in doubt Binance tries to “follow common sense”. “We're living in a world where unless there's a law forbidding you from doing something, then it's assumed it's legal,” he added.
The company was among four cryptocurrency exchanges and seven cryptocurrency issuers named in a series of US class action suits in April, which accused some of the biggest names in the industry of selling digital assets without registering them with federal or state regulators. The lawsuit against Binance said the exchange collected cash fees from issuers, often exceeding US$1 million, to list their assets, according to a Reuters report in April.
However, Zhao said he was not worried about the legal action. “Anybody can sue anybody today, right?” Zhao said, adding that the company’s lawyers are handling the case. “You're only guilty when the court rules that.”
Cybersecurity is also a fundamental challenge for cryptocurrency operators. Last year, Binance fell victim to hackers who made off with 7,000 bitcoin worth about US$40 million from the exchange in a “large scale security breach”.
Such security breaches have “cost quite a lot of money” but also “given us that much more incentive to fix things”, Zhao said. “We have invested literally hundreds of millions of dollars in security systems … If we don't make money we are going to make sure things are secure.”
The company has adopted a “zero trust framework”, according to the chief executive. “Even within a Binance team, no one can penetrate our system. We don't rely on a single person, a single access point.”
Zhao, whose family emigrated from China to Canada in the late 1980s, was named the richest cryptocurrency billionaire on the Hurun Global Rich List 2020 in February. He overtook cryptocurrency mining giant Bitmain’s ousted co-founder Micree Zhan Ketuan, who had topped the list in previous years, with a net worth of US$2.6 billion.
Binance’s major competitors include Huobi Group and OKEx. Huobi, which has a good relationship with Beijing, is actively helping China build a local cryptocurrency industry, according to a Bloomberg report in January.
In 2017, when China shut down all domestic cryptocurrency exchanges, Zhao closed the company’s Shanghai office and quickly moved Binance’s servers to Tokyo, outside the reach of Hong Kong and mainland regulators.
But Zhao said Binance is still “very much willing to push blockchain adoption in any way that's promoted in the country”. The company’s China Blockchain Institute announced a strategic partnership this month with China state-owned enterprise Zhongshang Beidou to use blockchain technology to improve supply chains.
The company’s nimble approach has been influenced by Zhao’s own international upbringing, he said. The Chinese Canadian, who is now residing in Singapore due to coronavirus-related travel restrictions, said he has lived in cities including Shanghai, Montreal, Tokyo, New York and Hong Kong in the past few years, staying not more than four years at a stretch on average.
“Growing up in different places gives you a global mindset, which really helps to build a global business,” he said. “Many of the other [cryptocurrency exchange] founders have only lived in one place or only lived in one or two countries … just subconsciously that experience helps change the decisions.”
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