“Exchanges are Inherently Risky Businesses”: CZ Talks Contagion Impact on Twitter AMA

“Exchanges are Inherently Risky Businesses”: CZ Talks Contagion Impact on Twitter AMA
15 November 2022

“Exchanges are inherently risky businesses so you have to run them well. You have to do security well, you have to do a number of things well, but we’re self contained… we’re a very clean, simple business,” Binance CEO Changpeng Zhao said on Monday, noting that Binance is in a strong position as it has not taken any loans or taken any VC investments, and does not owe anyone any funds, nor has it passed on any user funds to third parties to manage or try to make money from trading.

“Binance will be fine. If everybody withdraws their funds from the centralized exchange, we will just shut down the centralized exchange. We have many other profitable businesses,” Zhao said.

The exec took to Twitter on Monday evening SGT, while he was in Indonesia, for an 80-minute Ask Me Anything (AMA) session that saw about 40,000 users listening in, fielding questions that largely focused on the fallout from the collapse of rival FTX and how he thinks the industry will move forward.

Zhao likened the FTX saga as a cleansing event that will turn out positive for the crypto industry over time, and while he believes that the risk of contagion is real, the worst could already be over. “Short-term it is painful, but I think this is ultimately good for the industry in the long term. Blockchain technology is not going away. The industry is not going away.”

The BNB ecosystem and its portfolio has had limited exposure to the fallout, Zhao said, noting that the platform has been operating business as usual, following FTX’s collapse, and that user withdrawals on Binance are in line with market cycles. Additionally, he noted that explained that even if something happens to Binance, users will be able to redeem their BUSD for fiat at Paxos.

Taking a slight jab at his now defunct rival, Zhao said, “Honestly, we don’t view other exchanges as competitors. If we take all of their volumes, we [still] don’t grow that much, whereas if we grow the industry by 10X, we will grow proportionally. While small exchanges might want to get market share from us, if we move market share away from other smaller exchanges it doesn’t move the needle for us.”

On this topic, Zhao also highlighted the exchange’s industry recovery fund, which was set up on Monday to help projects that are facing a liquidity crisis, adding that about four other funds have indicated interest to join the initiative, including some projects and industry players.

“We actually think that this is a pretty good time to do it because most of these projects valuations are much more reasonable than they were a year ago,” he said.

The exchange is also working on a proof-of-reserve protocol with Ethereum co-founder Vitalik Buterin on how exchanges can prove their reserves, and wants Binance to be the first test case of the new protocol, Zhao said. 

One user said that Binance’s investment into FTX gave the latter legitimacy, leading many people to use the platform. Zhao responded however, that Binance shouldn’t be responsible for every user’s loss, and that most of the blame should be on founder Sam Bankman-Fried’s fraudulent and criminal actions. “FTX users choose to use FTX on their behalf. I don’t want to create a situation where if anything bad happens to the industry, Binance has to pay for it. I want to do what’s fair, and I don’t think that’s fair to our users,” he said.

His advice to crypto investors in the current market? “Just use your common sense” when evaluating businesses and platforms, and just HODL, particularly non-expert traders who cannot manage the risk. “A couple of years later, all this will just blow away. People may or may not remember this,” Zhao said. 

Shows Up in Bali

CZ made a stop in Bali last week for the Indonesia Fintech Summit, giving a rare in-person appearance at a crypto event to discuss the unfolding crisis at FTX, its impacts and regulation. (His appearance the week before at the Singapore Fintech Fest was via video stream)

Related: “Bailouts Don’t (Always) Make Sense”: Binance’s CZ Weighs in on Industry Lifelines

Giving an account of the events that had unfolded over the three days prior, which was prompted by the exchange’s sale of US$580 million in FTT tokens. He said that while Binance’s offer acquiring its rival was because it wanted to help affected users, he could not proceed with the deal because of revelations of FTX misappropriating user funds.

CZ said the FTX crisis is “another wake up call” for the industry. “We’re a new industry, there’s a lot of risks, and we need to learn how to deal with those risks and build a much healthier industry.”

But he said he expected stiffer competition following consolidation. “The technology is not going away, right? The Internet’s not going away. Blockchain is not going away. So, [the industry] will recover from this. And in a decentralized industry, when one player goes down, it causes a lot of pain but other players will come in a very quickly.… And those new players that fill it, it will be stronger ones,” CZ said.

On regulation, CZ said that among G20 countries, the the understanding of crypto among the regulatory bodies is still “relatively primitive” as many of them still use a tradfi lens to look at the industry and their relative newness to the space. “But the people who really understand, they really understand,” he said, citing regulators in Dubai and France – two regimes where Binance holds a crypto license – as on the cutting edge on industry development.

Blockhead Team
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