WHO IS GOING to save crypto? Cryptocurrency markets are in free fall, having lost some $2 trillion in a few months. Bitcoin, which in November 2021 was at its zenith of $67,000, is now hovering around $20,000.
The crash is compounded by the collapse of a number of prominent projects whose demise can be chalked up to shaky design and dubious financial soundness, rather than global financial unrest.
May, for instance, was marred by the $42 billion collapse of an “algorithmic stablecoin” that guaranteed its price would stick around $1, despite having no cash reserves. Two weeks ago, crypto lender Celsius, which had been invested in the terra-luna project, stopped all customer withdrawals due to a liquidity crisis; Singapore-based crypto hedge fund Three Arrows Capital has also been in distress, which might affect scores of customers and investors. Tether, a stablecoin reputedly backed by cash and other assets, has been facing the crypto equivalent of a bank run as users scrambled to exchange tethers for dollars, knocking some $15 billion off its market capitalization in under two months.
But amid the chaos, some players are thriving. Take Binance, the world’s largest cryptocurrency exchange. Several crypto companies are laying off staff, and yet Binance is on a hiring spree. While small-time bitcoin investors are licking their wounds, Binance’s CEO, Changpeng Zhao—who goes by CZ—remains convinced of crypto’s enormous value, if not its enormous price.
When we meet in a central London hotel, CZ is wearing a charcoal suit and a black Binance-branded T-shirt, ready for a day of meetings with lawmakers, regulators, and financial educators. His company is legally barred from operating in the UK following a decision by the British Financial Conduct Authority last year—although CZ says that preparations to get a license to allow Binance to operate in the UK are underway and that licenses have already been secured in France and other European countries. Since its launch in 2017, Binance has often clashed with regulators in countries ranging from Germany to Japan to the US, with accusations including the facilitation of money laundering (also the subject of a recent Reuters report, which Binance rebutted in a point-by-point essay), inadequate compliance with securities laws, and the opacity of its company structure.
In this end-of-times climate, CZ is left considering whether his company might play the role of crypto’s lender of last resort—the central bank that could help beat back a wider threat to the whole sector. Fellow exchange FTX has already started doing this with the “bailout” of ailing company BlockFi. Binance only has to pick which company to rescue next, further strengthening its hand in this volatile industry.
While some might soon salute Binance as a savior, others have taken exception to the company’s role in boosting crypto over the past couple of years—hype that ultimately came crashing down, hurting legions as a result. A class action suit in the US blames Binance for the terra-luna debacle, alleging that by promoting the project and listing its currency on its exchange, Binance gave the asset a legitimacy that misled investors. Sipping an English breakfast tea in London, CZ remains unfazed, almost philosophical in his acceptance that failures are going to fail.
This interview has been edited and condensed for clarity.
WIRED: I want your take on the current moment. What the hell is going on with crypto? Is this an existential crisis?
Changpeng “CZ” Zhao: When you get hundreds of millions of people trading assets, it just goes through cycles. It is definitely not an existential crisis. If you told me three years ago—when bitcoin price was between $3,000 and $6,000—that bitcoin would be worth $20,000, I’d be very happy.
That’s if you had it beforehand, right? If you bought it in 2021, you’d be less happy.
The latest entrants into the market are not very happy, yeah.
That’s a lot of people.
There’s a lot of people who had bitcoin before that, too.
Do you think this might undermine the idea that crypto would be a hedge against financial turbulence, that it is a safe haven? Now crypto is falling in concert with the stock market, and that wasn’t supposed to happen right?
There’s the price of crypto, and there is the value of crypto. The two things may be different. And so when something is trading, the market typically will overswing on both the high side and also sometimes on the low side. The value is the middle point between those two swings. As for myself, I do believe the value of crypto is increasing: The number of use cases and the number of people using it, the utility value of it, is increasing. But the markets are volatile.
So what is bitcoin’s main value?
For bitcoin, the number one value is that it has a limited supply, right? [That is because there is no central bank issuing bitcoin, and the maximum number of bitcoins is fixed at 21 million units.]
So it should be anti-inflationary.
Yes, anti-inflationary. And we are going, and will go, through a very significant inflation.
Right now the price is dropping a little bit. There’s multiple factors affecting bitcoin price. It has limited supply, so in theory, it should be anti-inflationary, but it doesn’t mean the price will always go up and never go down. Those are two different things.
So if I put $1,000 into bitcoin in 2021, now it’s down to $300 possibly. I’d feel stiffed, right? Inflation is going up and my bitcoin’s price is dwindling. So I understand your intellectual reasoning, but if I were a rank-and-file user in, say, rural Utah, what would you tell me?
The price fluctuates due to market psychology, but the fundamentals have not changed. Just because something’s anti-inflationary doesn’t mean it’s guaranteed to never drop. Any price of an asset is determined by market psychology. Most people who trade bitcoin also trade stocks, so when the stock market goes down, people are short on money and they sell the crypto, and the price drops. But it doesn’t change the fact that bitcoin is still anti-inflationary. There’s no inflation in bitcoin—but the price can still drop.
You are right that stock markets are not doing very well. But crypto markets are doing even worse: The sector’s value fell by over 70 percent, and $2 trillion was pulverized. There have been some spectacular failures, such as the demise of the stablecoin terra. Has crypto, as a sector, behaved more recklessly than traditional finance? Is it a funhouse mirror version of finance?
I don’t think so. In any market, there are always failures. Failures are necessary to build the successes. Google wasn’t built in a day—there’s many failed search engines before Google. That’s how innovation progresses. We learn from this cycle. So the crypto industry is still growing.
Do you think that the crypto sector allowed failed projects to become too central to the crypto industry?
When we talk about the crypto industry, what is it?
How would you define it?
It’s no one—that is the beauty of decentralization.
Binance invested in terra; it backed the project, it allowed terra to be traded on its exchange. Then last month terra-luna was revealed as a poorly designed project; it failed, and over $40 billion was lost in a weekend. Let’s say you are the industry in this case—and other big crypto companies are the industry.
I think the industry doesn’t allow or not allow those projects. It is users, people who are involved in those projects—they were following and supporting those projects. And many people support many failed projects, like many people used to use MySpace, right? And also the industry itself is surviving: It’s like not like terra-luna is gonna kill the crypto industry.
Yes, but terra-luna possibly got a level of legitimacy that maybe another failed project didn’t get. So why did it get it? Was it because exchanges listed it? Was it because big investors were backing terra?
I don’t know. We could also speculate that there could have been a bigger failure than terra that didn’t happen. It’s possible to have a bigger failure that the industry prevented somehow. I don’t know if it prevented it. So could the industry collectively prevent terra-luna’s collapse? Possibly it could. Did we? No. But did we prevent something bigger? Probably yes.
What did you prevent?
I don’t know. You never know the disasters you prevent. If somebody stopped 9/11 and the airplanes never crashed—then the guy wouldn’t know how big of a problem he prevented.
I think the better analogy here is if you only stopped one plane, but the other went through …
The things we prevent, we don’t know how big they are.
Has the terra debacle changed how Binance chooses which coins to list on its exchange? Has there been any teachable moment here?
I think we have all learned from this type of incident. So we now look at lending and borrowing protocols much more closely. We look at the mechanisms, the risk controls, etcetera, much more closely.
What about listing terra on your exchange? Had not Binance and other exchanges listed it— maybe terra wouldn’t have become that prominent, and its fall would have affected fewer people.
It’s a chicken and egg problem, right? When a coin gets a large number of followers, the exchanges do have to list it.
I checked Binance’s listing requirements. It’s about the number of users, but it’s also about the quality of the team, and in general the business model. So did your checks of those things discover anything about the project? Because the project was criticized by many–even on podcasts like Bankless, which is usually pro-crypto in any possible way—there were many people saying “terra-luna can’t work.”
I know we did all the checks—we have done the postmortem. We did do all the checks. I believe our team did all the proper checks. But for any project, there’s always someone saying bad things about the projects, especially the popular project.
In this case, they were right, weren’t they?
For all the failed projects, all the other guys who criticize those projects would be right.
Going back to terra-luna: How do background checks for coins asked to be listed on Binance work right now?
So we use the standard industry background checks. We’ll look at the profiles; we do ask them for background checks through a background check service.
Are you going to scale that up in any way?
We can always improve. But again, I don’t think we can guarantee no problems in the future. Like, no regulators can guarantee there’s no failed products or projects, or companies on Nasdaq. So it’s not a black-and-white problem to solve. Right. But can we learn lessons? Absolutely. What are we doing specifically? Yeah, we’re doing more analysis, especially when lending liquidity is involved. But do we have a perfect solution to avoid it? I don’t think so. Whenever you have innovation, you should allow failures.
With terra, my beef is that simply by reading how it worked—the model to me sounded unworkable.
You should have written about that, right? You made a mistake there.
But I didn’t list it on my exchange.
But you didn’t protect your readers. We all share the same responsibility.
Let’s change the subject. Binance is doing well right now, isn’t it? Other exchanges are tightening their belts, but you are hiring people rather than laying them off.
Yes. We didn’t spend a lot of money during the bull market. We’ve been around for a bear market—this is at least the second cycle for Binance. We know that bitcoin’s price can drop by 80-90 percent. So I always told our team that we need to keep 10 years’ of cash reserves. That’s how we operate. Also we continue to grow. And we are also very confident that the industry is still growing, the number of users are still coming in. And in another two, three years, the price may catch up to the value again. But we want to be ready for the users that come in that want to use our products.
How do you see Binance emerging from this moment of industrywide crisis?
I think most likely there will be consolidation, which will work to our advantage and whoever else has cash laying around. So we will be doing more investments, acquisitions, and hires. In the long term, this might not be a bad thing for us. But at the same time, I think it doesn’t matter—the bear market: People are actually more focused on making better products. In a bull market, everyone’s trying to raise money; everyone’s trying to do their own project. There’s a lot of shiny, fluffy stuff going on. We’re seeing a bear market. I think we just hunker down hard, to build our product. And then when the next bull market comes, we will be ready
Do you think that Binance and other big actors that have a lot of cash reserves—do they have a kind of responsibility to bail out projects that pose an existential threat to the whole crypto sector? So if a terra times 10 happened, would Binance help prop it up in any way?
I’m glad you mentioned this. So I think there’s three points. The number one so far: The industry hasn’t been on a lot of large scale bailouts, but the industry is still fine. Terra-luna got 40 billion disappearing in a day—the industry is still here. A few other projects are impacted, but that’s a small number. So even without “bailouts,” the industry is fine.
On bailouts, there’s two scenarios. Most failed companies are mismanaged. They made some mistake or they were badly designed. Why would you bail out something like that, then?
You don’t want to bail out mismanaged projects that will continue to be mismanaged and make them bigger, and have a bigger problem down the road. So in theory, the bailout is for companies that were temporarily mismanaged. You can bail them out, they can improve, and they go on to better.
Would you bail out the latter category? The good ones?
Is there anyone that you’re thinking of right now?
We do get requests from almost any project that is under pressure, even projects that are not in immediate liquidation risk but may be feeling a little bit of pressure.
There is not one single “bailout” mechanism: We could acquire the entire product, lend them some money, make an investment and have some equity. We could buy some of the tokens to give them liquidity, or acquire them. All of those things are possible. But fundamentally, we look at each project on an individual merit basis, right? We still look at the product, user base, product team. So bailing out or not, it’s not black and white.
Would you bail out crypto lender Celsius? It has been under stress, what with suspending all its users’ withdrawals, but maybe it is a good project.
I don’t want to comment on Celsius specifically. I think their team is—there’s some discussions going on. We’re talking with every project in the industry.
You’re talking with Celsius?
I cannot even confirm that. But I would assume there’s a very high possibility.
What other projects keep you up at night, these days?
I sleep pretty well, usually.
What about tether? For a moment, after terra-luna’s collapse, many thought it would be the next stablecoin to go. It is a $78 billion project. And now its managers are complaining that they are under attack by speculators.
I don’t think about it. It doesn’t cause me to lose sleep.
Would you bail it out?
It depends on how solid it is.
Tether is pretty solid, no?
I’m not sure. I am not questioning it; I just don’t know. They don’t talk to us. We don’t have information about the project, the team, who’s running it … It’s a black box to us. So when the project wants us to bail them out, we need to do due diligence. Before we can decide. Right? So today we haven’t done that due diligence. Would we bail out Tesla? I don’t know.
I mean, don’t tell Elon Musk. You gave him $500 million to help him buy Twitter. How are those conversations going with Elon about Twitter?
I don’t talk too much about Twitter with him.
And about other things?
Not that often. We’re pretty busy people, right? He’s busy. I’m less busy—but I feel busy. No chitchat.