World's biggest crypto exchange still lacks US footing

Often started by lone programmers lugging laptops across the globe, many cryptocurrency firms are restructuring themselves into more traditional entities that have boards of directors and audited financial reports

By Emily Flitter

Published: Aug 21, 2021

World's biggest crypto exchange still lacks US footing Changpeng Zhao, the billionaire founder of Binance, in Singapore on May 31, 2021. Zhao needs investors for the company’s U.S. unit after a recent venture capital deal fell through. (Ore Huiying/The New York Times)

The quest for legitimacy in the United States is leading Binance.com, the world’s largest cryptocurrency exchange, to pursue an initial public offering of its U.S. unit. But for a company founded on secrecy — as cryptocurrency firms typically are — the going could be slow and fitful.

This month, Brian Brooks, chief executive of Binance.US, left the company after just three months, citing “strategic differences.” Changpeng Zhao, the Chinese Canadian billionaire who owns Binance.com, had hired Brooks, a former regulator, to help the company gain a U.S. footing. Brooks left after a venture capital investment he was trying to put together for Binance.US fell through. The deal would have been the first step to a potential IPO, but some investors balked at the amount of control that Zhao would retain over Binance.US.

Companies that deal in digital money are trying to grow up. Often started by lone programmers lugging laptops across the globe, many cryptocurrency firms are restructuring themselves into more traditional entities that have boards of directors and audited financial reports. Some are gunning for a bigger presence in the United States, a lucrative market where hordes of customers are already flocking to their platforms — just as wary regulators have started paying close attention.

In a recent speech, Gary Gensler, chair of the Securities and Exchange Commission, referred to the space as “the Wild West.”

“This asset class is rife with fraud, scams and abuse in certain applications,” he said. “There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced and complete information.”

The initial public offering this spring of Coinbase, a San Francisco-based cryptocurrency exchange that lets customers trade digital currencies for real ones and vice versa, has provided rivals with a blueprint — and a glimpse of the money to be made. This month, Coinbase reported a profit of $1.6 billion in its second quarter as a public company.

“Fundraising and engaging potential investors is an essential part of Binance.US’s long-term strategy,” Hazel Watts, a Binance spokesperson, said in an email.

Watts said the company planned to dilute its ownership significantly by bringing in more outside shareholders.

“The original plan was only to dilute a small portion,” she said.

Zhao, who goes by “CZ” and lives in Singapore, created Binance.US in 2019 as a first step to appease U.S. regulators unwilling to let American customers trade on Binance.com. He currently owns most of both Binance.com and Binance.US. Brooks came on board in April with the mission of creating a legitimate and transparent business, starting by diversifying its ownership structure through venture capital investment in Binance.US.

A former regulator who briefly ran the Office of the Comptroller of the Currency — which oversees the nation’s biggest banks — under former President Donald Trump, Brooks was already familiar with the cryptocurrency industry, having served as the chief legal officer of Coinbase.

Brooks took pains to establish that Binance.com and Binance.US were separate entities despite their common ownership. Binance.US had “a truly arm's-length relationship” from the other, he said in a May 19 interview with Bloomberg — licensing the Binance brand and some technology but operating independently.

“That’s a very, very different thing from them owning us, which they don’t,” he said.

He was looking to raise at least $100 million from investors, according to Ray Lane, a longtime technology executive turned venture capitalist in San Francisco. Lane said his firm, GreatPoint Ventures, had never made a cryptocurrency investment, but when partner Andrew Perlman — to whom Brooks had made a pitch — proposed that they invest, Lane was willing to entertain the idea. A senior SoftBank executive also looked at making a personal investment in Binance.US but decided against it, a SoftBank spokesperson said.

GreatPoint entered discussions with Brooks about a partial investment in Binance.US. The investors initially drew comfort from assurances by Brooks that Binance.US would be run independently from Binance.com and follow all U.S. regulations. That U.S. oversight could eventually include requirements beyond those already in place, which require the platform to keep track of customers’ identities, report suspicious activity to federal authorities and make sure that its services are not being used to commit crimes.

But with U.S. authorities investigating Binance over money laundering and tax issues, according to a Bloomberg report, and Zhao’s ownership of Binance.US hovering around 90%, GreatPoint decided against making an investment.

“We’d have to make an investment decision before all of those issues were resolved,” Lane said.

Moreover, he and his partners thought that the walls separating Binance.US from its parent company were flimsy. “How would we ever feel comfortable that it was an independent company using the same technology?”

Around the time that GreatPoint was contemplating an investment, Brooks was aiming to bolster Binance.US’s regulatory chops. Cryptocurrency firms, which have already had run-ins with U.S. regulators, have begun to mount a counteroffensive by hiring lobbyists and luring former regulators, including former SEC chair Jay Clayton, into their fold.

In early July, Binance.US announced that it was hiring Manuel P. Alvarez, a former enforcement attorney for the Consumer Financial Protection Bureau who later served as California’s top banking regulator, to be its chief administrative officer. But once GreatPoint pulled out of the deal talks, both Brooks and Alvarez resigned.

Joshua Sroge, the interim chief executive of Binance.US, said in a statement that the company still had plans to grow, including raising external funds and “expanding its board of directors with experienced leaders, among other initiatives consistent with those pursued by fast-growing private companies.”

On the day that Brooks and Alvarez resigned, Zhao wrote in a Twitter post that Binance was “pivoting from reactive compliance to proactive compliance.”

Watts, the Binance spokesperson, said Binance.US was still expecting to complete a fundraising round “shortly,” although she declined to disclose names of possible investors. As part of the new round, Binance.US expects to expand its board of directors — which currently has three members: Zhao, Sroge and the chief strategy officer for Binance, Gin Chao — to between seven and nine people.

“Board composition is an important factor in any fundraising decision,” Watts said. “The proposal presented to the board at the time did not reflect this,” she added, referring to the venture capital investment suggested by Brooks. “CZ’s belief is that the board for Binance.US must be independent and operate with proper governance.”

The company is still planning on an initial public offering, she added. “It’s just a matter of time.”