Bloomberg Article Summary: Why did Bloomberg Chinese once describe Binance as a "Ponzi scheme"?

Bloomberg Businessweek Chinese edition Issue 250 features Binance founder Changpeng Zhao (CZ) on the cover, with the article titled "Changpeng Zhao's Ponzi Scheme" - what exactly in the content prompted Bloomberg Businessweek Chinese edition to use this as the cover headline?

The article mainly consists of a series of negative information and controversies surrounding Binance since its inception, along with responses from CZ. The term "Ponzi" appears only three times in relation to Bitcoin, Terra, and lesser-known tokens, while Binance's referral code mechanism is described as having a "multi-level marketing" style.

The content is arranged according to the paragraphs of the original text. All content except for "annotations" is from the original article. For further reference, please visit the original article. Reporting in Bloomberg Businessweek does not represent a stance. In fact, Binance issued a public letter in 2021 emphasizing user protection as a priority, regulatory compliance as a growth factor, and listing various compliance and self-regulatory guidelines currently being implemented.

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Exchange Mechanism, Regulatory Environment

This section includes a series of controversial aspects of Binance, with a disclaimer that the original text may contain biased or incorrect content.

1. Issue of Shitcoins

The article cites an anonymous trader who claims to have his account frozen by Binance and opts to remain anonymous, calling Binance a massive casino for shitcoins.

Bloomberg continues to mention that Binance's early practice of offering up to hundreds of competing coins, in contrast to Coinbase's initial offering of only three cryptocurrencies, was a key differentiator. Additionally, Binance's referral code program involves a multi-level marketing style, where Key Opinion Leaders (KOLs) profit from users' trading fees through referral codes.

2. Insider Trading in Coin Listings?

Bloomberg points out a conflict of interest in Binance's business model, where token listings on Binance lead to sudden surges in value, with a significant increase in trading activity before the listing.

A Binance spokesperson responded by stating that employees must adhere to a "strict code of ethics" prohibiting short-term trading, and Binance would dismiss any employee violating this policy.

3. Is Dubai Headquarters Just for Show?

Bloomberg reports that on the day of the interview, CZ mentioned that journalists could visit Binance's new office in Dubai. However, after a series of evasive responses from assistants and public relations in emails, a Binance representative later stated that the office was temporarily closed due to the increasing number of confirmed cases. Additionally, the day before, Binance had arranged an interview with the head of their Middle Eastern operations, who appeared without a mask in a crowded hotel lobby.

Binance explained that the office had minimal staff and was only used one or two days a week.

Terra's Crash Event

The article mentions Terra's crash and events such as Binance's investment in the LUNA token, which went from a high point of $16 billion to zero. Similar to previous reports on Binance.US being sued for violating securities laws and claims that UST was backed by fiat.

Users accuse Binance of initially launching UST financial products, suspecting exaggerated advertising claims of safety and high returns.

Binance spokesperson Jessica Jung stated that Binance rigorously reviews listing applications and that some tokens traded even more than on Binance. After Terra's crash, Binance began to assess the token's advertising methods.

Major U.S. Regulatory Agencies Focusing on Binance

Bloomberg notes that Binance is currently under investigation by almost all major U.S. regulatory agencies. While Binance believes these investigations are for negotiating in good faith, it is uncertain if the regulatory bodies share the same view. These agencies include:

• Department of Justice
• Internal Revenue Service
• Securities and Exchange Commission
• Commodity Futures Trading Commission
• Other national regulatory bodies

Compromising with Regulation, Establishing Headquarters

CZ, as the sole owner of "Binance Holdings Ltd." registered in the British Virgin Islands, most of Binance's trades are conducted through the flagship exchange Binance.com. However, Bloomberg believes that the location of the exchange's headquarters and the identity of co-owners remain a mystery.

Binance is now under investigation by the SEC for potential sales of unregistered securities during the 2017 ICO period. Todd White, a partner at the crypto lobbying firm Rulon & White Governance Strategies, stated:

These investigations are the consequences of CZ not taking compliance seriously. I know Binance is trying to build something, but anti-money laundering rules are crucial. I urged Binance executives to take compliance seriously at a meeting in 2018, but they were very dismissive of it.

CZ emphasized that the era of the past is over. Initially, when confronted by regulatory authorities, Binance stated that it did not have offices, headquarters, or parent companies. This angered regulators, leading Binance to establish the aforementioned entities over the past year.

Binance's Secret Base in Shanghai

Bloomberg cited a former employee who revealed that Binance had a secret base for years, which was very inconvenient because it contradicted Binance's early claims of being a decentralized organization. Moreover, the location was in China, where cryptocurrencies are banned.

Despite Beijing ordering Binance's competitors to cease operations at the time, over 100 Binance employees still commuted to the office in the Huangpu District of Shanghai every day.

In November 2019, Binance employees were informed to vacate the office and were reassigned to various shared offices.

Note:

The claim that "Binance had an office in China and was raided by the police" first appeared in The Block's report. Although The Block later emphasized the controversial nature of the term "raid" after updating the report, they still assert that Binance had two offices in Shanghai. This incident sparked a feud between The Block's Research Director Larry Cermak and CZ.

CZ vehemently refuted the claim on Twitter and criticized it:

No police, no raid, no office. Hope you didn't pay to read Fud Block's article.

Subsequently, CZ deleted the content of another tweet:

You can argue about the definition of this office, who rented it, for how long, if it's in use or not, etc., but you can't make up "police raids" that never happened. So, if there was no police raid, this article should not exist. Pure FUD!

In a later interview, CZ's tone differed from his initial strong rebuttal. He did not deny the existence of the Shanghai office, merely stating that some government officials visited the office, which he downplayed as not regulatory bodies but government officials. He remarked:

As a reporter, you can write two entirely different stories, right? You can say, 'This guy ran into a restaurant,' or you could also say, 'This guy casually walked into a restaurant,' enjoying the afternoon sun.

Binance's Wild Expansion

Bloomberg quoted a former product manager at Binance who stated that during an interview in 2017, Binance indicated they were not just seeking to dominate the crypto market but also aiming to replace traditional stock exchanges like Nasdaq.

Economist Lex Sokolin from blockchain company ConSenssys Software Inc. remarked:

Ironically, for a company skeptical of Wall Street, Binance is even more centralized than all top traditional financial institutions. Today, it functions as an exchange, brokerage, savings bank, venture capital firm, data provider, and a shitcoin casino all at once. In other words, an institution that combines Nasdaq, Charles Schwab, Bank of America, Morningstar, a16z, and Caesars Palace casino.

"Zhao Changpeng's crypto organization vertically integrates in a way that a traditional financial institution would never allow," said Lex Sokolin.

Former head of the SEC's Office of Internet Enforcement, John Reed Stark, noted:

While Binance is more mature compared to other competing exchanges, they continue to operate in ways that "violate consumer protection laws." Operating without any trust infrastructure, consumer protection, or regulation in place, in terms of finance, this is not something you want to be involved in.