November 22, 2023 • 48 mins
We get a very quick update on the OpenAI/Sam Altman situation and then turn our attention to the blockbuster news that Binance and its co-founder, Changpeng "CZ" Zhao, have entered a guilty plea on charges that include money laundering. What does this mean for Binance in particular and cryptocurrency in general?
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Episode Transcript
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Speaker 1 (00:04):
Welcome to tech Stuff, a production from iHeartRadio. Hey there,
and welcome to tech Stuff. I'm your host Jonathan Strickland.
I'm an executive producer with iHeart Podcasts. And how the
tech are you? Now? As we're about to head into
Thanksgiving here in America, the huge tech news stories just
(00:27):
won't stop. So earlier this week I talked about what
happened at open ai and how the board of directors
fired CEO Sam Altman and how that had massive and
immediate consequences. There's already another update to that. After being fired,
Altman reportedly received an offer from Microsoft to become CEO
(00:49):
of some advanced AI division. But now it is reported
that he is in line to return as open AI's
CEO once again. So you know, if you listen to
the stories, you know that he was fired, the board
reversed its decision, begged him to come back. He demanded
that the members of the board stepped down, you know,
(01:12):
the ones who had voted him out, that they have
to step down, and they refused, and it went back
and forth. Well, now it looks like he is on
track to come back as CEO of open Ai, and
the board was really kind of forced into this because
there were a lot of staff members who were ready
to just walk out if the decision had not been reversed.
Greg Brockman, the former president of open Ai, who also
(01:35):
resigned in the wake of that event, is also set
to return to the company. All of the old board
of open Ai is now on the outseas, with the
exception of Adam DiAngelo. He's the sole holdover from the
board that fired Sam Altman, and he's supposed to be
there to kind of help with transition this new board
(01:59):
of directors, which is very small. I think it's like
three or four people. They're going to be in charge
of actually creating an expanded board of directors, and I'm
pretty sure that at least one of those seats will
be taken by somebody from Microsoft, because, as I mentioned
in the earlier stories, Microsoft has invested billions into open
Ai and was mightily miffed that the open Ai board
(02:23):
made this decision without first talking to its partner. I
also guess that Emmett Sheer, the former CEO of Twitch
who was serving as CEO of open Ai, is going
to count his tenure at the company in hours rather
than you know, like weeks. Or months or whatever. This
is a wild story, but that's not what we're here
(02:45):
to talk about today. We're going to talk about a
different and equally wild story. We're going to talk about
a different CEO, one who has played a really important
part in the crypto community and who yesterday, on November
twenty first, twenty twenty three, pled guilty to a host
of charges that include things like money laundering and sanctions
(03:07):
violations and that sort of stuff, among other things. So
today we're going to learn a bit about the crypto
exchange Binance, and it's soon to be former CEO Chong
Peng Xiao Akacz. In fact, I guess now he really
is the former CEO. I believe he's already formally stepped down.
All right, this time last year CZ was coming up
(03:30):
in the news because of another crypto bro Fond of
Initialisms SBF aka Sam Bankman freed, and that was when FTX,
the second largest cryptocurrency exchange in the world, was starting
to fall apart. Well. CZ's company, Binance was the largest
(03:52):
cryptocurrency exchange in the world still is, so it was
number one and FTX was number two. Or a short
time it looked like Finance was gonna swoop in and
acquire FTX in an effort to head off catastrophe, but
then CZ changed his mind, and well, now FTX is gone.
It's sister company, Alameda Research, is gone. SBF is a
(04:16):
waiting sentencing after he had been found guilty of multiple
white collar crimes, and now CZ has pled guilty to
white collar crimes. It is a wild roller coaster ride,
and we will touch on all of that a bit
more as this episode goes on, but first, let's back
up and just learn a little bit about Finance and
(04:36):
about CZ himself. His story, in many ways, really exemplifies
the mythology that perpetuates throughout the tech sphere that, you know,
a person can come from humble beginnings and then end
up being one of the richest people in the world.
You know, at one time, CZ was worth more than
twenty billion dollars. In order to do that, you might,
(05:00):
you know, along the way, have to ignore some illegal
stuff in order to maintain the Disney version of the
Rags to Richest story, because, as it turns out, a
lot of billionaires got their billionaire status by doing things
that you know aren't necessarily legal. So in nineteen seventy seven.
(05:22):
Cizi was born in the Jiangsu province of China. Both
his parents were teachers, but China in the nineteen seventies
and the nineteen eighties was a tumultuous place for people
who were dedicated to educating others. The Chinese Communist Party
wanted very much to have a direct hand in how
(05:43):
China's citizens thought, which meant educators were potentially enemies of
the state, because it turns out teaching folks how to
think critically tends to be bad for authoritarian regimes. It
doesn't work well with their motives oppa, So, according to
cz his father had been identified as a potentially dangerous
(06:05):
individual and his family was forced to move to a
more rural province. On June fourth, nineteen eighty nine, student
led protests in Tianamen Square in Beijing reached a tipping point.
After months of demonstrations, the Chinese government deployed troops against
the protesters and commanded the troops to tell the protesters
(06:27):
to vacate the square and use force if necessary. Violent
clashes followed, and a whole bunch of people died in
the process. To the point where it's often referred to
as the Tianaman Square massacre. Now, how many people actually
died is still a matter of conjecture. The Chinese government
isn't exactly forthcoming with the figures, and in fact has
(06:48):
tried many different approaches to either dismiss or downplay or
recontextualize the event. At one point, they even referenced it
as a vaccination against future political turmoil, which is about
as chilling a description as I can think of. So
this environment in China was obviously really dangerous for people
(07:11):
who were in the education sector. So Cez's family chose
that to leave China, and a couple of months after
the massacre, Cz and his mother immigrated to Canada and
he became a nationalized citizen of Canada. Sez said he
took several jobs as a teenager to help his mother
cover family expenses, including working at a McDonald's. So again,
(07:35):
this plays into sort of that mythology of the tech space,
where you have people from these pretty humble beginnings reach
incredible heights. He also dedicated himself to his schoolwork. He
proved to be adept at mathematics, and he decided to
enroll in McGill University in Montreal and focus on computer science.
(07:58):
After he graduated college, Cz took a gig first as
a subcontractor and he was developing software for the Tokyo
Stock Exchange. Then he took a job with Bloomberg trade
Book and was again developing software that was related to
making trades on stock markets. And in two thousand and five,
Cz made the decision to head back to China in
(08:19):
an effort to create tech startups in China itself. So
for years, China has represented a large and for quite
some time, largely untapped market. You've got a country that
has more people than any other country in the world.
Right there's like one point four billion people in China,
(08:40):
and so that's an enormous potential market to tap into
if you can. And it's really tricky, not just because
the Chinese government is very much an authoritarian presence, but
also there are international sanctions that you have to deal
with where other countries have put sanctions upon China, and
(09:00):
it made it a lot harder to do certain types
of business. Meanwhile, China went through a phase in which
the government began to encourage tech companies in particular to
start business in China, both natively, like encouraging native Chinese
businesses and to encourage international companies to create a position
(09:21):
or an office in China, as China was looking to
not just catch up, but to surpass other countries in
the tech space. So Cz worked in China for several
years trying to hit it big with various startups, and
that's how things went. He built businesses that bridged the
gap between tech and finance. He continued to focus on
things like high frequency trading platforms, that sort of stuff.
(09:44):
And in two thousand and eight, you had a famous
white paper publish which was called Bitcoin, a peer to
peer electronic cash system. This introduced the world to concepts
like blockchain and cryptocurrency. And Cz said he first heard
about all of this when he was playing in a
poker game in Shanghai and there was another guy at
(10:05):
the table, a guy named Bobby Lee, who at that
time was the CEO of a cryptocurrency exchange company that
was called BTC China. So Bobby Lee turns to Cz
in the middle of this poker game and apparently says
that Cz should really invest like ten percent of his
wealth into bitcoin because it was going to be the
(10:26):
next big thing. CZ said that instead of doing the
ten percent deal. He's like, well, if ten percent is good,
all of it should be better. So reportedly he then
sold his apartment and then invested everything he had in bitcoin.
But at first things did not go so well. The
value of bitcoin took a hit. Cz saw his personal
wealth diminish as a result. I want to say that
(10:49):
that bitcoin's value dropped to just a third of what
it had been when he made his initial investment, and
that looked bad. But Cz practiced the old crypto mantra
of hoddle hodl hold on for dear life and eventually
saw bitcoin rebound. He also thought that the entire crypto
(11:10):
community would benefit if it were easier for normal folks
to get into cryptocurrency, because even in twenty thirteen, which
is already half a decade after the initial concept of
bitcoin and blockchain had been unveiled, the folks who were
into crypto mostly consisted of wealthy folks who were tech nerds,
(11:31):
or maybe people who had aspirations of being wealthy but
already were a tech nerd. But outside of that group,
cryptocurrency was still largely not really understood or known. So
Cz thought it might make sense to build a more
accessible platform to allow investors to get into cryptocurrency, and
that this in turn would benefit the entire crypto community,
(11:54):
like it becomes a rising tide situation, you have more
people getting into this and then actually potentially making cryptocurrency
live up to what it was supposed to be, which
was a digital means of exchange that would offer up
opportunities that you just could not realize if you were
dependent upon stuff like fiat currency. But nor for that
(12:16):
to work, you got to get people to adopt it.
If it's just this one small, insular group using the technology,
it doesn't really go anywhere. So he started to build
up resources that he would need to launch his own
cryptocurrency exchange, which he would call Binance. He named it
after a portmanteau. Essentially he was combining the words binary
(12:36):
and finance, and he would essentially launch Binance out of
China in July twenty seventeen. So I guess we need
to actually talk about what a cryptocurrency exchange is. Essentially,
it does what it says on the ten. So these
are businesses that facilitate the exchange of money from one
form of currency into another. I'll explain more about how
(13:01):
this happens. But first we need to take a quick
break to thank our sponsors. Okay, so how does a
cryptocurrency exchange work? Well, in some ways, it's similar to
(13:22):
how an establishment, like a currency exchange in a country works,
except those are offshoots of like nationalized financial systems. But
you know, you would walk up to one of these
places and you would exchange your home currency for whatever
the native currency was. So if I were going to
(13:43):
the UK, I would be exchanging US dollars for British
pounds sterling. But in the process, I would also be
paying a small fee to the institution itself on top
of this, so I'm not getting a one to one
value exchange here. I'm losing some because I'm paying the
(14:03):
institution for the process. Cryptocurrency exchanges are similar, except what
they're really doing is they're matching up buyers and sellers.
So let's say that you want to get into bitcoin
and you're doing it for the first time. You would
use a cryptocurrency exchange. You would open up an account there,
create a digital wallet, transfer some of your money into
(14:24):
this digital wallet. Then you would use the exchange to
purchase bitcoin from somebody who already holds some and it
would be at an agreed upon price. Typically the exchange
handles all of this for you, so you don't have
to like go through negotiations or anything, and then you
purchase your bitcoin by quote unquote exchanging your US dollars
(14:44):
for the bitcoin, and the crypto exchange takes a cut
of that transaction. There's a transaction fee that goes to
the exchange itself. Now, these exchanges can and often do,
have their own cryptocurrency or token associated with the exchange.
For example, the now defunct ft X exchange had its
(15:06):
token called FTT. Binance has a unit that is shortened
down to B and B, but it is called the
binance coin. There are a few reasons that cryptocurrency exchanges
could mint their own crypto coins their own tokens. One
big one is just to raise money. You attract investors
(15:27):
to your platform and you tell the investors, in return
for your investment, you will get x number of native tokens,
and those tokens will be useful in different ways. So
one of those ways is that can reward those investors,
obviously just to give them a return on their initial investment.
But this is somewhat tricky, right, because if you're an
early backer of a crypto exchange like Binance and you
(15:52):
get this huge number of binance coins in return for
your investment, really all you have is a whole bunch
of right. It's not magically worth anything. I mean, it's
worth whatever the initial coin offering or ICO says it's worth,
but it's not pegged to that value. The value can
(16:13):
actually drop below that ICO. So let's say that bidance
coin launches with a value of one US dollar per
binance coin. There's nothing that magically ties those values together
on their own, So it could be that the binance
coin falls to seventy cents instead of a dollar. That
could happen, or it could go up. It could be
(16:33):
that it suddenly is worth five hundred dollars. So at first,
it feels like you're being handed a big old pile
of monopoly money, right, because the bills say they're worth
certain amounts, But you can't actually spend monopoly money anywhere
other than in a game of monopoly. But as people
join the exchange and they put some money into the
exchange's own currency, either to facilitate trades for other currencies
(16:56):
or just as an investment, the crypto coin starts to
take on a value that's determined by the market. So
let's say that you are an early investor in finance.
As a result, Binance gives you like a million Binance coins,
and then after a while your Binance coins are worth
two hundred bucks apiece. You've now got two hundred million
(17:18):
dollars worth of Binance coins. That's kind of like how
these cryptocurrency exchanges get off the ground is just through
this group hallucination that the token is going to be
worth something, and maybe it will and maybe it won't.
It's a gamble. Now. On top of all that, often
in exchange will also extend certain benefits to people who
(17:39):
are holding and using the native tokens for that exchange. So,
for example, if you're using binance coins on Binance, you
might get a discount on those transaction fees, so you'll
still have to pay a transaction fee, but it won't
be as much, so you'll be able to keep more
of the value associated with that currency change. So in
(18:01):
a way, it almost becomes something like a loyalty program.
You can maximize your profits by investing in and trading
with the native tokens of the exchange. All right, So
back to binances in particular. So Caz holds this initial
coin offering, he attracts investors to pour money into supporting
finance by essentially buying up these tokens, and he launches
(18:24):
it in the summer of twenty seventeen. However, that was
around the same time that the Chinese government was starting
to grow really leery of cryptocurrency. Now you could argue
this was China being stereotypically suspicious of any entity that
the government did not have direct control over, and so
they treated it like it was a potential threat to
(18:46):
their authority. If the Chinese government can't control it, then
there's always the possibility it could grow to a point
that means it could defy the Chinese government. Now, you
could also say that the Chinese government saw the potent
for cryptocurrency to be the funding mechanisms for all sorts
of illegal activities, and that could include things like money laundering,
(19:08):
funding terrorist organizations, all this kind of stuff, And there's
a legitimate argument for that. In fact, that's part of
what the Binance has pled guilty to have done. But
however you want to frame it, China began to pass
more and more restrictive laws that essentially were muscling crypto
companies out of the country. It was becoming harder and
(19:29):
harder for them to do business in China, particularly with
the level of freedom that they needed to operate in
if they wanted to grow. So Cz chose to have
a change of venue and he relocated the headquarters for Binance,
and what would follow was a kind of global game
of hopscotch. Cz would pull up roots and relocate Binance's
(19:54):
headquarters to a different country. Then he would do it
all over again once that new country became and to
pass more regulations around cryptocurrency. So he went from China
to Japan, then he went from Japan to Malta. Then
he went from Malta to the Cayman Islands. You'll often
hear that Binance's headquarters are quote unquote offshore here in
(20:15):
the United States, because there is a US branch of Binance,
but the actual main company of Binance is always referenced
as being offshore, and that's partly because the company has
been rather fleet footed when it comes to making tracks
when regulations start to pop up. Well within a year,
Binance became the largest cryptocurrency exchange as far as trading
(20:37):
volume is concerned. So twenty eighteen, it already had made
a name for itself. In twenty nineteen, Binance launched a
stable coin backed by the US dollar called Binance USD. Originally,
the Binance coin was trading on the Ethereum blockchain, but
in twenty nineteen, Binance migrated all of its tokens onto
(20:59):
its own blockchain, called the Binance Chain. That year also
saw a big problem. Binance was the target of hackers,
so some hacker or hackers were able to siphon a
way around seven thousand bitcoin from the exchange as a whole. Now,
in twenty nineteen, that amount of bitcoin had a value
(21:20):
of somewhere in the neighborhood of forty million US dollars.
That's a pretty big bank heist. Binance ultimately covered all
the losses. The company had already established a fund specifically
for those kinds of emergencies. Cz had that foresight. He
knew that there needed to be a safety net there
because cryptocurrency is inherently risky for various reasons. This was
(21:45):
a reminder, in fact, that cryptocurrency is not inherently safer
than other forms of currency. It's different, but it's not
necessarily better, at least not when it comes to things
like risk. Then Binance launched its own smart chain or
smart blockchain if you prefer so. The initial Binance chain
was a pretty straightforward and simple blockchain, so it allowed
(22:07):
for stuff like transaction validations and overall governance of the blockchain.
But the smart chain that Binance launched carried the capabilities
of supporting smart contracts. Now, smart contracts are a technology
that allows for all sorts of different implementations on the
blockchain that have really yet to be realized in a
(22:28):
way that has been seen as practical, but it allows
for stuff like NFTs. NFTs are built on top of
smart contracts, and they can only exist on blockchains that
have that support for them. So Binance launches its own
smart blockchain technology. This also allowed Binance to provide an
alternative to Ethereum, which was really the premiere smart blockchain solution. Like,
(22:53):
when you say smart blockchain, you don't necessarily just mean Ethereum,
but practically that's what a lot of people did mean
when they talked about smart blockchains. They were talking specifically
about the Ethereum blockchain. Because it supported those kinds of transactions.
It also complicates matters when it comes to things like
discussing NFTs in a way that is genuine and meaningful
(23:15):
and accurate, because one of the arguments about NFTs is
that you can move them to other blockchains and they
will remain relevant. And that's only true if the blockchain
supports smart contracts in the first place, and even then
it gets tricky to migrate stuff, but that's for another
podcast entirely. Binance also offered lower transaction fees and faster
(23:39):
transaction speeds than you could find on ethereum, so you
could say that Binance was trying to drink Ethereum's milkshake
in some ways. Now this leads up to a point
where the US government begins to pay a bit more
attention to cryptocurrency in general and Binance in particular. For
a few years, the crypto world was operating kind of
like the wild West. There were very few laws and
(24:01):
regulations that could get in the way, and there were
lots of opportunities to make money and to grow, and
even more opportunities if you weren't terribly picky about, you know,
operating in a legal way and that kind of stuff.
If you weren't if you didn't mind getting your hands dirty,
you could grow real fast in the crypto world. But
in twenty twenty, Forbes published an article that essentially implicated
(24:26):
cz As building a business that was specifically structured to
deceive US regulators while still profiting from US based investors. Essentially,
they were saying cz was designing Binance to confound US
regulators and keep the business from being restricted by regulations
(24:48):
and laws. The US government moved to investigate Binance, specifically
looking into the possibility that finance was guilty of things
like tax avoidance as well as money laundering. A lot
of this came down to the differences between Binance dot Us,
the United States face of Binance, which was supposed to
(25:10):
operate within the laws and regulations of the United States,
and Binance overall right like so, Binance Overall operated with
far fewer restrictions, but investors in the United States were
supposed to be interfacing with Binance dot Us, which was
supposed to be the more tame and legal version of Binance.
(25:34):
The investigation uncovered information that implicated Binance as allowing certain
US investors to engage with the more untame, wild and
wooly version of Binance, in other words, to operate without
obeying those regulations and laws, which was a huge no no.
Cz at the time maintained that the investigation was unwarranted.
(25:57):
He said, this is all totally baseless, and we will
come out proving that Binance hasn't done anything illegal and
we've been operating within the law. So that investigation starts
and it continues for a couple of years. And while
that was going on, there was also massive drama happening
within the crypto community at large, and to go into
(26:21):
all of it would actually require a mini series of
episodes to really dive into what happened in twenty twenty
two in the crypto community, it's very complicated. Part of
it is precipitated by stuff that happened years earlier, right
because in twenty twenty the crypto community saw a big boost.
(26:42):
The pandemic had lots of effects throughout all of culture
and the economy. One of those effects was that a
lot of people, once confined to their own home, started
to look into things like, huh, I wonder if it
would make sense to invest in cryptocurrency, and a ton
of people who had never really been involved in cryptocurrency
(27:02):
at that point, started to get involved, and this began
a series of events that would start to drive the
value of various crypto coins higher and higher, sometimes too
unsupportable amounts. Like look at doge coin, a coin that
was made as a joke and essentially was made in
a way to flaunt how ridiculous the cryptocurrency world could be.
(27:25):
Even dosee coin, the joke coin, the trash coin, became
very valuable compared to what it had started out as,
but only for a short while before it collapsed in
on itself when the perception could no longer support itself.
Things like that were happening leading up to twenty twenty
two that would allow for an enormous rug pull, not
(27:47):
necessarily an intentional one, but one that just kind of
happened because of a confluence of events. I'll explain more,
but first we're going to take another quick break to
thank our sponsors. In twenty twenty one, cryptocurrency was having
(28:12):
a banner year, right like, driven by the increase in
interest in twenty twenty twenty twenty one was huge. In
November of twenty twenty one, just two years ago, the
value of bitcoin hit a high of around sixty nine
thousand dollars per bitcoin, a value it has not hit since,
(28:32):
although while it took a massive dive over the course
of the next year, it has recovered significantly since then. However,
after this huge high, investors started to back off of cryptocurrency.
This was due to a lot of different reasons. Part
of it was that the traditional financial systems around the
world saw interest rates growing. Right, so like the regular
(28:56):
banking industry, you start to see interest rates go up,
which means it becomes more expensive to take out a loan. Now,
this was something that kind of shocked me because I
don't know, I just take a much more conservative approach
when it comes to investment. I don't believe in investing
money I don't have. But as it turns out, I
am in the minority. A lot of people believe in
(29:19):
investing money they do not have in an effort to
make way more money, and that will involve things like
taking out a loan in order to make massive investments
and stuff. But when you take out a loan, you
have to pay the loan back, plus you have to
pay back the interest well. As the interest rates go up,
it becomes an inhibiting factor on investing. Right, Investors are
(29:40):
less likely to pour money into stuff because now they're
going to have to pay much higher interest rates on
the loans they take out in order to make those
investments in the first place. Whereas I was of the
naive opinion that you take the money you actually have,
not money that you have taken a you know, not
a loan you've taken out the rather money you actually have,
(30:01):
and then you invest that I'm a sucker. That's not
how you're supposed to do it, apparently, But that explains
why I'm not a financial genius or anything. But anyway,
the point being that because of these higher interest rates,
there was a slowdown in investing in cryptocurrency. That was
just one of the factors that was having an impact
(30:22):
on the crypto community. In twenty twenty two. Another happened.
In May of that year. There was a cryptotoken called
tara USD that was supposed to be pegged to the
US dollar. Now, pegged means that the value of the
cryptotoken is tied to the value of something else, in
this case, the US dollar. But in May of twenty
(30:45):
twenty two, because of some pretty complex issues. Tara USD
became unpegged to the US dollar and its value collapsed,
and that collapse became kind of like the first domino
to fall in a chain, so it's like a chain
reaction was initiated. The collapse undermined the security of several
(31:07):
other crypto organizations that held units of this digital currency
that suddenly had become worthless. So it was like if
the dollar or whatever your native currency is suddenly became
worth nothing, it wouldn't matter how much of it you had,
it's still worth nothing. You would just have a whole
lot of nothing if you were you know, if you
had a bank account filled with millions of dollars or
(31:30):
pounds or euro or whatever it might be, but the
value of each individual euro or dollar or whatever fell
to zero, you're still penniless, effectively. So this happened to
a lot of cryptocurrency companies, whether they were crypto lenders
or crypto exchanges or whatever, and you started to see
(31:50):
a lot of these crypto companies go under FTX, which
at this point in twenty twenty two was not yet
known to just be a house of cards, at least
not from anyone who wasn't already inside the company, FDx
moved to help cover some of these companies that were
affected by the collapse of tara USD, So FTX was
(32:12):
doing this in an effort to try and stabilize the
overall crypto community. However, this also meant that FTX itself
was over extended. And remember at this point, FTX was
the second largest crypto exchange in the world behind Binance. Now,
when you get to November of twenty twenty two, FTX
(32:33):
itself is in major trouble. So at first, before the
full extent of what was going on at FTX was known,
CZ indicated that Binance was going to essentially cover for
FTX again in an effort to ensure the stability of
the overall market. Then, as more information came out about
(32:54):
ftx's questionable practices, CZ reversed course and said that Binance
would instead liquidate all of its holdings in FTT tokens.
So remember FTT was the native token of the FTX exchange.
So Binance is saying, you know what, we're cashing out,
We're getting out of it entirely. Instead of rescuing them,
(33:16):
we're walking away, and that signaled a mass sell off
of FTT, and meanwhile it became clear that FTX didn't
actually have the money to cover all of that. See,
these exchanges are supposed to have the resources to cover
a mass withdrawal of the native token. If they don't
(33:37):
have that, then you have a run on the bank.
And then suddenly the bank reveals it doesn't have the
ability to cover all the withdrawals, and you get a
scene like the one from It's a Wonderful Life where
you find out, oh, no, no, no, no, your money's
not here. It's a it's an old Wilson's barn and
it's in, you know, like that sort of thing. That's
(33:58):
terrible Jimmy Stewart, But I did that for my friend Shay,
who loves Jimmy Stewart and hates my impression. So FTX,
it turns out, had been secretly funneling customer holdings FTX
customer's money to cover bad investments that were made by
its sister company, Animator Research. That was why FTX could
(34:19):
not handle the situation that found itself in. It was
already not just overextended, but it was hollow because of
this issue of funneling billions of dollars worth of funds
of FTX customer money to a different sister company. Now,
you could make the argument that CZ's move of saying
(34:42):
he would first support FTX and then withdrew that support
made the situation even worse. You could say, Okay, CZ
kicked SBF while he was already down. And in fact
CZ and SBF definitely do not like each other. They
have feuded a in public throughout things like Twitter posts
(35:02):
and stuff, you know, the way mature people do, and
there has been a long history of the two of
them sniping at each other. So you could say that
what CZ did was he saw that SBF and FTX
were in a bad position and he just decided to
kind of twist the knife and make it worse. I
would say that, in the wake of all the information
we learned through the various trials involving FTX executives, that
(35:27):
the company was doomed. Whether CZ got involved or not,
CZ's involvement was salt on the wound, but the wound
was already deadly. Whether CZ said anything or didn't say anything,
FTX had sealed its own fate with some truly terrible decisions. Meanwhile,
Binance itself still was in the crosshairs of the US government.
(35:48):
It's not like it was free and clear of its
own investigation. And during the course of that investigation, US
authorities determined that Binance was failing to comply with various
US laws, like the Bank Secrecy Act, which the Bank
Secrecy Act requires financial institutions to investigate and to reveal
(36:09):
suspicious transactions. So if a series of transactions indicate that
perhaps someone is trying to launder huge amounts of money,
maybe because of the drug trade or some other illegal activity,
they are required by law to report that. And so
the investigation was saying Binance was failing to do this,
even though the Bank Secrecy Act would cover Binance's activities
(36:33):
within the United States, because again, Binance is a global company.
It's not like the United States has jurisdiction over the
entire world, although sometimes our country behaves that way. It
is still, however, operating within the United States, and at
least for those operations it is meant to comply with
the US law. But as I mentioned earlier, the investigators
(36:53):
had already determined that at least some US customers were
making use not of the US based version of finance,
but by the global less regulated version of finance. So
the authority said Finance failed to put in even rudimentary
systems to do things like check on suspicious transactions or
(37:14):
to even be able to detect them in the first place,
Like not only was Binance not investigating transactions that could
lead to criminal activity, but didn't even have the system
in place to do it, despite the fact that it
was legally obligated to do that. As such, the authorities
argue that Binance had become a haven for money laundering.
The illegal drug trade could lean on Binance to launder
(37:37):
funds and hide the financials for massive illegal operations, and
not just the drug trade. There were lots of other accusations,
including things like funding of terrorist organizations or people trading
in child abuse material. We're talking terrible grim stuff. And
according to the investigation, even Binance's own staff had commented
(38:00):
and joked about this problem. Within Binance, there was one
joke being referenced about how Binance should put up web
banner ads across the web, telling drug dealers that if
they're having trouble laundering their money, they should come to
Binance because you can do it there and you'll get cake.
So like arguing that Binance not only allowed for money laundering,
(38:23):
but welcomed it and profited mightily from it. So, just yesterday,
which again was November twenty first, twenty twenty three, for
all of those who are listening from the future, Binance
pled guilty to several charges relating to money laundering and
similar crimes. CZ himself also pled guilty as part of this,
And it's kind of like a settlement, you know, it's
(38:44):
a or a plea bargain deal. CZ will be forced
to pay a fine of fifty million dollars. Now, fifty
million dollars is a princely song, Don't get me wrong.
Fifty million is a lot of money. If someone gifted
me fifty fifty million dollars, I would essentially retire and
(39:05):
run off to the woods to live a quiet life
of isolation and video games. So fifty million is a
huge amount of money. However, you have to remember CZ
is a billionaire. In fact, his current net worth is
somewhere in the neighborhood of ten billion dollars, so fifty
million is a fine that he can certainly afford to pay.
(39:27):
He has also been forced to resign as CEO of Binance,
his part of the agreement means that he will never
be allowed to hold an executive position with a cryptocurrency
exchange again. However, he is allowed to remain an advisor
to Binance and a shareholder the majority shareholder in the company,
So while he can't be the CEO, he can be
(39:50):
the shareholder. And you know, we know major shareholders often
in fact always direct where a company goes because they're
the ones who hold the money. Technically, he could also
face jail time. The Bank Secrecy Act holds a maximum
sentence of five years for people who are found guilty
(40:10):
of violating the law, so he technically could face five
years for that, as well as other prison sentences for
the other crimes he admitted to, but that's probably not
going to happen. Since he pled guilty, chances are he's
going to avoid any significant prison time. In fact, I
(40:30):
would guess I would bet that he doesn't spend any
time behind bars. At most, he might have house arrest
for a while or probation or something, but I don't
think he's going to see any jail time. Unlike his
colleague SBF. SBF is looking at potentially some very serious
jail time, So that's an interesting contrast there. But then again,
(40:50):
SBF pled not guilty and put up a big fight
to suggest that he was not at fault for the
crimes he committed, So there are lots of differences there. Binance, meanwhile,
is on the hook to pay a whopping four point
three billion with a B dollars in fines collectively. It's
(41:11):
actually a couple of different fines that the company will
be paying, but when you add it up, it's four
point three billion dollars. In addition, the company has agreed
to a monitorship, so essentially that means that representatives of
US authority will watch over Binance to make sure that
Binance is following the law. It's not that the US
is going to have control of finance, but they are
(41:32):
supposed to get full transparency into Binance's operations to make
sure that you know, it's not still engaged in money
launtering and such. This case is huge. It follows in
the wake of other instances in which US authorities have
gone after various crypto companies for playing fast and loose
with the law, or, as US Attorney General Merrick Garland
(41:54):
has put it, quote, using new technology to break the law.
Does not make you a disruptor, It makes you a criminal.
End quote. Considering that SBF was found guilty of several crimes,
that CZ has now pled guilty to other crimes and
has agreed to no longer hold an executive position with Finance,
and that numerous other cryptocurrencies or crypto companies rather have
(42:15):
found themselves in similar situations, including one called Kraken that
is currently part of a massive investigation. This really could
just be part of a very nasty and painful growing
process for the crypto world in general, because it turns out,
unlike what the ideals suggested back when it was first
announced back in two thousand and eight, cryptocurrency is not
(42:38):
able to operate wholly separate from established financial practices and institutions.
It just can't. That's not how the world works, and
that means that ultimately it will be held accountable, at
least in some part, when those crypto companies fail to
follow the rules. How or if these specific criminal cases
(42:59):
are going to impact cryptocurrencies as a whole remains to
be seen. I imagine we might see some short term volatility,
I mean more volatile than what we already see in
cryptocurrency but I'm not convinced that it's like the death now.
I've long been a critic of cryptocurrencies. I mean even
in the early days. I remember I said I objected
(43:21):
to the being called cryptocurrencies because they weren't being treated
as currency. They were being treated like commodities or securities.
They weren't being treated like a currency. You wouldn't dare
spend it because the value of the currency was so
volatile and the transaction time was so long that the
value that you spent at the beginning of transaction could
(43:43):
be very different than the value at the end of it.
Like imagine going up and buying a stick of gum
for like five cents, but then by the time the
transaction's over, that five cents has the equivalent value of
what used to be one hundred dollars. You're like, well,
that was the most expensive state of gum I've ever
bought in my whole life. That's a ridiculous example, except
(44:04):
that's how it really works with stuff like bitcoin, Like
it can really vary that much from the beginning of
a transaction to when it's validated. So I've always been
a critic of cryptocurrencies that doesn't even get into things
like the environmental impact and how it has engendered a
lot of really unfair systems, and it has created a
(44:25):
whole class of crypto bro evangelists who are desperate to
get more people into cryptocurrency because that means that they
can get a payout, and it starts to look more
and more like a pyramid scheme. I still have all
these criticisms of cryptocurrencies. However, I do not think this
is the beginning of the end of cryptocurrency. I don't
(44:46):
think it's going to find the foundations crumbling and come
crashing down. I don't think that's happening. There's no shortage
of other crypto exchanges out there that are looking at
this as an opportunity to maybe make a bigger move
in the space. Binance is still the largest cryptocurrency exchange
in the world. It's not even close by orders of
(45:06):
magnitude larger than the second largest cryptocurrency exchange out there.
That's kind of like how Google holds a dominant position
in web search, like it's undeniable. They have almost a
monopoly on that. Well. Binance is not quite at a
monopoly level in cryptocurrency exchanges, but they're certainly the biggest
player in town, but I bet a lot of other
(45:27):
cryptocurrency exchanges right now are saying this is our chance
to get a larger slice of the pie. It's just
that a lot of them are still operating in areas
that got Binance into trouble in the first place. So
I think we're just through a very tumultuous phase in cryptocurrency,
and that we're not close to the end of that
(45:48):
phase yet, where there's going to be this reckoning between
the cryptocurrency community and various legal establishments around the world
that are trying to make sure that crypto currency doesn't
become a tool for criminals to use to get around
the law. I think that's just going to be the
continuing story for the next few years. And I don't
(46:10):
want cryptocurrency to just collapse because I don't want people
to lose all their savings. I would much rather see
people extricate themselves from cryptocurrencies and perhaps find other ways
to invest their money, and then maybe once everyone is safe,
then I wouldn't mind seeing cryptocurrency collapse because I really
do think ultimately it's more harmful than helpful. I think
(46:35):
it has created a very toxic kind of environment, but
I don't want to see it go away and also
bankrupt lots of people who were desperately hoping that this
was their ticket to real stability. That I don't want
to see that happen. All Right, that was another very
long episode about a very crazy sequence of events that
(46:59):
happened this week. Who knows what will happen tomorrow. I don't,
and I also won't be talking about it because I'll
be busy stuffing myself with turkey and lots of side dishes.
For those of you in the United States who are
celebrating Thanksgiving, I wish you a safe and happy and
healthy holiday. For everyone else out there, I wish you
(47:21):
an absolutely wonderful week. We will have a rerun tomorrow,
and of course Friday is the day for classic episodes,
but we'll be back next week with all new episodes
before I go on holiday again, because the end of
the year is crazy like that. I wish you all
the best, and I'll talk to you again really soon.
(47:47):
Tech Stuff is an iHeartRadio production. For more podcasts from iHeartRadio,
visit the iHeartRadio app, Apple Podcasts, or wherever you listen
to your favorite shows, me
Welcome to tech Stuff, a production from iHeartRadio. Hey there,
and welcome to tech Stuff. I'm your host Jonathan Strickland.
I'm an executive producer with iHeart Podcasts. And how the
tech are you? Now? As we're about to head into
Thanksgiving here in America, the huge tech news stories just
(00:27):
won't stop. So earlier this week I talked about what
happened at open ai and how the board of directors
fired CEO Sam Altman and how that had massive and
immediate consequences. There's already another update to that. After being fired,
Altman reportedly received an offer from Microsoft to become CEO
(00:49):
of some advanced AI division. But now it is reported
that he is in line to return as open AI's
CEO once again. So you know, if you listen to
the stories, you know that he was fired, the board
reversed its decision, begged him to come back. He demanded
that the members of the board stepped down, you know,
(01:12):
the ones who had voted him out, that they have
to step down, and they refused, and it went back
and forth. Well, now it looks like he is on
track to come back as CEO of open Ai, and
the board was really kind of forced into this because
there were a lot of staff members who were ready
to just walk out if the decision had not been reversed.
Greg Brockman, the former president of open Ai, who also
(01:35):
resigned in the wake of that event, is also set
to return to the company. All of the old board
of open Ai is now on the outseas, with the
exception of Adam DiAngelo. He's the sole holdover from the
board that fired Sam Altman, and he's supposed to be
there to kind of help with transition this new board
(01:59):
of directors, which is very small. I think it's like
three or four people. They're going to be in charge
of actually creating an expanded board of directors, and I'm
pretty sure that at least one of those seats will
be taken by somebody from Microsoft, because, as I mentioned
in the earlier stories, Microsoft has invested billions into open
Ai and was mightily miffed that the open Ai board
(02:23):
made this decision without first talking to its partner. I
also guess that Emmett Sheer, the former CEO of Twitch
who was serving as CEO of open Ai, is going
to count his tenure at the company in hours rather
than you know, like weeks. Or months or whatever. This
is a wild story, but that's not what we're here
(02:45):
to talk about today. We're going to talk about a
different and equally wild story. We're going to talk about
a different CEO, one who has played a really important
part in the crypto community and who yesterday, on November
twenty first, twenty twenty three, pled guilty to a host
of charges that include things like money laundering and sanctions
(03:07):
violations and that sort of stuff, among other things. So
today we're going to learn a bit about the crypto
exchange Binance, and it's soon to be former CEO Chong
Peng Xiao Akacz. In fact, I guess now he really
is the former CEO. I believe he's already formally stepped down.
All right, this time last year CZ was coming up
(03:30):
in the news because of another crypto bro Fond of
Initialisms SBF aka Sam Bankman freed, and that was when FTX,
the second largest cryptocurrency exchange in the world, was starting
to fall apart. Well. CZ's company, Binance was the largest
(03:52):
cryptocurrency exchange in the world still is, so it was
number one and FTX was number two. Or a short
time it looked like Finance was gonna swoop in and
acquire FTX in an effort to head off catastrophe, but
then CZ changed his mind, and well, now FTX is gone.
It's sister company, Alameda Research, is gone. SBF is a
(04:16):
waiting sentencing after he had been found guilty of multiple
white collar crimes, and now CZ has pled guilty to
white collar crimes. It is a wild roller coaster ride,
and we will touch on all of that a bit
more as this episode goes on, but first, let's back
up and just learn a little bit about Finance and
(04:36):
about CZ himself. His story, in many ways, really exemplifies
the mythology that perpetuates throughout the tech sphere that, you know,
a person can come from humble beginnings and then end
up being one of the richest people in the world.
You know, at one time, CZ was worth more than
twenty billion dollars. In order to do that, you might,
(05:00):
you know, along the way, have to ignore some illegal
stuff in order to maintain the Disney version of the
Rags to Richest story, because, as it turns out, a
lot of billionaires got their billionaire status by doing things
that you know aren't necessarily legal. So in nineteen seventy seven.
(05:22):
Cizi was born in the Jiangsu province of China. Both
his parents were teachers, but China in the nineteen seventies
and the nineteen eighties was a tumultuous place for people
who were dedicated to educating others. The Chinese Communist Party
wanted very much to have a direct hand in how
(05:43):
China's citizens thought, which meant educators were potentially enemies of
the state, because it turns out teaching folks how to
think critically tends to be bad for authoritarian regimes. It
doesn't work well with their motives oppa, So, according to
cz his father had been identified as a potentially dangerous
(06:05):
individual and his family was forced to move to a
more rural province. On June fourth, nineteen eighty nine, student
led protests in Tianamen Square in Beijing reached a tipping point.
After months of demonstrations, the Chinese government deployed troops against
the protesters and commanded the troops to tell the protesters
(06:27):
to vacate the square and use force if necessary. Violent
clashes followed, and a whole bunch of people died in
the process. To the point where it's often referred to
as the Tianaman Square massacre. Now, how many people actually
died is still a matter of conjecture. The Chinese government
isn't exactly forthcoming with the figures, and in fact has
(06:48):
tried many different approaches to either dismiss or downplay or
recontextualize the event. At one point, they even referenced it
as a vaccination against future political turmoil, which is about
as chilling a description as I can think of. So
this environment in China was obviously really dangerous for people
(07:11):
who were in the education sector. So Cez's family chose
that to leave China, and a couple of months after
the massacre, Cz and his mother immigrated to Canada and
he became a nationalized citizen of Canada. Sez said he
took several jobs as a teenager to help his mother
cover family expenses, including working at a McDonald's. So again,
(07:35):
this plays into sort of that mythology of the tech space,
where you have people from these pretty humble beginnings reach
incredible heights. He also dedicated himself to his schoolwork. He
proved to be adept at mathematics, and he decided to
enroll in McGill University in Montreal and focus on computer science.
(07:58):
After he graduated college, Cz took a gig first as
a subcontractor and he was developing software for the Tokyo
Stock Exchange. Then he took a job with Bloomberg trade
Book and was again developing software that was related to
making trades on stock markets. And in two thousand and five,
Cz made the decision to head back to China in
(08:19):
an effort to create tech startups in China itself. So
for years, China has represented a large and for quite
some time, largely untapped market. You've got a country that
has more people than any other country in the world.
Right there's like one point four billion people in China,
(08:40):
and so that's an enormous potential market to tap into
if you can. And it's really tricky, not just because
the Chinese government is very much an authoritarian presence, but
also there are international sanctions that you have to deal
with where other countries have put sanctions upon China, and
(09:00):
it made it a lot harder to do certain types
of business. Meanwhile, China went through a phase in which
the government began to encourage tech companies in particular to
start business in China, both natively, like encouraging native Chinese
businesses and to encourage international companies to create a position
(09:21):
or an office in China, as China was looking to
not just catch up, but to surpass other countries in
the tech space. So Cz worked in China for several
years trying to hit it big with various startups, and
that's how things went. He built businesses that bridged the
gap between tech and finance. He continued to focus on
things like high frequency trading platforms, that sort of stuff.
(09:44):
And in two thousand and eight, you had a famous
white paper publish which was called Bitcoin, a peer to
peer electronic cash system. This introduced the world to concepts
like blockchain and cryptocurrency. And Cz said he first heard
about all of this when he was playing in a
poker game in Shanghai and there was another guy at
(10:05):
the table, a guy named Bobby Lee, who at that
time was the CEO of a cryptocurrency exchange company that
was called BTC China. So Bobby Lee turns to Cz
in the middle of this poker game and apparently says
that Cz should really invest like ten percent of his
wealth into bitcoin because it was going to be the
(10:26):
next big thing. CZ said that instead of doing the
ten percent deal. He's like, well, if ten percent is good,
all of it should be better. So reportedly he then
sold his apartment and then invested everything he had in bitcoin.
But at first things did not go so well. The
value of bitcoin took a hit. Cz saw his personal
wealth diminish as a result. I want to say that
(10:49):
that bitcoin's value dropped to just a third of what
it had been when he made his initial investment, and
that looked bad. But Cz practiced the old crypto mantra
of hoddle hodl hold on for dear life and eventually
saw bitcoin rebound. He also thought that the entire crypto
(11:10):
community would benefit if it were easier for normal folks
to get into cryptocurrency, because even in twenty thirteen, which
is already half a decade after the initial concept of
bitcoin and blockchain had been unveiled, the folks who were
into crypto mostly consisted of wealthy folks who were tech nerds,
(11:31):
or maybe people who had aspirations of being wealthy but
already were a tech nerd. But outside of that group,
cryptocurrency was still largely not really understood or known. So
Cz thought it might make sense to build a more
accessible platform to allow investors to get into cryptocurrency, and
that this in turn would benefit the entire crypto community,
(11:54):
like it becomes a rising tide situation, you have more
people getting into this and then actually potentially making cryptocurrency
live up to what it was supposed to be, which
was a digital means of exchange that would offer up
opportunities that you just could not realize if you were
dependent upon stuff like fiat currency. But nor for that
(12:16):
to work, you got to get people to adopt it.
If it's just this one small, insular group using the technology,
it doesn't really go anywhere. So he started to build
up resources that he would need to launch his own
cryptocurrency exchange, which he would call Binance. He named it
after a portmanteau. Essentially he was combining the words binary
(12:36):
and finance, and he would essentially launch Binance out of
China in July twenty seventeen. So I guess we need
to actually talk about what a cryptocurrency exchange is. Essentially,
it does what it says on the ten. So these
are businesses that facilitate the exchange of money from one
form of currency into another. I'll explain more about how
(13:01):
this happens. But first we need to take a quick
break to thank our sponsors. Okay, so how does a
cryptocurrency exchange work? Well, in some ways, it's similar to
(13:22):
how an establishment, like a currency exchange in a country works,
except those are offshoots of like nationalized financial systems. But
you know, you would walk up to one of these
places and you would exchange your home currency for whatever
the native currency was. So if I were going to
(13:43):
the UK, I would be exchanging US dollars for British
pounds sterling. But in the process, I would also be
paying a small fee to the institution itself on top
of this, so I'm not getting a one to one
value exchange here. I'm losing some because I'm paying the
(14:03):
institution for the process. Cryptocurrency exchanges are similar, except what
they're really doing is they're matching up buyers and sellers.
So let's say that you want to get into bitcoin
and you're doing it for the first time. You would
use a cryptocurrency exchange. You would open up an account there,
create a digital wallet, transfer some of your money into
(14:24):
this digital wallet. Then you would use the exchange to
purchase bitcoin from somebody who already holds some and it
would be at an agreed upon price. Typically the exchange
handles all of this for you, so you don't have
to like go through negotiations or anything, and then you
purchase your bitcoin by quote unquote exchanging your US dollars
(14:44):
for the bitcoin, and the crypto exchange takes a cut
of that transaction. There's a transaction fee that goes to
the exchange itself. Now, these exchanges can and often do,
have their own cryptocurrency or token associated with the exchange.
For example, the now defunct ft X exchange had its
(15:06):
token called FTT. Binance has a unit that is shortened
down to B and B, but it is called the
binance coin. There are a few reasons that cryptocurrency exchanges
could mint their own crypto coins their own tokens. One
big one is just to raise money. You attract investors
(15:27):
to your platform and you tell the investors, in return
for your investment, you will get x number of native tokens,
and those tokens will be useful in different ways. So
one of those ways is that can reward those investors,
obviously just to give them a return on their initial investment.
But this is somewhat tricky, right, because if you're an
early backer of a crypto exchange like Binance and you
(15:52):
get this huge number of binance coins in return for
your investment, really all you have is a whole bunch
of right. It's not magically worth anything. I mean, it's
worth whatever the initial coin offering or ICO says it's worth,
but it's not pegged to that value. The value can
(16:13):
actually drop below that ICO. So let's say that bidance
coin launches with a value of one US dollar per
binance coin. There's nothing that magically ties those values together
on their own, So it could be that the binance
coin falls to seventy cents instead of a dollar. That
could happen, or it could go up. It could be
(16:33):
that it suddenly is worth five hundred dollars. So at first,
it feels like you're being handed a big old pile
of monopoly money, right, because the bills say they're worth
certain amounts, But you can't actually spend monopoly money anywhere
other than in a game of monopoly. But as people
join the exchange and they put some money into the
exchange's own currency, either to facilitate trades for other currencies
(16:56):
or just as an investment, the crypto coin starts to
take on a value that's determined by the market. So
let's say that you are an early investor in finance.
As a result, Binance gives you like a million Binance coins,
and then after a while your Binance coins are worth
two hundred bucks apiece. You've now got two hundred million
(17:18):
dollars worth of Binance coins. That's kind of like how
these cryptocurrency exchanges get off the ground is just through
this group hallucination that the token is going to be
worth something, and maybe it will and maybe it won't.
It's a gamble. Now. On top of all that, often
in exchange will also extend certain benefits to people who
(17:39):
are holding and using the native tokens for that exchange. So,
for example, if you're using binance coins on Binance, you
might get a discount on those transaction fees, so you'll
still have to pay a transaction fee, but it won't
be as much, so you'll be able to keep more
of the value associated with that currency change. So in
(18:01):
a way, it almost becomes something like a loyalty program.
You can maximize your profits by investing in and trading
with the native tokens of the exchange. All right, So
back to binances in particular. So Caz holds this initial
coin offering, he attracts investors to pour money into supporting
finance by essentially buying up these tokens, and he launches
(18:24):
it in the summer of twenty seventeen. However, that was
around the same time that the Chinese government was starting
to grow really leery of cryptocurrency. Now you could argue
this was China being stereotypically suspicious of any entity that
the government did not have direct control over, and so
they treated it like it was a potential threat to
(18:46):
their authority. If the Chinese government can't control it, then
there's always the possibility it could grow to a point
that means it could defy the Chinese government. Now, you
could also say that the Chinese government saw the potent
for cryptocurrency to be the funding mechanisms for all sorts
of illegal activities, and that could include things like money laundering,
(19:08):
funding terrorist organizations, all this kind of stuff, And there's
a legitimate argument for that. In fact, that's part of
what the Binance has pled guilty to have done. But
however you want to frame it, China began to pass
more and more restrictive laws that essentially were muscling crypto
companies out of the country. It was becoming harder and
(19:29):
harder for them to do business in China, particularly with
the level of freedom that they needed to operate in
if they wanted to grow. So Cz chose to have
a change of venue and he relocated the headquarters for Binance,
and what would follow was a kind of global game
of hopscotch. Cz would pull up roots and relocate Binance's
(19:54):
headquarters to a different country. Then he would do it
all over again once that new country became and to
pass more regulations around cryptocurrency. So he went from China
to Japan, then he went from Japan to Malta. Then
he went from Malta to the Cayman Islands. You'll often
hear that Binance's headquarters are quote unquote offshore here in
(20:15):
the United States, because there is a US branch of Binance,
but the actual main company of Binance is always referenced
as being offshore, and that's partly because the company has
been rather fleet footed when it comes to making tracks
when regulations start to pop up. Well within a year,
Binance became the largest cryptocurrency exchange as far as trading
(20:37):
volume is concerned. So twenty eighteen, it already had made
a name for itself. In twenty nineteen, Binance launched a
stable coin backed by the US dollar called Binance USD. Originally,
the Binance coin was trading on the Ethereum blockchain, but
in twenty nineteen, Binance migrated all of its tokens onto
(20:59):
its own blockchain, called the Binance Chain. That year also
saw a big problem. Binance was the target of hackers,
so some hacker or hackers were able to siphon a
way around seven thousand bitcoin from the exchange as a whole. Now,
in twenty nineteen, that amount of bitcoin had a value
(21:20):
of somewhere in the neighborhood of forty million US dollars.
That's a pretty big bank heist. Binance ultimately covered all
the losses. The company had already established a fund specifically
for those kinds of emergencies. Cz had that foresight. He
knew that there needed to be a safety net there
because cryptocurrency is inherently risky for various reasons. This was
(21:45):
a reminder, in fact, that cryptocurrency is not inherently safer
than other forms of currency. It's different, but it's not
necessarily better, at least not when it comes to things
like risk. Then Binance launched its own smart chain or
smart blockchain if you prefer so. The initial Binance chain
was a pretty straightforward and simple blockchain, so it allowed
(22:07):
for stuff like transaction validations and overall governance of the blockchain.
But the smart chain that Binance launched carried the capabilities
of supporting smart contracts. Now, smart contracts are a technology
that allows for all sorts of different implementations on the
blockchain that have really yet to be realized in a
(22:28):
way that has been seen as practical, but it allows
for stuff like NFTs. NFTs are built on top of
smart contracts, and they can only exist on blockchains that
have that support for them. So Binance launches its own
smart blockchain technology. This also allowed Binance to provide an
alternative to Ethereum, which was really the premiere smart blockchain solution. Like,
(22:53):
when you say smart blockchain, you don't necessarily just mean Ethereum,
but practically that's what a lot of people did mean
when they talked about smart blockchains. They were talking specifically
about the Ethereum blockchain. Because it supported those kinds of transactions.
It also complicates matters when it comes to things like
discussing NFTs in a way that is genuine and meaningful
(23:15):
and accurate, because one of the arguments about NFTs is
that you can move them to other blockchains and they
will remain relevant. And that's only true if the blockchain
supports smart contracts in the first place, and even then
it gets tricky to migrate stuff, but that's for another
podcast entirely. Binance also offered lower transaction fees and faster
(23:39):
transaction speeds than you could find on ethereum, so you
could say that Binance was trying to drink Ethereum's milkshake
in some ways. Now this leads up to a point
where the US government begins to pay a bit more
attention to cryptocurrency in general and Binance in particular. For
a few years, the crypto world was operating kind of
like the wild West. There were very few laws and
(24:01):
regulations that could get in the way, and there were
lots of opportunities to make money and to grow, and
even more opportunities if you weren't terribly picky about, you know,
operating in a legal way and that kind of stuff.
If you weren't if you didn't mind getting your hands dirty,
you could grow real fast in the crypto world. But
in twenty twenty, Forbes published an article that essentially implicated
(24:26):
cz As building a business that was specifically structured to
deceive US regulators while still profiting from US based investors. Essentially,
they were saying cz was designing Binance to confound US
regulators and keep the business from being restricted by regulations
(24:48):
and laws. The US government moved to investigate Binance, specifically
looking into the possibility that finance was guilty of things
like tax avoidance as well as money laundering. A lot
of this came down to the differences between Binance dot Us,
the United States face of Binance, which was supposed to
(25:10):
operate within the laws and regulations of the United States,
and Binance overall right like so, Binance Overall operated with
far fewer restrictions, but investors in the United States were
supposed to be interfacing with Binance dot Us, which was
supposed to be the more tame and legal version of Binance.
(25:34):
The investigation uncovered information that implicated Binance as allowing certain
US investors to engage with the more untame, wild and
wooly version of Binance, in other words, to operate without
obeying those regulations and laws, which was a huge no no.
Cz at the time maintained that the investigation was unwarranted.
(25:57):
He said, this is all totally baseless, and we will
come out proving that Binance hasn't done anything illegal and
we've been operating within the law. So that investigation starts
and it continues for a couple of years. And while
that was going on, there was also massive drama happening
within the crypto community at large, and to go into
(26:21):
all of it would actually require a mini series of
episodes to really dive into what happened in twenty twenty
two in the crypto community, it's very complicated. Part of
it is precipitated by stuff that happened years earlier, right
because in twenty twenty the crypto community saw a big boost.
(26:42):
The pandemic had lots of effects throughout all of culture
and the economy. One of those effects was that a
lot of people, once confined to their own home, started
to look into things like, huh, I wonder if it
would make sense to invest in cryptocurrency, and a ton
of people who had never really been involved in cryptocurrency
(27:02):
at that point, started to get involved, and this began
a series of events that would start to drive the
value of various crypto coins higher and higher, sometimes too
unsupportable amounts. Like look at doge coin, a coin that
was made as a joke and essentially was made in
a way to flaunt how ridiculous the cryptocurrency world could be.
(27:25):
Even dosee coin, the joke coin, the trash coin, became
very valuable compared to what it had started out as,
but only for a short while before it collapsed in
on itself when the perception could no longer support itself.
Things like that were happening leading up to twenty twenty
two that would allow for an enormous rug pull, not
(27:47):
necessarily an intentional one, but one that just kind of
happened because of a confluence of events. I'll explain more,
but first we're going to take another quick break to
thank our sponsors. In twenty twenty one, cryptocurrency was having
(28:12):
a banner year, right like, driven by the increase in
interest in twenty twenty twenty twenty one was huge. In
November of twenty twenty one, just two years ago, the
value of bitcoin hit a high of around sixty nine
thousand dollars per bitcoin, a value it has not hit since,
(28:32):
although while it took a massive dive over the course
of the next year, it has recovered significantly since then. However,
after this huge high, investors started to back off of cryptocurrency.
This was due to a lot of different reasons. Part
of it was that the traditional financial systems around the
world saw interest rates growing. Right, so like the regular
(28:56):
banking industry, you start to see interest rates go up,
which means it becomes more expensive to take out a loan. Now,
this was something that kind of shocked me because I
don't know, I just take a much more conservative approach
when it comes to investment. I don't believe in investing
money I don't have. But as it turns out, I
am in the minority. A lot of people believe in
(29:19):
investing money they do not have in an effort to
make way more money, and that will involve things like
taking out a loan in order to make massive investments
and stuff. But when you take out a loan, you
have to pay the loan back, plus you have to
pay back the interest well. As the interest rates go up,
it becomes an inhibiting factor on investing. Right, Investors are
(29:40):
less likely to pour money into stuff because now they're
going to have to pay much higher interest rates on
the loans they take out in order to make those
investments in the first place. Whereas I was of the
naive opinion that you take the money you actually have,
not money that you have taken a you know, not
a loan you've taken out the rather money you actually have,
(30:01):
and then you invest that I'm a sucker. That's not
how you're supposed to do it, apparently, But that explains
why I'm not a financial genius or anything. But anyway,
the point being that because of these higher interest rates,
there was a slowdown in investing in cryptocurrency. That was
just one of the factors that was having an impact
(30:22):
on the crypto community. In twenty twenty two. Another happened.
In May of that year. There was a cryptotoken called
tara USD that was supposed to be pegged to the
US dollar. Now, pegged means that the value of the
cryptotoken is tied to the value of something else, in
this case, the US dollar. But in May of twenty
(30:45):
twenty two, because of some pretty complex issues. Tara USD
became unpegged to the US dollar and its value collapsed,
and that collapse became kind of like the first domino
to fall in a chain, so it's like a chain
reaction was initiated. The collapse undermined the security of several
(31:07):
other crypto organizations that held units of this digital currency
that suddenly had become worthless. So it was like if
the dollar or whatever your native currency is suddenly became
worth nothing, it wouldn't matter how much of it you had,
it's still worth nothing. You would just have a whole
lot of nothing if you were you know, if you
had a bank account filled with millions of dollars or
(31:30):
pounds or euro or whatever it might be, but the
value of each individual euro or dollar or whatever fell
to zero, you're still penniless, effectively. So this happened to
a lot of cryptocurrency companies, whether they were crypto lenders
or crypto exchanges or whatever, and you started to see
(31:50):
a lot of these crypto companies go under FTX, which
at this point in twenty twenty two was not yet
known to just be a house of cards, at least
not from anyone who wasn't already inside the company, FDx
moved to help cover some of these companies that were
affected by the collapse of tara USD, So FTX was
(32:12):
doing this in an effort to try and stabilize the
overall crypto community. However, this also meant that FTX itself
was over extended. And remember at this point, FTX was
the second largest crypto exchange in the world behind Binance. Now,
when you get to November of twenty twenty two, FTX
(32:33):
itself is in major trouble. So at first, before the
full extent of what was going on at FTX was known,
CZ indicated that Binance was going to essentially cover for
FTX again in an effort to ensure the stability of
the overall market. Then, as more information came out about
(32:54):
ftx's questionable practices, CZ reversed course and said that Binance
would instead liquidate all of its holdings in FTT tokens.
So remember FTT was the native token of the FTX exchange.
So Binance is saying, you know what, we're cashing out,
We're getting out of it entirely. Instead of rescuing them,
(33:16):
we're walking away, and that signaled a mass sell off
of FTT, and meanwhile it became clear that FTX didn't
actually have the money to cover all of that. See,
these exchanges are supposed to have the resources to cover
a mass withdrawal of the native token. If they don't
(33:37):
have that, then you have a run on the bank.
And then suddenly the bank reveals it doesn't have the
ability to cover all the withdrawals, and you get a
scene like the one from It's a Wonderful Life where
you find out, oh, no, no, no, no, your money's
not here. It's a it's an old Wilson's barn and
it's in, you know, like that sort of thing. That's
(33:58):
terrible Jimmy Stewart, But I did that for my friend Shay,
who loves Jimmy Stewart and hates my impression. So FTX,
it turns out, had been secretly funneling customer holdings FTX
customer's money to cover bad investments that were made by
its sister company, Animator Research. That was why FTX could
(34:19):
not handle the situation that found itself in. It was
already not just overextended, but it was hollow because of
this issue of funneling billions of dollars worth of funds
of FTX customer money to a different sister company. Now,
you could make the argument that CZ's move of saying
(34:42):
he would first support FTX and then withdrew that support
made the situation even worse. You could say, Okay, CZ
kicked SBF while he was already down. And in fact
CZ and SBF definitely do not like each other. They
have feuded a in public throughout things like Twitter posts
(35:02):
and stuff, you know, the way mature people do, and
there has been a long history of the two of
them sniping at each other. So you could say that
what CZ did was he saw that SBF and FTX
were in a bad position and he just decided to
kind of twist the knife and make it worse. I
would say that, in the wake of all the information
we learned through the various trials involving FTX executives, that
(35:27):
the company was doomed. Whether CZ got involved or not,
CZ's involvement was salt on the wound, but the wound
was already deadly. Whether CZ said anything or didn't say anything,
FTX had sealed its own fate with some truly terrible decisions. Meanwhile,
Binance itself still was in the crosshairs of the US government.
(35:48):
It's not like it was free and clear of its
own investigation. And during the course of that investigation, US
authorities determined that Binance was failing to comply with various
US laws, like the Bank Secrecy Act, which the Bank
Secrecy Act requires financial institutions to investigate and to reveal
(36:09):
suspicious transactions. So if a series of transactions indicate that
perhaps someone is trying to launder huge amounts of money,
maybe because of the drug trade or some other illegal activity,
they are required by law to report that. And so
the investigation was saying Binance was failing to do this,
even though the Bank Secrecy Act would cover Binance's activities
(36:33):
within the United States, because again, Binance is a global company.
It's not like the United States has jurisdiction over the
entire world, although sometimes our country behaves that way. It
is still, however, operating within the United States, and at
least for those operations it is meant to comply with
the US law. But as I mentioned earlier, the investigators
(36:53):
had already determined that at least some US customers were
making use not of the US based version of finance,
but by the global less regulated version of finance. So
the authority said Finance failed to put in even rudimentary
systems to do things like check on suspicious transactions or
(37:14):
to even be able to detect them in the first place,
Like not only was Binance not investigating transactions that could
lead to criminal activity, but didn't even have the system
in place to do it, despite the fact that it
was legally obligated to do that. As such, the authorities
argue that Binance had become a haven for money laundering.
The illegal drug trade could lean on Binance to launder
(37:37):
funds and hide the financials for massive illegal operations, and
not just the drug trade. There were lots of other accusations,
including things like funding of terrorist organizations or people trading
in child abuse material. We're talking terrible grim stuff. And
according to the investigation, even Binance's own staff had commented
(38:00):
and joked about this problem. Within Binance, there was one
joke being referenced about how Binance should put up web
banner ads across the web, telling drug dealers that if
they're having trouble laundering their money, they should come to
Binance because you can do it there and you'll get cake.
So like arguing that Binance not only allowed for money laundering,
(38:23):
but welcomed it and profited mightily from it. So, just yesterday,
which again was November twenty first, twenty twenty three, for
all of those who are listening from the future, Binance
pled guilty to several charges relating to money laundering and
similar crimes. CZ himself also pled guilty as part of this,
And it's kind of like a settlement, you know, it's
(38:44):
a or a plea bargain deal. CZ will be forced
to pay a fine of fifty million dollars. Now, fifty
million dollars is a princely song, Don't get me wrong.
Fifty million is a lot of money. If someone gifted
me fifty fifty million dollars, I would essentially retire and
(39:05):
run off to the woods to live a quiet life
of isolation and video games. So fifty million is a
huge amount of money. However, you have to remember CZ
is a billionaire. In fact, his current net worth is
somewhere in the neighborhood of ten billion dollars, so fifty
million is a fine that he can certainly afford to pay.
(39:27):
He has also been forced to resign as CEO of Binance,
his part of the agreement means that he will never
be allowed to hold an executive position with a cryptocurrency
exchange again. However, he is allowed to remain an advisor
to Binance and a shareholder the majority shareholder in the company,
So while he can't be the CEO, he can be
(39:50):
the shareholder. And you know, we know major shareholders often
in fact always direct where a company goes because they're
the ones who hold the money. Technically, he could also
face jail time. The Bank Secrecy Act holds a maximum
sentence of five years for people who are found guilty
(40:10):
of violating the law, so he technically could face five
years for that, as well as other prison sentences for
the other crimes he admitted to, but that's probably not
going to happen. Since he pled guilty, chances are he's
going to avoid any significant prison time. In fact, I
(40:30):
would guess I would bet that he doesn't spend any
time behind bars. At most, he might have house arrest
for a while or probation or something, but I don't
think he's going to see any jail time. Unlike his
colleague SBF. SBF is looking at potentially some very serious
jail time, So that's an interesting contrast there. But then again,
(40:50):
SBF pled not guilty and put up a big fight
to suggest that he was not at fault for the
crimes he committed, So there are lots of differences there. Binance, meanwhile,
is on the hook to pay a whopping four point
three billion with a B dollars in fines collectively. It's
(41:11):
actually a couple of different fines that the company will
be paying, but when you add it up, it's four
point three billion dollars. In addition, the company has agreed
to a monitorship, so essentially that means that representatives of
US authority will watch over Binance to make sure that
Binance is following the law. It's not that the US
is going to have control of finance, but they are
(41:32):
supposed to get full transparency into Binance's operations to make
sure that you know, it's not still engaged in money
launtering and such. This case is huge. It follows in
the wake of other instances in which US authorities have
gone after various crypto companies for playing fast and loose
with the law, or, as US Attorney General Merrick Garland
(41:54):
has put it, quote, using new technology to break the law.
Does not make you a disruptor, It makes you a criminal.
End quote. Considering that SBF was found guilty of several crimes,
that CZ has now pled guilty to other crimes and
has agreed to no longer hold an executive position with Finance,
and that numerous other cryptocurrencies or crypto companies rather have
(42:15):
found themselves in similar situations, including one called Kraken that
is currently part of a massive investigation. This really could
just be part of a very nasty and painful growing
process for the crypto world in general, because it turns out,
unlike what the ideals suggested back when it was first
announced back in two thousand and eight, cryptocurrency is not
(42:38):
able to operate wholly separate from established financial practices and institutions.
It just can't. That's not how the world works, and
that means that ultimately it will be held accountable, at
least in some part, when those crypto companies fail to
follow the rules. How or if these specific criminal cases
(42:59):
are going to impact cryptocurrencies as a whole remains to
be seen. I imagine we might see some short term volatility,
I mean more volatile than what we already see in
cryptocurrency but I'm not convinced that it's like the death now.
I've long been a critic of cryptocurrencies. I mean even
in the early days. I remember I said I objected
(43:21):
to the being called cryptocurrencies because they weren't being treated
as currency. They were being treated like commodities or securities.
They weren't being treated like a currency. You wouldn't dare
spend it because the value of the currency was so
volatile and the transaction time was so long that the
value that you spent at the beginning of transaction could
(43:43):
be very different than the value at the end of it.
Like imagine going up and buying a stick of gum
for like five cents, but then by the time the
transaction's over, that five cents has the equivalent value of
what used to be one hundred dollars. You're like, well,
that was the most expensive state of gum I've ever
bought in my whole life. That's a ridiculous example, except
(44:04):
that's how it really works with stuff like bitcoin, Like
it can really vary that much from the beginning of
a transaction to when it's validated. So I've always been
a critic of cryptocurrencies that doesn't even get into things
like the environmental impact and how it has engendered a
lot of really unfair systems, and it has created a
(44:25):
whole class of crypto bro evangelists who are desperate to
get more people into cryptocurrency because that means that they
can get a payout, and it starts to look more
and more like a pyramid scheme. I still have all
these criticisms of cryptocurrencies. However, I do not think this
is the beginning of the end of cryptocurrency. I don't
(44:46):
think it's going to find the foundations crumbling and come
crashing down. I don't think that's happening. There's no shortage
of other crypto exchanges out there that are looking at
this as an opportunity to maybe make a bigger move
in the space. Binance is still the largest cryptocurrency exchange
in the world. It's not even close by orders of
(45:06):
magnitude larger than the second largest cryptocurrency exchange out there.
That's kind of like how Google holds a dominant position
in web search, like it's undeniable. They have almost a
monopoly on that. Well. Binance is not quite at a
monopoly level in cryptocurrency exchanges, but they're certainly the biggest
player in town, but I bet a lot of other
(45:27):
cryptocurrency exchanges right now are saying this is our chance
to get a larger slice of the pie. It's just
that a lot of them are still operating in areas
that got Binance into trouble in the first place. So
I think we're just through a very tumultuous phase in cryptocurrency,
and that we're not close to the end of that
(45:48):
phase yet, where there's going to be this reckoning between
the cryptocurrency community and various legal establishments around the world
that are trying to make sure that crypto currency doesn't
become a tool for criminals to use to get around
the law. I think that's just going to be the
continuing story for the next few years. And I don't
(46:10):
want cryptocurrency to just collapse because I don't want people
to lose all their savings. I would much rather see
people extricate themselves from cryptocurrencies and perhaps find other ways
to invest their money, and then maybe once everyone is safe,
then I wouldn't mind seeing cryptocurrency collapse because I really
do think ultimately it's more harmful than helpful. I think
(46:35):
it has created a very toxic kind of environment, but
I don't want to see it go away and also
bankrupt lots of people who were desperately hoping that this
was their ticket to real stability. That I don't want
to see that happen. All Right, that was another very
long episode about a very crazy sequence of events that
(46:59):
happened this week. Who knows what will happen tomorrow. I don't,
and I also won't be talking about it because I'll
be busy stuffing myself with turkey and lots of side dishes.
For those of you in the United States who are
celebrating Thanksgiving, I wish you a safe and happy and
healthy holiday. For everyone else out there, I wish you
(47:21):
an absolutely wonderful week. We will have a rerun tomorrow,
and of course Friday is the day for classic episodes,
but we'll be back next week with all new episodes
before I go on holiday again, because the end of
the year is crazy like that. I wish you all
the best, and I'll talk to you again really soon.
(47:47):
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