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The world’s biggest crypto fortune began with a friendly poker game

For now, though, the money is pouring in.

Binance generated at least $US20 billion of revenue last year, according to a Bloomberg analysis of its trading volume and fees. That’s almost triple what Wall Street analysts expect Coinbase Global , a publicly traded firm with a market value of $US50 billion, will collect for 2021.

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“Coinbase might appear to be the 800-pound gorilla from a US perspective, but Binance is significantly bigger,” said DA Davidson & Co. analyst Chris Brendler.

Zhao declined to comment for this story, and Binance disputed the accuracy of Bloomberg’s estimates of the firm’s market value and his net worth.

“Crypto is still in its growth stage,” Binance said in a statement. “It is susceptible to higher levels of volatility. Any number you hear one day will be different from a number you hear the next day.”

‘I’m not an anarchist’

A month before watching Formula One stars Lewis Hamilton and Max Verstappen battle it out on the Yas Marina Circuit, Zhao spoke at the Bloomberg New Economy Forum in Singapore, where he rattled off the numbers behind the meteoric rise of the firm he created in 2017.

In one recent 24-hour span, Binance completed $US170 billion of transactions. On a really slow day, he said, it’s about $US40 billion — and that’s up from as little as $US10 billion two years before that.

In the crypto world, these are gargantuan numbers. Binance routinely facilitates as much trading as the next four largest exchanges combined.

When Bloomberg’s Erik Schatzker asked the billionaire about his wealth during the November interview in Singapore, Zhao demurred. “I don’t care about wealth, money, rankings,” he said.

The slender crypto entrepreneur, donning rimless glasses and a slightly oversize striped tie, added that such matters are a distraction and that he’s prepared to give away almost all of his fortune before he dies.

Whether Zhao can hang on to what he’s gained remains to be seen, and he has plenty of reason to be concerned about his firm’s unbridled growth.

In addition to the DOJ and IRS investigation, the Commodity Futures Trading Commission is probing possible market manipulation and insider trading within Binance, and whether it illegally allowed US clients to trade derivatives tied to cryptocurrencies, according to people familiar with the matter. The CFTC declined to comment.

Binance also has been the subject of consumer warnings in the UK, Japan and Germany, among other countries. On December 30, a Canadian securities regulator reprimanded the company for telling users of its trading platform that it was allowed to continue operations in the country when it still lacks a registration to do so.

A spokesperson for Binance said the company is “working with regulators around the world and we take our compliance obligations very seriously.”

Zhao has said he welcomes — and wants — regulation.

Until recently it was rare for a crypto entrepreneur to appear on global wealth rankings. An increasing number are making the cut as more firms in the industry tap venture-capital funding or public markets, bringing greater transparency into the value of these businesses.

“I’m not an anarchist,” he said at the Bloomberg forum. “I don’t believe human civilisation is advanced enough to live in a world without rules.”

Fortunes built on crypto have ballooned along with the value of digital tokens, which totalled $US2.09 trillion on January 7, up from $US135 billion three years ago.

Until recently it was rare for a crypto entrepreneur to appear on global wealth rankings. An increasing number are making the cut as more firms in the industry tap venture-capital funding or public markets, bringing greater transparency into the value of these businesses.

Exchanges such as Coinbase, Gemini, FTX and Kraken have attracted hefty valuations in public and private markets, and Binance’s popularity with users and myriad products may be even more enticing to investors.

Crypto fortunes, however, are volatile. Bitcoin has slumped more than 11 per cent this year to about $US41,000 and is well below early November’s highs of nearly $US69,000. Coinbase shares have tumbled about 35 per cent over the past two months.

And some businesses have run afoul of regulators. BitMex, once the world’s largest crypto-derivatives exchange, is a cautionary tale.

The volatility of cryptocurrecnies have made estimating personal fortunes difficult.

The volatility of cryptocurrecnies have made estimating personal fortunes difficult.Credit:AP

In August, BitMex paid $US100 million to settle cases with the CFTC and Financial Crimes Enforcement Network over claims that it allowed illegal derivatives trades and violated anti-money laundering laws. The firm didn’t admit or deny the allegations. Founders Arthur Hayes, Samuel Reed and Ben Delo are awaiting trial after entering not guilty pleas in a separate Justice Department case that accuses them of violating the Bank Secrecy Act.

The Bloomberg Billionaires Index estimated Binance’s 2021 revenue using its US dollar-denominated spot and derivatives exchange volumes as published by industry researchers Coingecko and Nomics, and its advertised trading fees. The calculation doesn’t include the firm’s other revenue sources, such as margin lending, technology, consulting and NFTs. It’s valued using the enterprise value-to-sales multiple of publicly traded peers. It assumes Zhao owns 90 per cent of the firm, based on his public statements and regulatory filings in jurisdictions where that information is required to be disclosed.

Binance’s revenue is realised across hundreds of crypto tokens, which the firm doesn’t convert to traditional currencies, Zhao told Bloomberg during the November interview.

“We just hold them,” he said. “If you calculate the number today, it’s one number, and 5 minutes later it’s a different number because every price is changing.”

Road to crypto riches

Zhao, a Canadian citizen, was born in China’s Jiangsu province. His father, a university professor, was exiled to the countryside during the Cultural Revolution and, when CZ was 12, moved the family to Vancouver.

Exposed to technology at a young age, Zhao later studied computer science and eventually landed finance jobs in Tokyo and New York, including a four-year stint at Bloomberg LP, the parent of Bloomberg News.

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His road to crypto riches began in Shanghai in 2013 during a friendly poker game with Bobby Lee, then CEO of BTC China, and investor Ron Cao, who both encouraged him to put 10 per cent of his net worth into Bitcoin.

After spending some time studying it, he took the plunge and ended up selling his apartment for Bitcoin. In 2017, he founded Binance (a portmanteau of binary and finance) and it quickly blossomed into a crypto powerhouse. Zhao even got the company’s logo tattooed on his arm.

Binance has become the top destination for trading “alternative coins” — cryptocurrencies that are less liquid than more established tokens such as Bitcoin and Ethereum and have become some of the most speculative corners of the market. The firm offers trading in more than 350 coins on its international exchange, more than double of what’s offered by Coinbase, according to Coingecko.

Binance succeeded in creating “user stickiness,” in part by allowing clients to use Binance Coin to reduce trading fees, said Tim Swanson, head of market intelligence at Clearmatics, a London-based blockchain firm.

“They don’t even have to be the first to list a coin anymore for liquidity to aggregate there,” Swanson said of Binance.

Zhao’s firm is also the largest provider of derivatives trading by volume, letting users speculate on crypto with even more risk and potential reward.

Initially, Binance allowed clients to open accounts with nothing more than an email address. It focused on crypto-to-crypto transactions, limiting its interactions with traditional banks and their regulators. In August, the company announced that all new users must verify their identity, and existing users who haven’t will be limited to withdrawals.

It has never had a formal headquarters. Binance was founded in China, banished to Japan and self-exiled to Malta, whose financial regulator later denied having oversight of the exchange. While the firm has a major presence in Singapore, it was dealt a setback last month when its local unit withdrew an application to run an exchange in the city-state.

In one recent 24-hour span, Binance completed $US170 billion of transactions. On a really slow day, Zhao said, it’s about $US40 billion.

In one recent 24-hour span, Binance completed $US170 billion of transactions. On a really slow day, Zhao said, it’s about $US40 billion.Credit:Bloomberg

Now Binance is trying to settle on a location, Zhao said during the November interview, adding that an announcement about the headquarters would be coming “in a very short period.”

That’s an about-face from 2020, when Zhao said that the company’s headquarters was wherever he happened to be. In legal filings, the firm’s lawyers have said that it’s incorporated in the Cayman Islands, which is well-known for being an offshore tax and regulatory haven.

Binance’s ability to operate just about anywhere has made it difficult for regulators to establish jurisdiction over the company.

“Their approach was, ‘We don’t need a regulator, we are decentralised,’” said Brendler, the DA Davidson analyst. “That worked really well for growing and scaling and product innovations.”

Zhao’s freewheeling approach may need to change as Binance seeks to raise money from outside investors, who typically want some measure of government oversight as an assurance that a business is legally sound. Zhao is driven to find a supportive regulatory regime, according to people familiar with his discussions in the UAE.

Binance has been filling senior posts with former employees of UAE regulators, and it signed an agreement with the Dubai World Trade Centre authority to help craft a crypto regulatory framework.

Not all of Binance’s efforts to ingratiate itself to regulators have gone smoothly.

Last year, Binance.US, a separately managed trading operation associated with the exchange, hired a former US acting comptroller of the currency as CEO. His appointment was seen as a positive step toward addressing regulatory concerns, but he lasted just three months, departing in August after citing differences over strategic direction.

Despite its legal challenges, investors may be tempted to take a chance on the world’s most successful crypto exchange. Late last year, Binance was seeking to raise money from sovereign wealth funds, and its US affiliate was also pursuing investors with the goal of an initial public offering. In November, the Wall Street Journal reported that former executives estimated the company could be worth as much as $US300 billion.

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“To raise capital, we believe that the company needs to show a path to settling on a global headquarters and consolidating operations,” said Robert Le, an analyst for Pitchbook.

If Binance pulls it off, it could make Zhao even richer than Elon Musk, currently the world’s wealthiest person, and No. 2 Jeff Bezos, whom Zhao said he admires.

“I don’t know him personally,” Zhao, speaking at the November Bloomberg event, said of the Amazon.com Inc. founder. “But I would love to be associated with him in the future.”

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