Although China has banned cryptocurrency trading, this market is crucial for Binance.
Authors: Patricia Kowsmann, Caitlin Ostroff / Source: https://www.wsj.com/articles/crypto-is-illegal-in-china-bina
Translation: Luffy, Foresight News
When China classified cryptocurrency trading as illegal in 2021, the world's largest cryptocurrency exchange, Binance, was supposed to completely withdraw from this market.
However, that's not the case. According to internal data provided by current and former Binance employees, Chinese users have contributed $90 billion in trading volume to Binance in just one month today, making China the largest market for Binance to date, accounting for 20% of its global trading volume (excluding trades from some super-large traders).
According to current and former Binance employees, the company openly discusses the importance of the Chinese market internally. Despite the ban, Binance's investigative team closely cooperates with Chinese law enforcement to investigate potential criminal activities among over 900,000 active users in the country.
Binance is currently facing regulatory crackdown, partly due to its secretive operations globally. The U.S. Securities and Exchange Commission sued Binance and its founder, Changpeng Zhao, in June, accusing them of illegal operations and misusing customer funds. The U.S. Department of Justice is also conducting an ongoing investigation into Binance. Binance's market share in the U.S. has almost disappeared, and the company has recently cut more than 1,000 positions globally.
Binance's footprint in China was not previously public, but now people can see how this cryptocurrency giant quietly operates on the edge in unwelcoming places.
According to an internal document seen by The Wall Street Journal, Binance guides Chinese users to access different websites with Chinese domain names and then reroutes them to the trading platform website to help them bypass restrictions. This document circulated within the company after the 2017 crackdown and before the 2021 ban.
"The Binance.com website is blocked in China, and Chinese users cannot access it," a company spokesperson said, without further comment.
Binance's cryptocurrency trading volume globally exceeds that of most competitors. For Binance, maintaining its position in the Chinese market is crucial, and executives are concerned that regulatory pressure could threaten Binance's future.
Binance's relationship with China is complex. Changpeng Zhao, born in China and raised in Canada, founded the company in Shanghai in 2017. A few months later, the government issued multiple regulatory bans on cryptocurrency trading platforms. Officials were concerned that these platforms could be used to transfer illegal funds. Zhao later said he moved Binance's operations to Japan.
As previously reported by The Wall Street Journal, Binance retained dozens of employees in China. Executives at its U.S. subsidiary were concerned that this arrangement could have a negative impact, as Chinese developers might have control over U.S. user data.
Zhao once said that people think Binance has a close relationship with China simply because he and some employees have Chinese heritage.
"The biggest challenge Binance faces today is that we have been designated as a criminal entity in China. Meanwhile, opponents in the West spare no effort to depict us as a 'Chinese company,'" he wrote in a blog last year.
China intensified its crackdown on the cryptocurrency industry in 2021 and declared all transactions related to cryptocurrency to be illegal.
At that time, Binance stated that it would conduct a review of platform users and switch Chinese customers' accounts to "withdrawal only" mode, meaning they would be prohibited from trading.
"Binance has always taken its compliance obligations seriously and strictly adhered to the relevant requirements of local regulatory authorities," Binance said in a statement in October 2021.
The U.S. regulatory agency sued Binance founder Changpeng Zhao, accusing him of illegal operations and misusing customer funds. Photo source: Bloomberg
Chinese officials seem to have taken a mild approach to the enforcement of this comprehensive ban.
"The cryptocurrency market in China remains strong, with healthy trading volumes for both centralized and decentralized services," said Kim Grauer, research director at the cryptocurrency research firm Chainalysis. According to Chainalysis data, despite an initial drop in trading volume after the 2021 ban, China remains the fourth-largest cryptocurrency trading market.
Binance's competitor, Huobi, has suggested that Chinese users apply for Dominican citizenship so they can trade on the platform.
Zhao was an initial proponent of a project to sell residency permits in Palau to foreigners, although Binance said it eventually disassociated from further involvement in the project. According to a source familiar with the matter, part of the reason Binance was interested in the Palau project was to help Chinese users.
Cryptocurrency traders in China and elsewhere also use VPNs to register on trading platforms that are banned in their countries/regions.
A former Binance employee said that after the ban took effect in 2021, Binance's Chinese business accounted for 24% of its total trading volume in the middle of the year, dropping to 17% by the end of the year.
However, it rebounded in 2022 and has remained high. According to data from Binance's internal platform called "Mission Control," in May 2023, the cryptocurrency trading volume from Chinese customers exceeded $90 billion, with most of the trades coming from cryptocurrency-related futures contracts. The U.S. prohibits cryptocurrency futures trading.
According to Mission Control data, Binance has 5.6 million registered users in China, with 911,650 active users. The second-largest market for the trading platform is South Korea, accounting for 13% of the share, followed by Turkey, which accounts for nearly 10%. The trading volume from all other countries/regions accounts for less than 5%.
According to internal documents and a former employee, as of January, Binance had classified about 100,000 Chinese users as "politically exposed persons." Banks and regulatory agencies use the PEP designation to mark government officials, their relatives, or close associates because they are at higher risk of being involved in bribery, corruption, or money laundering and therefore require stricter scrutiny.
The former employee said that Binance had taken a lenient approach to verifying the identities of Chinese users in the past. In the months following the ban at the end of 2021, less than half of the registered Chinese users underwent KYC checks.
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