This Thursday, on a baking hot afternoon in Tel Aviv, the Finance Magnates team headed over to Israel's Airport City for the annual FinTech Junction Conference. A huge range of financial technology companies was present, ranging from investment banking giant JP Morgan to travel insurance start-ups.
But it was Binance and the other cryptocurrency companies that we were there to see. And, after the day had finished and the event workers were busy dismantling billboards and booths, we spoke to the exchange’s strategy officer - Gin Chao.
Born in Denmark, raised in the USA and living in China, Chao joined Binance last year. Though his background is in finance, the crypto executive spent the five years prior to taking up his role at the exchange developing the NBA’s set of operations in China.
No market making
We started our interview discussing Binance’s much-vaunted plans for margin trading.
In the retail FX and CFDs world, leverage has been at the heart of a number of scandals. Most memorable was the FXCM incident in 2015. A large retail FX broker, FXCM had always said that it didn’t take the other side of its margin trading clients.
But when the Swiss franc was unpegged from the euro in 2015, and its clients suffered millions in losses, it soon became apparent that the US broker was indeed taking the other side of its clients’ trades - albeit via a subsidiary - resulting in the company almost going bust.
“We do not do our own market making,” said Chao after I had put that example to him. “We don’t have a dealing desk or anything like that. It’s going to be the large market makers that are already operating with us that enable margin trading. And a select group of them are already working with us in trial mode.”
Another question that’s been on all crypto traders’ minds is how much leverage will be offered. Though Binance has confirmed it will be providing margin trading, it has not said how much money they will be able to trade with.
“You mentioned 5:1,” said Chao with a smile. “I can tell you that we will be able to do that, for sure. But we’re also not going to be doing 100:1 like some other people are doing. So it’s going to be somewhere in between.”
"We take our users' interests first"
Aside from dubious market making practices, people in the FX world will also be familiar with the regulatory problems that high leverage has led to.
After a long period of light-handed regulation, last year the European Securities and Markets Authority introduced severe caps on leveraged currency trading, with 30:1 being the highest that retail traders can now access in the European Union.
Regulators put those leverage caps in place as they claimed high leverage was leading to client losses, misleading marketing campaigns, and, on the part of brokers, massive risk exposures.
With that in mind, I asked Chao whether Binance could play a role in preventing similar regulation from being imposed upon the cryptocurrency exchanges by, for example, establishing a set of proper practices in the industry.
“First and foremost, the reason why I think Binance has been successful is that we take our users' interests first,” said Chao. “You saw how we handled the hack [where Binance refunded all affected clients].
“So I think a reputation like that builds trust - both for margin trading clients and with regulators. But traders also have to be responsible, right? We can’t just tell them what to do. They also have to accept that they are taking on risk and understand that.”
Tiered system
That latter point may be true, but it’s one that regulators, when it comes to FX and CFDs, have largely ignored. With that in mind, it was positive to hear that Binance has some measures in place so that rookie traders will be able to educate themselves and won’t be able to immediately drown themselves in high leverage.
“Firstly, we’ll be building up Binance Academy,” said Chao. “There already is a lot of educational content there, but we’ll be adding more.
“The other plan is to have tiers of leverage. So it’s not like right away you can use the max amount. You would need to prove to you that you are a fairly competent or experienced trader.”
Again, there is an overlap here with the FX industry. Last month, the Cypriot financial regulator announced plans for a three-tiered system for retail currency traders, with the most experienced amongst them having access 50:1 leveraged trading.
People that want to access that highest tier have to provide evidence of their ability to trade. With Binance’s tiered model, the evidence is likely to come in the form of trading stats.
“It’s probably going to be a mix of your trading frequency and volumes,” said Chao. “From that, we can generally see if traders are experienced and know what they’re doing. I don’t know if we’ll do limits of percentage of funds, but that might also happen.”
DEX can outlive Binance
Moving away from the nitty-gritty of leveraged trading, we turned to another big Binance project - it’s decentralized exchange. Binance DEX is already in operation, and the company says that, over time, it hopes to see it become more and more decentralized.
Philosophically, this is a nice idea. But there are undoubtedly many people that don’t really care about the philosophy of an exchange, they just want to know how it works for them in practice.
“There probably is an element of truth to that,” said Chao. “But you also have to remember that the philosophy behind DEX has gone into its functionality. That means it does actually change the user experience.
“So, for example, if you want the fastest execution and transaction times - the regular Binance exchange is probably better for you. But if you are more concerned about security of funds or even the stability of Binance, DEX is probably better for you.”
A suicidal exchange?
As with Charles Hoskinson, who Finance Magnates spoke to earlier this week, there seemed to be something quasi-cannibalistic about the DEX that Chao was describing. Would a decentralized exchange effectively make Binance, with no control over said exchange, redundant?
“I don’t know if that’s the case,” said Chao. “People are still likely to want the execution and customer service that Binance’s exchange can provide. But DEX means that you don’t have to worry about your funds being mishandled.
“It also means that, in an extreme scenario, if Binance ceases to exist, the exchange will still be running. It’s like the internet, Google could stop operating, but the internet would still be operational.
“The other thing is BNB would still be used as the ‘gas’ [the cryptocurrency used to pay fees on an exchange] on the DEX. We’re obviously big holders of BNB, so that would benefit us too.”
Working with Facebook
From the ins and outs of decentralization, we turned to the topic that, despite only being a couple of weeks old, is already making interviews boring for cryptocurrency executives all over the world - Libra and Facebook.
As Finance Magnates reported yesterday in a taster for this interview, Binance is in touch with the social media giant. The talks are in their preliminary stages and appear to have focused mostly on listing and infrastructure.
“We have had official dialogue with Facebook,” said Chao. “With regarding to listings specifically, right now they are going to be on a so-called ‘private chain.’ So that means they won’t be looking for external liquidity.
“However, from what we understand the potential to be, that would lead them to wanting a secondary market. Currencies benefit from a secondary market, so it would be in their best interest to want to be listed.”
Bringing people to market
As big as Binance might be in the cryptocurrency world, Facebook is undoubtedly substantially larger. And with over two billion users, the social media giant is potentially well-positioned to overwhelm all of its competitors in the cryptocurrency space.
At least for now, however, the social media giant doesn’t appear to be interested in launching an exchange. Instead, it wants to focus on Payments and emerging markets - something that Chao thinks will prevent Binance from being overrun by the data-eating behemoth.
“I look at us and them, and I think we’re just such different business,” said Chao. “If they were to launch an exchange, I’m sure they would do well and might become a competitor to us. But that’s not happening at the moment. In fact, there’s a level of synergy between us because we can be a gateway for people to change Libra for fiat or other Cryptocurrencies .”
Does that mean, I asked Chao, Binance views Facebook’s entry into the market as being a positive thing?
“Facebook is a household name, right?” said Chao. “We are well known in the crypto world but if you walk down the road now and ask someone, ‘what’s Binance?’ There’s a good chance they won’t know us. But almost everyone on earth knows who Facebook is.
“That means there’s a good chance they’ll bring people to the market and maybe those people, especially if they don’t like Facebook as a business, will trade with us. But that works both ways. There could also be people trading with us who do like Facebook and decide to move over to them.”
Back to the USA
To finish off our interview, we discussed the exchange’s US operations. As many crypto traders are aware, Binance stopped offering its services to Americans earlier this month.
According to Chao, that was down to regulatory pressures in the Land of the Free. But, the strategy officer said, the exchange is likely to be back in the very near future.
“I don’t think we have a definite date at this stage, but it’s likely to be in the next quarter or so,” he said. “You know, the regulators are making moves so these are the steps that we need to take unfortunately.
“But I think this will actually help move more people to crypto. People will see that you can’t solve these problems by going after the technology. You solve them by going after criminals.”
