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Ryan Knutson: For having founded one of the biggest cryptocurrency companies in the world, Changpeng Zhao was a bit of a late comer to crypto. Four years after Bitcoin was invented, Zhao still wasn't really paying attention, until one day in 2013, when he says he was at a poker game.

Changpeng Zhao: The poker group was a bunch of entrepreneurs and a bunch of DCs. So it's not a bunch of gambling guys. It's a very friendly game. We play for very low stakes. It's usually at somebody's place. That day was at my place.

Ryan Knutson: Zhao, who goes by his initials CZ, was living in Shanghai at the time. He has a background in finance and computer programming. And he says the other poker players were guys like him, tech savvy entrepreneurs. And at some point in the game, one of them turned to him and said-

Changpeng Zhao: "CZ, you should look into this thing about Bitcoin. You should think about converting 10% of your net worth into Bitcoin. You might go to zero, which means you lose 10%. You might 10X, which means you double your net worth." And he said this very seriously. After that day, I spent quite a lot of time looking to Bitcoin and, yeah, thanks to them, I got into crypto.

Ryan Knutson: Got into crypto is a bit of an understatement.

Caitlin Ostroff: He sold his apartment for Bitcoin.

Ryan Knutson: What, what?

Caitlin Ostroff: Yeah, yeah, yeah. He definitely like went all in.

Ryan Knutson: That's Caitlin Ostroff, who covers crypto. She recently interviewed CZ, along with our colleague Patricia Kowsmann. Together, they've been taking a look at the company CZ founded just four years after that poker game. It's called Binance, and former executives say that today it could be worth $300 billion. That's more than PayPal. So I have barely heard of this company.

Caitlin Ostroff: Yeah.

Ryan Knutson: That's probably because Binance is a pretty new kind of cryptocurrency company.

Caitlin Ostroff: Binance is the world's largest cryptocurrency exchange.

Ryan Knutson: A cryptocurrency exchange.

Caitlin Ostroff: Basically that means that it is a platform where if you want to buy Bitcoin or Ether or Dogecoin, like any of these things that you've heard of but like really don't understand what they are, all of these cryptos? It is like the default place to go and trade pretty much everything you could possibly want.

Ryan Knutson: So if I was a buyer of crypto, Binance would be the place that I would go to trade my US dollars for cryptocurrency.

Caitlin Ostroff: It's the place where a lot of people go, yeah.

Ryan Knutson: In the crypto world, Binance is big. By one estimate it processes $76 billion in trades a day. Is it sort of like the New York Stock Exchange of crypto?

Caitlin Ostroff: It's not just the New York Stock Exchange. It is the New York Stock Exchange, the London Stock Exchange, Hong Kong, combined. No other exchange even comes close to it.

Ryan Knutson: But Binance isn't built like the New York Stock Exchange. It has no head office, no formal address. It lacks licenses in many of the countries where it operates. And now the company is facing its biggest challenge yet, regulation.

Caitlin Ostroff: Binance just grew and grew and grew. And now you have a moment where all of a sudden all of these regulators are now coming out of the woodwork, and they're saying, "Wait a minute, we have concerns."

Ryan Knutson: Welcome to The Journal, our show about money, business, and power. I'm Ryan Knutson. It's Tuesday, November 30th. Coming up on the show, the rise of Binance and the regulators trying to reel it in. CZ and his partners launched Binance at something of a turning point for the cryptocurrency world. For years crypto had been the domain of tech obsessed early adopters, but in 2017 it seemed to be poised for a mainstream breakthrough.

Speaker 4: Bitcoin has rocketed to yet another new high, surging closer to the $10,000 mark.

Speaker 5: This week, we hit 13,000, 14,000, 15,000. Now it looks like we may hit the 17,000 mark.

Speaker 6: And with the ballooning value of this market, interest is at fever pitch.

Ryan Knutson: Bitcoin prices were on a tear. People who had never considered buying crypto before were looking to jump in, but the infrastructure for buying and selling coins was still pretty lacking. And crypto exchanges didn't have the best reputation.

Caitlin Ostroff: This was a couple years after you had this almost infamous now exchange in Japan called Mt. Gox.

Speaker 7: Mt. Gox, which was once the world's largest trading platform for Bitcoins, has gone dark.

Caitlin Ostroff: Which was hacked and a bunch of Bitcoin was stolen.

Speaker 8: Thieves may have made off with $365 million worth of virtual currency. We're going to be talking about that.

Ryan Knutson: Caitlin says that CZ sensed an opportunity.

Caitlin Ostroff: He had been thinking, with his comp-sci background, maybe there is a moment now with interest in crypto once again climbing, to do a secure exchange where people could put in their money and just trade crypto for crypto.

Ryan Knutson: So the opportunity that he saw was to create a cryptocurrency exchange that was more secure. That was sort of its like market offering.

Caitlin Ostroff: Yeah. More secure, more responsive, is kind of like how he envisioned it.

Ryan Knutson: Binance.com launched in 2017. What was the site like back then?

Caitlin Ostroff: Binance started off with it's website in a bunch of different languages. It really wanted to target the global user. It focused on security and customer service. And so that was kind of an early draw for people. And on top of that, you had very low trading fees that it offered. You had more coins listed on it than just about anywhere else that people could trade. And it was just also very easy to use. Even from individual investors to really experienced crypto traders, people have said that using the Binance app, using the website, is just so much easier and faster than other exchanges.

Ryan Knutson: At first binance.com was pretty limited. You could trade one type of cryptocurrency for another, and that was about it. But over the next few years, Binance expanded. It added over 300 different kinds of coins. It started allowing users to buy crypto with dollars, and it created this separate site, binance.us, for the American market. And on binance.com, it added more complex financial products like derivatives.

Caitlin Ostroff: These are products that you can bet that Bitcoin will go up in the future. That's honestly been one of their big money makers. That's been one of their big sources of trading and volume, is the fact that people have loved these derivatives products.

Ryan Knutson: In a lot of ways, using Binance felt like using any mainstream financial institution's website. The user interface was slick and it offered good customer support. If you reached out with a question, someone would usually get back to you within 24 hours. But in at least one major respect, Binance was different from other financial institutions, because it wasn't really based anywhere.

Caitlin Ostroff: Binance has really never had a headquarters. The exchange started in China, it started in Shanghai where he was living, but it was never really headquartered anywhere.

Ryan Knutson: How is that possible? I mean, you have to have an office, presumably, or at least you have to exist someplace, don't you?

Caitlin Ostroff: They have different addresses of sometimes they're shared working spaces. Sometimes they're just like other agents who file forms on their behalf, but there's really no clear delineation of, yes, here is the main address for this company.

Ryan Knutson: What did CZ say then about the decision not to have a headquarters?

Caitlin Ostroff: I mean, he kind of saw a headquarters as being antiquated. It was this old tradition of the corporate and financial world that he just didn't see as really applicable to crypto to this decentralized structure that they were emulating.

Ryan Knutson: Today, CZ says that Binance has about 3000 employees spread across the world. How would you describe Binance's growth over the past few years?

Caitlin Ostroff: It's been explosive. So Binance started as a cryptocurrency exchange in 2017 and within six months, it was the largest among all of its competitors. And it's basically retained that since then. Binance is, indisputably, a giant in this space.

Ryan Knutson: And CZ is its public face.

Speaker 9: This gentleman runs the world's largest cryptocurrency exchange. And so if you're looking for insights into the world of crypto and where they're headed, no better place to start than with you.

Caitlin Ostroff: Binance and CZ are almost synonymous. He's gained this massive following and people just kind of flocked to Binance in part also because of his own personal charisma around it.

Changpeng Zhao: But this is the future. It's a technology. It's not a currency, not a commodity, not a-

Ryan Knutson: Today, 4 million people follow CZ on Twitter, where he is known for his short pro-cryptocurrency pronouncements, Tweets like, "Crypto never sleeps," or, "Don't fight technology innovation. It won't stop. Be with it." CZ has also gotten rich off Binance. He told Caitlin he's the company's largest shareholder. But many of the same things that have made Binance so popular among crypto consumers have also raised concerns with regulators. And this year that tension came to a head. That's after the break. On May 19th of this year, something happened that would cause global regulators to take a closer look at Binance.

Caitlin Ostroff: On May 19th, you had a big crash in the value of Bitcoin.

Speaker 10: Bitcoin, absolutely falling out of bed. All the cryptos are sharply lower as well.

Speaker 11: You've got Bitcoin down big right now. In fact, it broke below 40 thousands, kind of bouncing back and forth in between that-

Ryan Knutson: Traffic on Binance surged.

Caitlin Ostroff: All of a sudden everyone's going on the platform at once and wanting to sell or in some cases buy or change their positions. And all of a sudden, not just Binance, but other platforms as well, started to buckle and they started to have some issues.

Ryan Knutson: What kinds of issues?

Caitlin Ostroff: So according to people we spoke with who say that they've lost money on that day, a lot of them were trying to get into the app and having issues, or they were trying to close out some of their positions, and just were not able to. They said the app was freezing.

Ryan Knutson: Some of those users lost everything.

Caitlin Ostroff: All of a sudden, the gains that they had had on whatever their positions had been, suddenly disappeared. We spoke to someone who had put the money that they had planned to use for graduate school in Binance and invested that in crypto and money that they had been working for years to build up was suddenly just gone.

Ryan Knutson: What has Binance said about this outage?

Caitlin Ostroff: So Binance said that it took immediate steps to engage with people who were affected by the outage and that it offered compensation to people who actually experienced trading losses.

Ryan Knutson: Some users, though, weren't satisfied. They set about trying to get their money back by threatening to sue Binance, but they quickly ran into a problem.

Caitlin Ostroff: So remember how we spoke about Binance doesn't have a headquarters. One of the issues this creates is that if you want to sue Binance, there's really no headquarters to actually sue. And so trying to go the physical route of the legal process of sending letters to people with a company that has no address has just proven to be extremely frustrating for a lot of these people.

Ryan Knutson: Lawyers representing a group of Binance users in Italy, for example, say they sent 11 letters to addresses they thought might be affiliated with Binance. A Binance spokesman declined a comment on that legal matter, but users didn't just threaten to sue Binance.

Caitlin Ostroff: The other thing that a lot of the people who experienced losses did was they also emailed their regulators. So we spoke to someone in Canada who emailed securities regulators after the fact. And went like, "This happened. I lost a lot of money. And I think you guys should do something about it."

Ryan Knutson: The question was what global regulators could do about it. Traditionally, regulators have had the most power over companies based within their own borders, but Binance's primary exchange business, binance.com, wasn't really based anywhere, didn't have a headquarters. It just offered services to whoever had an internet connection.

Caitlin Ostroff: And so you've had this moment where regulators have sat there and gone, "This thing is global. It's massive. And how do you actually regulate a giant company that has no headquarters?"

Ryan Knutson: Was this a wake up call for regulators?

Caitlin Ostroff: Yeah. This was kind of one of the moments where regulators sat there and went, "Specifically with Binance, we need to take more action."

Ryan Knutson: Regulators around the world started taking a closer look at Binance, and some noticed a problem. Binance was offering all kinds of complicated financial products, like derivatives, all over the world. But in many countries, it wasn't licensed to do that. Regulators started sounding the alarm.

Caitlin Ostroff: So you've seen statements from the UK, Germany, Italy, the Cayman Islands, Malta, Singapore, South Africa, Japan, Thailand, Lithuania saying, "This is almost a consumer warning. Binance does not have a license to sell securities in this jurisdiction. Binance does not have the authority to operate a cryptocurrency exchange in our borders." And you've just had kind of a lot of warnings that have come out.

Ryan Knutson: So in your interview with CZ, how did he respond to these concerns from regulators?

Caitlin Ostroff: He said that Binance has realized in the wake of all of these regulatory statements that they need to fall in line with what regulators want

Changpeng Zhao: To be very frank, four years ago when we started Binance, we wanted to go the decentralized way. So we want to decentralize everything, no offices, no bank accounts, no headquarters. But guess what? When regulators come in, the regulators ask us very simple questions like, "Where's your headquarters?" Our response is, "We have no headquarters." Guess what? That's a problem for the regulators. So the regulators don't know how to work with us. It gets tricky. So we understood now that in order to work with the regulators as a centralized business, we need to have centralized structure. So we need to have a headquarters. We need to have multiple headquarters. We need to have a legal structure. We need to have proper cap tables. We need to have proper governance.

Caitlin Ostroff: So they need to get licensed in the different countries where they have services. They want to set up local headquarters and a main headquarter and give regulators that system that they're used to working within.

Changpeng Zhao: We have to fit in that structure. We can't be like too decentralized.

Caitlin Ostroff: He's also said that he welcomes regulation.

Changpeng Zhao: So we welcome regulation. If you look at cryptocurrency adoption worldwide today, it's probably less than 2%. So that means if you grab 100 guys on the street, probably less than two people have some kind of cryptocurrency. That 2% of people who have some exposure to cryptocurrencies, those guys are early adopters. The rest of the 98% of people, they're what we call the normal people, the regular people. So the regular users, they want the safety, they want the regulations to be in place. So in order to attract those 98% of people, we need to be regulated. We need to have the proper licenses. This is the best way to gain trust for the mass adoption. So this will allow us access to the 98%.

Ryan Knutson: Binance has already started rolling back its services in some countries. In the US, for example, Binance doesn't offer derivatives trading. But setting up offices and obtaining licenses will take time and money. Having a headquarters means getting into real estate, and applying for licenses can take months or even over a year depending on the country. When this is a company that's already operating all over the world, so is it going to have to start scaling itself back as it just chooses the markets that it wants to open up offices and get licensed in?

Caitlin Ostroff: I mean, it's kind of already been doing that. So there's been more countries recently where it's said, "We're not going to offer trading on binance.com to users in Singapore or Malaysia." And so there is the indication that they're going to have to scale down and they're going to kind of have to pick the jurisdictions to get licenses in where they feel they can, and maybe for the other countries, they don't offer the same range of products that they previously had.

Ryan Knutson: What is it going to take for Binance to make this transformation? Do you think it's even possible?

Caitlin Ostroff: I mean, they certainly have the money to do it. If Binance wants to make that transformation, it can. The question is can Binance continue to be the biggest? All of those things that had been in their playbook that helped them achieve this growth, are they going to have to pull those back and can they still maintain this dominance under this new regime?

Ryan Knutson: Why should anybody care about what happens to Binance?

Caitlin Ostroff: You've had interest in crypto growing. You've had the number of people trading crypto growing. I mean, even if you yourself don't hold crypto, you probably know someone who does. And figuring out a way in which people can invest safely seems to be at the forefront of regulators minds today. And so it's kind of trying to figure out where does crypto go from here, because it's not disappearing.

Ryan Knutson: That's all for today, Tuesday, November 30th. The Journal is a co-production of Gimlet and the Wall Street Journal. Additional reporting in this episode by Patricia Kowsmann. Thanks for listening. See you tomorrow.