B2 EZ BD THE WASHINGTON POST.SUNDAY, APRIL 3 , 2022
cal for Binance. On Twitter and Reddit, horror
stories abounded, with at least one individual
claiming a loss of $30 million. On Discord, an
ad hoc support group swelled to more than 700
people. Some of the traders, including Kim, had
dealt fruitlessly with Binance’s customer serv-
ice, which offered them a small percentage of
their losses. At one point, according to a screen-
shot of a chat with a Binance customer service
representative that Kim shared, he was offered
a voucher for $60,000 in Tether — a commonly
used, if controversial, stablecoin — and an-
other $60,000 in trading credits as an induce-
ment to keep him on the very platform that he
felt had robbed him. (Binance said that it does
not discuss individual cases, but is “always
happy to assist any user who has a concern.”)
With Binance refusing to make them whole,
the Discord group began to plan a class-action
lawsuit, which has the potential to win relief for
a broad swath of aggrieved customers. Kim and
Ahmed connected with Liti Capital, a Switzer-
land-based blockchain private-equity firm —
essentially, a litigation finance firm that issues
its own cryptocurrency and tries to incorporate
public decision-making into which cases it
takes on. Liti staked $5 million to support the
suit, which is now being led by international
law firm White & Case. Binance’s user agree-
ment requires litigious customers to submit to
arbitration at the Hong Kong International
Arbitration Center, where a minimum cost of
more than $50,000 for the services of the court
and a qualified arbiter is prohibitive for traders
who lost a few hundred or thousand dollars. By
pooling millionaire day traders with mom-and-
pop claimants, and using the backing of Liti
Capital, White & Case got around that hurdle.
(Binance declined to comment on “potential
legal proceedings.” A representative said,
“When issues arise, we strive to take care of
users to the best of our ability.”)
But first they have to win, and then they have
to collect, and no one seems sure how much
money Binance might have in the bank — or
which bank. There’s a lot about Binance, which
has no central headquarters, that seems
strange, even in the freewheeling world of
crypto. Just as exchanges like Binance have
helped “decentralize” finance, the company
has also essentially decentralized its workforce
— perhaps in an unprecedented way for a
company dealing with billions of dollars in
daily transactions. Nominally headquartered
in the Cayman Islands, Binance’s employees
are scattered across the world. Binance’s cryp-
to-nerd-celebrity chief executive, Changpeng
Zhao, or CZ, serves as the company’s face via
Twitter while jetting among various global tech
and financial capitals. A Binance representa-
tive said of its structure that the company “is a
remote-first organization, and as such does not
have traditional buildings or campuses like
Apple or Google.”
The company’s hazy operations and lack of
regulatory oversight have spurred investiga-
tions in a number of countries, including in the
United States, where the Commodities Futures
Trading Commission is reportedly investigat-
ing possible market manipulation, and the
Justice Department and Internal Revenue
Service are examining whether Binance facili-
tates money laundering and tax evasion. On
Feb. 15, the Wall Street Journal reported that
the Securities and Exchange Commission was
investigating relationships between crypto
trading firms and Binance’s U.S. division.
Binance declined to comment on these in-
vestigations but said that it aims to work
“collaboratively with regulators and share in-
formation with them when requested.” A repre-
sentative said that the company “has always
welcomed increasing regulatory and govern-
ment involvement in the crypto space. We
believe regulation and compliance is necessary
for the growth of the industry. We are commit-
ted to being fully licensed and regulated
around the world, and we were recently award-plained outages, including an inability to with-
draw funds. On Sept. 7, 2021, for example, when
El Salvador introduced bitcoin as a form of
legal tender — despite social protests and
technical issues with the Chivo app designed
for Salvadoran citizens to access their coins — a
marketwide slide led to a number of exchanges
reporting transaction delays and other prob-
lems. Similarly, Binance users report regular
technical issues, with Tesla chief executive
Elon Musk publicly criticizing the exchange
recently for an issue that prevented traders
from withdrawing Dogecoin for at least two
weeks. (A Binance representative said that “the
Dogecoin withdrawal issue was an unlikely
and unfortunate coincidence for Binance and
the DOGE network” and pointed out that “the
technical issue was resolved.”)
On the other side of the world last May, in
Toronto, Fawaz Ahmed, a 33-year-old trader,
was having the same experience as Kim, but
from the opposite end of the gamble. Over the
past year, also using leverage, Ahmed had
ridden the crypto wave up, turning an initial
stake of 1,250 Ethereum tokens into 3,300 that
were eventually worth more than $13 million.
(He said he started trading in 2017 with about
$25,000.) Ahmed was betting that the crypto
market would continue its overall rise, though
he said he planned to cash out if the price of
Ethereum reached $4,100. Like Kim, Ahmed
expected some volatility along the way, but it
was only on May 19, when Ethereum plunged
dramatically alongside bitcoin and other cur-
rencies, that Ahmed realized the gravity of his
situation. He needed to close his position, and
fast.
For an hour he frantically tried to get out, but
just as for Kim, the app wouldn’t work. “I saw
my position get liquidated,” said Ahmed, refer-
ring to a margin call that happened while the
app was unresponsive. “It was right in front of
my eyes.” Just like that, Ahmed’s eight-figure
crypto fortune was gone. He described it as
“one of the worst days of my life.”
By the time the Binance app was back up and
running some hours later, it was too late for
both Kim and Ahmed. While Ahmed’s position
had been liquidated because the app wasn’t
working and the price was plunging, destroy-
ing the value of his holdings, for Kim, some-
thing even stranger happened. Although he
was correct in his bet, and his short position
was worth $171,000 when bitcoin hit its lowest
price that day, by the time the Binance app was
usable again, the price had bounced back to
near its original level. Rather than being up
nearly $150,000, all his profits had evaporated.
Hoping for the market to turn in his favor
again, Kim held onto his original position, only
to see his short position liquidated when the
price continued to rise.
The response from Binance was of little help
to users. It nevertheless revealed something
fundamental about how cryptocurrency ex-
changes exist as murkily operated casinos that
are essentially unaccountable to their custom-
ers. Instead of acknowledging the full scale of
the problem, the official Binance Twitter ac-
count simply said that Ethereum withdrawals
were “temporarily disabled due to network
congestion,” before announcing them “re-
sumed” less than 90 minutes later. Aaron
Gong, a company executive, tweeted a vague
apology, urging “affected users” to fill out a
“derivatives compensation claim form,” which
has since been taken offline. Then Gong delet-
ed the tweet. No announcement appeared on
the official Binance blog. Two months later,
Binance announced that it had “recently learnt
of a few users who publicly claimed to have
been impacted during a market-wide outage
on May 19,” but that it had investigated and
“could not identify any relevant technical or
system issues that impacted their trading.”
But thanks to social media, Kim and Ahmed
soon learned that they weren’t alone — and
that strange outages like this one weren’t atypi-popular online brokerage Robinhood, for in-
stance, offers loans to customers to buy stock,
but nowhere near the amount that Binance
once offered.) So why would Binance, along
with some competing exchanges, allow such
sky-high leverage? According to experts such as
Carol Alexander, a professor of finance at Sus-
sex University Business School, it may be be-
cause, like some of its competitors, Binance
plays a number of roles that may pose conflicts
of interest.
As Alexander points out, Binance is not just
an exchange where people can buy and sell
crypto. The company, whose valuation some
employees claim may be as high as $300 bil-
lion, is practically its own vertically integrated
crypto economy, offering crypto loans and the
widest selection of tokens. If that weren’t
enough, Binance itself trades on its own ex-
change. In traditional markets, this kind of
arrangement would never be allowed, as the
conflicts of interest — and potential for market
manipulation — are glaring. Imagine the New
York Stock Exchange or Nasdaq taking posi-
tions on different sides of trades it facilitates.
No financial regulator would allow it, for obvi-
ous reasons. (“Market making activities are
standard in both traditional finance and cryp-
to,” a Binance representative said in response
to a question about whether the company
trades on its own platform. “They ensure li-
quidity and directly support a healthy, vibrant,
and efficient marketplace to the benefit of end
users.”)
But for cryptocurrencies, this is how the
whole market works, especially since much of
it is based in offshore jurisdictions and oper-
ates in legal and regulatory gray areas. “It’s not
just Binance,” said Alexander. Practically all
crypto exchanges occupy these varied, poten-
tially conflicting roles, which in conventional
markets are divided up between different enti-
ties. “And they’re completely unregulated,” she
said. The lack of government oversight, com-
bined with the conflicts, will become more of
an issue as cryptocurrencies grow increasingly
mainstream, advertised on every possible me-
dium and traded in retirement portfolios. Even
relatively savvy investors stand to lose every-
thing on risks they could never take in another
circumstance.
This was the situation Francis Kim had put
himself into when he took out a bitcoin short
position on Binance. Whether by luck or skill,
his bet soon proved right — or seemed to. In the
first few weeks of May, the price of bitcoin fell
from $58,000 per coin to $40,000. On May 19, it
collapsed, with the slide even steeper on Bi-
nance’s trading platform (crypto prices can
vary slightly among platforms, offering arbi-
trage opportunities for sophisticated traders).
As Kim watched on his phone screen, the price
per bitcoin fell in minutes from $38,000 to
$30,000. And as the market tanked, his short
position exploded, its value growing from
$30,000 to $171,000. Time to cash out: All he
had to do was click a button on the Binance app
to lock in his gains.
But the app wouldn’t respond. Experienced
in online trading, Kim switched to the two
other Internet connections he had installed as
backups in his house. None of them got the app
to work. “So I’m just going there, going crazy,
going click click click, you know, trying to close
out of that position, to lock in the profits,” he
told us. “And you know, I jump on Twitter.
Other people are having similar issues.”
Flash crashes in crypto markets tend to be
accompanied by technical snafus or unex-BINANCE FROM B1Who’s really winning
in the crypto boom?
B
itcoin, the original cryptocurrency, was
designed to enable transactions using
only digital identities and without the
intervention of a trusted third party, like a
bank. This seemed a godsend to those con-
cerned about the rapid erosion of privacy in our
increasingly digital age — and those looking for
covert ways to exchange money. Bitcoin’s intro-
duction in early 2009, when the global finan-
cial crisis had decimated trust in governments
and banks, was perfectly timed with a growing
aversion to these big institutions.
It turns out that the cryptocurrency does
not, in fact, guarantee anonymity. Users’ digital
identities can, with some effort, be connected
to their real identities. Moreover, in an ultimate
irony, the revolution that bitcoin started might
end up destroying whatever vestiges of privacy
are left in modern financial markets. As the
technology goes mainstream, it threatens to
give big corporations and government a better
view into our financial lives and greater control
over how we spend our money.
Bitcoin’s reputation as a tool for shady deal-
ings is perhaps overstated. While it has played a
role in allowing hackers to obtain payoff money
for ransomware attacks, this requires a level of
technical sophistication beyond that of most
garden-variety criminals. Bitcoin’s use in trans-
actions that once fueled the “dark Web,” where
unsavory and illicit commerce is conducted,
has fallen sharply. The Russian government
can scarcely count on bitcoin to evade the
sanctions levied for its war in Ukraine — after
all, payments for international transactions
still need to be settled in real money such as
dollars or euros.
Still, the ability to conduct secure, somewhat
private financial transactions helps explain
cryptocurrency’s growing appeal. That’s large-
ly thanks to its groundbreaking blockchain
technology. A blockchain is, in effect, a digital
ledger of transactions or ownership records.
The bitcoin blockchain contains a publicly
visible record of all transactions ever undertak-
en using this cryptocurrency: the dates and
amounts, as well as the digital — but not
real-life — identities of the transacting parties.
These electronic ledgers are maintained on a
large number of computers around the world
and synchronized in real time, making them
tamper-proof and secure. Any attempt to med-
dle with a ledger on one or even a few comput-
ers would quickly be detected and rejected byCryptocurrency could help governments and businesses spy on us
ed virtual assets service provider licenses in
Bahrain and Dubai.”
Binance’s best defense may be to claim basic
technical incompetence — perhaps that net-
work congestion led to malfunctions in the
company’s app. What actually happened on
May 19 remains a mystery. But people like
Alexander and Matt Ranger, a data scientist
and former professional poker player, propose
that the platform’s problems may go beyond
simple technical outages. In blog posts, aca-
demic papers and conversations with journal-
ists, they have argued that Binance has been
outplayed in its own casino. According to their
analysis, Binance has become the perfect play-
ground for professional trading firms to clean
up against unsophisticated retail traders. Us-
ing state-of-the-art algorithmic trading pro-
grams and access to the latest market-moving
information, these firms are both faster and
more powerful than the regular Joes they
compete against.
Ranger compares what’s happening on cryp-
to exchanges now to the online poker craze of
the mid-2000s. Back then, you had a sense of
the stakes and could see who was beating you at
the virtual table. “At least poker’s kind of
honest,” said Ranger. “You’re losing to this guy
named, like, Penis420, and he bluffed you out of
your cash, and you’re here.” But for average
crypto investors/gamblers trading on Binance,
there is no such clarity. Across the table could
sit an advanced computer trading program.
Regular traders don’t stand a chance; when the
professional firms easily outmaneuver them,
they can get wiped out in seconds.
Under these circumstances, potential liti-
gants argue, it’s impossible to have anything
resembling a fair market. In their view, Binance
is so compromised — dependent on a constant
stream of suckers coming through the door
while also keeping an eye on the savvy trading
firms picking novice traders’ pockets — that its
problems may be existential. (Zhao himself
said that Binance may eventually lose out to
more nimble and harder-to-regulate DeFi, or
decentralized finance, exchanges.) Now, along
with its proliferating legal troubles across the
United States, Europe and Asia, it has thou-
sands of alienated customers and one of the
world’s top law firms ready to use it as an
example of what happens when an unregulated
crypto exchange is put under the microscope.
Despite its distributed — and still mostly
unaccountable — corporate structure, Binance
probably faces significant legal head winds. Its
decline as the world’s preeminent crypto ex-
change could be as steep as its rise. For many
crypto traders, high risk is an accepted part of
the game, and an exchange or DeFi protocol is
only as good as the profit opportunities it
presents. Should Binance fall, another unregu-
lated trading platform might quickly take its
place.
It’s hard to see how this “democratization of
finance,” as it’s often called, leads to a fairer
economy rather than a more chaotic one, with a
vast gulf between winners and losers. The
liberatory rhetoric and experimental eco-
nomics of crypto are alluring, but they seem to
amplify many of the worst qualities of our
existing capitalist system while privileging a
minority group of early adopters and well-con-
nected insiders. Right now, Binance is in the
vanguard of this attention-grabbing, money-
churning industry, but perhaps its example
should be taken as a warning.
Twitter:@ben_mckenzie
@SilvermanJacobBen McKenzie is an actor, writer and director who
now writes about cryptocurrency and fraud. He
holds a degree in economics and foreign affairs
from the University of Virginia. Jacob Silverman is
a staff writer at the New Republic and the author of
“Terms of Service: Social Media and the Price of
Constant Connection.” He and McKenzie are
working on a book about crypto and fraud.It is now technologically feasible for a central
bank to offer digital currency accounts similar
to bank accounts that would pay no interest
and charge no fees, but would give everyone in
an economy easy access to a digital payment
system. The downside is that this could give
central banks and, ultimately, governments
more visibility into our financial transactions.
These risks could be mitigated through care-
ful design. For instance, the Federal Reserve
could manage the payment infrastructure for
its digital currency while leaving it to banks
and other private companies to provide pay-
ment services to customers and businesses.
This could preserve some confidentiality in
transactions, with the central bank getting
access to the identities of transacting parties
only when it suspects foul play. But it is not
difficult to imagine governments and central
banks playing far more direct and intrusive
roles in managing payments, allocating credit
and engineering specific outcomes.
That’s not all. Digital “smart money” that
replaces cash could become an instrument of
government control, with authoritarian re-
gimes using it as a surveillance tool and even
ostensibly benevolent governments employing
it to promote social objectives, such as prevent-
ing its use to purchase ammunition, abortion
services or pornography. This prospect might
seem dystopian — except it has become clear
that, even in an open democracy such as the
United States, with many guardrails against
corporate and government overreach, long-
standing norms on privacy and confidentiality
are surprisingly fragile. There are few regula-
tions governing the collection and use of our
data that Meta hoovers up from its Facebook,
Instagram and WhatsApp platforms, for in-
stance (just try restricting WhatsApp from
gaining access to the full set of contacts on your
phone).
Bitcoin’s blockchain technology will help in
creating better digital payment systems, auto-
mating a broad range of transactions and
democratizing finance. But in an ironic twist,
the true (and potentially dark) legacy of bitcoin
might be the erosion of confidentiality, the
broader prevalence of government-managed
payment systems, and a greater intrusion of big
business and government in financial systems
— and in the functioning of society.
Twitter: @eswarsprasadEswar Prasad i s a professor at Cornell University, a
senior fellow at the Brookings Institution and the
author of “The Future of Money: How the Digital
Revolution Is Transforming Currencies and Finance.”own digital currencies. The central banks of
China, Japan and Sweden are already experi-
menting with this. T he U.S. Federal Reserve has
been slower but is now considering options for
a digital dollar. That would provide a free,
convenient digital payment system for the
masses, even those without a bank account or a
credit card. Tax-dodging and counterfeiting
would become harder, and the use of currency
for money laundering, terrorism financing and
other nefarious activities would be curtailed.
But these advantages have strings attached.
Electronic transactions leave a digital trail that
cannot easily be erased. Using cryptographic
tools, the identities of transacting parties using
electronic money can be masked, but a central
bank would always have the option of unravel-
ing those identities if it suspected that its
money was being used for illicit purposes. Even
with privacy protections in place, transactions
using a central bank’s digital currency would
ultimately be auditable and traceable.
And deeper changes could be afoot in the
nature of money. Electronic currency offers
possibilities that cash cannot. For instance, in
an economic crisis, a government could dole out
digital money with expiration dates, ensuring it
is spent rather than saved and thereby stimulat-
ing the economy. This could make economic
policy more effective — but it would take some
key decisions out of the hands of households in
favor of government-directed outcomes.the rest of the network. This technology could
soon be adapted for a broad range of more
conventional uses, including buying a house
and maintaining digital registries of public
records. The blockchain enables such transac-
tions to be executed securely without the in-
volvement of intermediaries such as settle-
ment lawyers or bankers.
As a result, a lot of large corporations are
trying to cash in — some of which have dubious
records when it comes to protecting personal
information. Meta, formerly Facebook, had
plans to issue its own cryptocurrency, ostensi-
bly to make the world a better place by giving
everyone easy access to a low-cost payment
system. Under p ressure from government regu-
lators suspicious of its intentions, though, Meta
was forced to shut down the project. Mean-
while Amazon and PayPal are reportedly con-
sidering developing cryptocurrencies. (Ama-
zon founder Jeff Bezos owns The Washington
Post.) Imagine these companies, which already
pervade our lives, now having a window into all
aspects of our social and commercial existence.
As various forms of crypto enter the main-
stream, governments are taking notice. Presi-
dent Biden’s recent executive order on digital
assets attempts to rein in the Wild West aspects
of this technology by bringing it under regula-
tory oversight.
Offshoots of bitcoin’s technology are also
setting the stage for central banks to issue theirLUKE MACGREGOR/BLOOMBERG NEWSThe popularity
of digital
currencies like
bitcoin could
erode the last
vestiges of
privacy in
modern
financial
markets, says
economist
Eswar PrasadA sign advertises a
bitcoin ATM at a
Texaco station in
London.
Cryptocurrencies
are increasingly
mainstream, in part
because of the
perception that they
guarantee private,
anonymous
transactions.The liberatory
rhetoric and
experimental
economics of
crypto are
alluring, but
they seem to
amplify many
of the worst
qualities of our
existing
capitalist
system.