The quest for legitimacy in the US is leading Binance.com, the world’s largest cryptocurrency exchange, to pursue an initial public offering of its US unit. But for a secrecy-based business — as cryptocurrency businesses typically are — things could be slow and choppy.
This month, Brian Brooks, the chief executive of Binance.US, left the company after just three months on the job, citing “strategic differences”. Changpeng Zhao, the Chinese-Canadian billionaire owner of Binance.com, had hired Mr. Brooks, a former regulator, to help the company gain a foothold in the United States. Mr. Brooks left after a failed venture capital investment he was trying to set up for Binance.US. The deal would have been the first step in a potential IPO, but some investors balked at the control Mr Zhao would retain over Binance.US.
Companies dealing with digital money are trying to grow. Often started by lone programmers carrying laptops around the world, many cryptocurrency businesses restructure into more traditional entities with audited boards and financial reporting. Some are aiming for a bigger presence in the United States, a lucrative market where hordes of customers are already flocking to their platforms – just as wary regulators have started paying close attention.
In a recent speechGary Gensler, chairman of the Securities and Exchange Commission, called the space a “Wild West.”
“This asset class is rife with frauds, scams and abuse in certain applications,” he said. “There is a lot of hype and spin about how crypto assets work. In many cases, investors are unable to obtain rigorous, balanced and complete information.
The initial public offering this spring of Coinbase, a San Francisco-based cryptocurrency exchange that allows customers to exchange digital currencies for real ones and vice versa, has provided rivals with a blueprint – and a glimpse of the money to earn. This month, Coinbase reported a profit of $1.6 billion in the second quarter as a public company.
“Funding and engaging potential investors is a critical part of Binance.US’ long-term strategy,” Binance spokesperson Hazel Watts said in an email. Ms Watts said the company plans to significantly dilute its ownership by bringing in more outside shareholders. “The original plan was only to dilute a small portion,” she said.
Mr. Zhao, who goes by “CZ” and lives in Singapore, created Binance.US in 2019 as a first step to appease US regulators who didn’t want to let US customers trade on Binance.com. He currently owns most of both Binance.com and Binance.US. Mr. Brooks came on board in April with a mission to build a legitimate and transparent business, starting with diversifying its ownership structure through a venture capital investment in Binance.US.
A former regulator who briefly led the Office of the Comptroller of the Currency — which oversees the nation’s largest banks — under President Donald J. Trump, Mr. Brooks was already familiar with the cryptocurrency industry, having served as chief legal officer at Coinbase.
Mr. Brooks was careful to establish that Binance.com and Binance.US were separate entities despite their common ownership. Binance.US had “a truly independent relationship” from each other, it said in a May 19 post. maintenance with Bloomberg – licensing the Binance brand and certain technologies but operating independently.
“It’s a very, very different thing about them owning us, which they don’t,” he said.
It was looking to raise at least $100 million from investors, according to Ray Lane, a longtime tech executive turned venture capitalist in San Francisco. Mr. Lane said his company, GreatPoint Ventures, had never made a cryptocurrency investment, but when his partner Andrew Perlman – to whom Mr. Brooks had made a presentation – offered to invest, Mr. Lane was willing to consider the idea. A senior SoftBank executive also considered making a personal investment in Binance.US, but decided against it, a SoftBank spokesperson said.
GreatPoint has entered into discussions with Mr. Brooks regarding a partial investment in Binance.US. Investors were initially reassured by Mr. Brooks’ assurances that Binance.US would be run independently from Binance.com and adhere to all US regulations. This US oversight could potentially include requirements beyond those already in place, which require the platform to track customer identities, report suspicious activity to federal authorities, and ensure its services are not used to commit crimes.
But with US authorities investigating Binance for money laundering and tax issues, according to a Bloomberg reportand Mr. Zhao’s property of Binance.FR fluctuating around 90%, GreatPoint decided not to invest.
“We would have to make an investment decision before all of these issues are resolved,” Mr. Lane said.
Moreover, he and his partners believed that the walls separating Binance.US from its parent company were weak. “How could we feel comfortable that it was an independent company using the same technology?”
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Around the time GreatPoint was considering an investment, Mr. Brooks aimed to bolster the regulatory chops of Binance.US. Cryptocurrency firms, which have previously had run-ins with U.S. regulators, have begun to mount a counteroffensive by hiring lobbyists and luring in former regulators, including former SEC Chairman Jay Clayton, in their bosom.
In early July, Binance.US announced that it was hiring Manuel P. Alvarez, a former enforcement attorney for the Consumer Financial Protection Bureau, who later served as California’s top banking regulator, to be its chief administrative officer. . But once GreatPoint pulled out of the talks, Mr. Brooks and Mr. Alvarez quit.
Joshua Sroge, interim CEO of Binance.US, said in a statement that the company still has plans for growth, including raising external funds and “expanding its board of directors with experienced leaders, among other initiatives. consistent with those pursued by fast-growing private companies.
On the day that Mr. Brooks and Mr. Alvarez resigned, Mr. Zhao wrote in a Twitter post that Binance was “moving from reactive compliance to proactive compliance.”
Ms. Watts, Binance’s spokesperson, said Binance.US still expects to complete a fundraising “soon”, although she declined to disclose the names of potential investors. As part of the new round, Binance.US plans to expand its board of directors – which currently has three members, Mr Zhao, Mr Sroge and Binance Chief Strategy Officer Gin Chao – to between seven and nine. people.
“Board composition is an important factor in any fundraising decision,” Ms. Watts said. “The proposal presented to the board at the time did not reflect that,” she added, referring to the venture capital investment suggested by Mr Brooks. “CZ’s belief is that the Binance.US board should be independent and operate with proper governance.”
The company is still planning an initial public offering, she added. “It’s just a matter of time.”