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The Ledger: Binance’s Secret Sauce, Fake Satoshi, Waiting on Bakkt

I’ve written about the tech industry for ten years but never can I recall a firm becoming so dominant so fast as Binance. The exchange came out of nowhere in mid-2017 and rapidly gobbled up a huge share of the crypto trading business, while also launching its own currency—Binance Coin—that now has a market cap over $3 billion, and is the seventh most valuable cryptocurrency in the world.

How did Binance pull it off? A big part of its success lies in a feat of regulatory arbitrage, which has seen Binance skip from country to country in order to avoid serious scrutiny from governments. In doing so, Binance further minimized its legal exposure by focusing on crypto-to-crypto trading and avoiding the heavily regulated fiat banking system.

Steering clear of regulators is only one reason for Binance’s success. Another key factor is its launch of a cryptocurrency that’s actually useful. In a shrewd move, the company tied the use of Binance Coin to trading discounts, and also introduced a so-called “burn” program to purchase and destroy batches of the coins at regular intervals—a policy akin to share buybacks. More recently, Binance has made holding the currency a prerequisite to participate in its Launchpad platform, which offers a curated list of crypto projects to investors.

“What’s unique about Binance Coin is it’s so much easier to value than other tokens,” says Jeff Dorman, a former Wall Street trader who is now Chief Investment Officer at crypto investment firm Arca in Los Angeles. The burn program, for example, “means you could use the same discounted cash flow metrics used to value traditional companies,” he adds.

This month, Binance’s ambitions got even bigger as the company plans to nudge companies to move their token operations from Ethereum to Binance’s own blockchain—where they’ll pay fees in, you guessed it, Binance Coin. If CEO Changpeng Zhao can pull this off, Binance will be richer and more formidable than ever.

But one other thing I’ve learned in a decade of covering tech is that market dominance can be transient, and barriers to competition can be an illusion. Overnight success stories can collapse as fast as they rise.

This, then, will be Binance’s next big test: It has market power but will it have staying power? If Zhao’s company is still on top a year from now, we could have the crypto version of Facebook or Google—monopolists protected by powerful network effects—on our hands. More news below.

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Speaking of giant crypto companies, our inaugural Brainstorm Finance conference will feature a conversation between the CFOs of the two biggest—Binance and Coinbase—who will tell us what it’s like holding the finance reins. Come join us in Montauk, New York on June 19-20.

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Jeff John Roberts
@jeffjohnroberts
jeff.roberts@fortune.com

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DECENTRALIZED NEWS

To the Moon…  ConsenSys seeks $200 million from global investors. Arca asks SEC to approve tokenized T-Bills. New VC fund Proof of Capital raises $50M to back blockchain startups. Chainalysis Series B round reaches $36M. Coinbase expands to 11 more countries and counts Serena as an investor. Shrem and the Winklevoss twins settle $26M suit. A real-world $1 million Bitcoin scavenger hunt. A Venmo credit card. JP Morgan expands use of blockchain.

…Rekt. Blockchain journalism meets SURVIVOR. Online lenders fear winter is coming. Coinbase revenue for 2018 is 60% below projections. Kraken boots Bitcoin SV coin. U.S. Bitcoin trader faces death penalty after Thai navy seizes ‘Seasteader’ home.

BUBBLE-O-METER

$434,000,000

That’s the fall-off in total crypo investments from Q4 of 2018 ($465M) to Q1 of 2019 ($31M). A quarter-to-quarter change is just that, however, and doesn’t tell the full story. The bulging Q4 figure consists mostly of Coinbase’s Series E and, even in the midst of the so-called crypto winter, investors are still on the prowl for deals. As CB Insights (source of the figures above) notes, new hot sectors include “Ethereum killers,” privacy and custody. The research firm also supplied a list of the most active VC investors. The top three: Andreessen Horowitz, General Catalyst, Union Square Ventures.

MEMES AND MUMBLES

Fake Satoshi Smackdown. Crypto Twitter brimmed with delight when Binance CEO CZ delisted an alt-coin created by Craig Wright, a controversial entrepreneur who says he is Satoshi and threatens to sue those who claim—with ample evidence—that he’s not. It didn’t take long for the smackdown memes to roll in:

FOMO NO MO’

NYSE’s long wait for Bitcoin. The venerable New York Stock Exchange made a splash in 2018 with its plans to get into the Bitcoin business through a subsidiary called Bakkt. It’s more than nine months later and the project is hopelessly tangled in a regulatory morass with no launch in site. What happened? In an interview with the Chair of the CFTC, Coindesk provides a painstaking portrayal of the specific problems. In short: Bakkt’s initial plan to store bitcoin in its own digital “warehouse” fell afoul of complex custody rules, while also making clearinghouses uncomfortable.

Since [NYSE] is not a bank or state-regulated custodian, this would have required an exemption to the rules described by [the CFTC Chair]. … “A potential challenge here, and as we saw with bitcoin futures, is that the other asset class participants in the clearinghouse don’t always want the exposure to mutualize their risk on their interest rate or commodity futures with somebody else’s cryptocurrency holdings.”

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