Binance’s former CFO warns about ‘long winter’ in cryptocurrency market after FTX collapse

Zhou Wei, former chief financial officer of the world’s largest cryptocurrency exchange Binance, said the crypto market will remain depressed for a long time with more restrictive regulations on the way, following the collapse of FTX.

“Basically, we have to all brace ourselves for a pretty long winter in the crypto world,” Zhou said in an exclusive interview with the South China Morning Post on Wednesday.

“It’s going to push everyone into a deeper bear market,” said Zhou, who quit Binance last year and is currently the CEO of Coins.ph, a fiat and crypto mobile wallet in the Philippines that he bought from Indonesian on-demand services giant Gojek earlier this year.

The latest blow to the crypto market came in early November when Binance CEO Zhao Changpeng, who goes by his initials CZ, announced that his company would be selling its roughly US$530 million in FTX’s native token FTT. It triggered a flood of withdrawal requests from FTX investors that the exchange failed to meet, leading to its bankruptcy.

Before the implosion, FTX was Binance’s closest rival in the crypto exchange business.

The price of bitcoin, the most traded virtual currency, has since dived nearly 20 per cent, while the value of ethereum, another popular token, has plummeted 23 per cent.

As of Wednesday, US law enforcement has taken FTX founder and former CEO Sam Bankman-Fried into custody and was transferring him from the Bahamas to New York, where he is accused of defrauding FTX customers. Two former executives pleaded guilty to various fraud charges earlier.

With FTX’s meltdown, Binance has been scrambling to reassure customers, who pulled billions of dollars of funds from the exchange last week.

But while the company said that the US$1.14 billion in withdrawals in a 12-hour window was “handled with ease”, worries resurfaced after Mazars Group, an external audit firm that Binance hired to produce reports meant to demonstrate that it holds the necessary reserves needed to cover any potential surge of customer withdrawals, announced it had halted its work for crypto firms.

While Zhou declined to comment on the financial health of Binance, he said that FTX had been running “a fraudulent business”, which amounts to “not just a business issue, but actually a legal or criminal issue”.

According to the US Securities and Exchange Commission, Bankman-Fried and his associates had been knowingly moving customer funds in FTX to its affiliated derivatives trading platform Alameda Research.

Unlike the US, where lawmakers are only rushing to tighten regulations on the crypto industry in the wake of FTX’s fallout, China has long imposed an outright ban on cryptocurrency trading and mining, which uprooted the operations of many cryptocurrency exchanges from the country, including Binance’s.

The FTX scandal has offered Chinese state media fodder to justify the country’s strict ban on cryptocurrency. “Fortunately, Chinese regulators have taken a hard line on cryptocurrencies, avoiding the flow of many resources into this area and avoiding losses for many people,” read a November 17 article in the Securities Times, a newspaper overseen by the Communist Party mouthpiece People’s Daily.

Zhou said China’s ban, in retrospect, is “actually OK” because it offers certainty and clarity.

Despite the restrictions, however, an underground cryptocurrency trading community continues to exist in China. Mainland Chinese accounted for 8 per cent of FTX’s customer base, several times larger than the 2 per cent of customers in the US, according to a filing in FTX’s bankruptcy hearing last month.

These Chinese customers have found it difficult to recoup losses in a jurisdiction where crypto investments are not protected by the law. Attempts by victims to connect on WeChat, the country’s most popular social media platform, have been largely unsuccessful, as discussions of cryptocurrency-related topics are strictly censored.

In the US, senators last week pressed Congress to regulate cryptocurrency under existing financial rules.

Zhou said he believes “there’s going to be more legislative action taking place” and that crypto-related policies around the world may become “more restrictive”.

Still, he said he hopes that the US government will regulate the industry “in a pro-growth way”, because it “sets the direction on how the rest of the world moves”.