Crypto castles in the Gulf

Summary: Gulf states are making deals with the king of crypto as they compete to establish global dominance of a market that with the collapse of FDX has significant questions hanging over it.

It was by all accounts a glittering event. The governor of the Central Bank of Bahrain (CBB) was in attendance, as was the CEO of the Bahrain Economic Development Board. The location was the Bahrain Institute for Banking and Finance and the occasion was the launch of the Bahrain platform of the global blockchain behemoth Binance. The star attraction was the man known in the world of bitcoin as CZ, Changpeng Zhao, the Chinese-Canadian CEO of Binance.

In just five years, beginning in 2017, Zhao has built what is described as the world’s biggest crypto exchange which according to Fortune has processed up to US$140 billion in a single day. Along the way he has become one of the world’s richest persons, a multi-billionaire many times over who, according to his own claims once worked at a McDonald’s in Vancouver.

Binance Bahrain launch
The official launch event for Binance Bahrain on January 16, 2023 [photo credit: @SalmanAlSha52]
The 16 January event in Manama was hailed as evidence of “Bahrain’s position as a leading hub for crypto assets, blockchain and fintech innovations, not just in the region but around the world” by Khalid Humaidan, the head of the Bahrain Economic Development Board. Rasheed al-Maraj the CBB governor cited the deal as further evidence that Bahrain was developing “a supervisory framework that facilitates innovation and appropriate regulatory controls for encrypted asset trading service providers and their clients, based on global trends and developments in financial services.”

With Binance naming Manama as its regional base Bahrain could be seen as getting a significant step up in the race to become MENA’s bitcoin top dog. As Richard Teng, Binance’s regional head for Europe and MENA put it: “Working with the government of Bahrain and witnessing the country’s forward-thinking perspectives towards the crypto asset industry has been an excellent experience.”

CZ, though the star of the show, chose to keep a low profile. That may be because he and Binance continue to be the subject of an investigation by the US Department of Justice. The DoJ, is  considering charges related to unlicensed money transmission, money laundering conspiracy and criminal sanctions violations, the last mentioned believed to do with Iran.

In the UK, the Financial Conduct Authority (FCA) ordered Binance to halt its regulated activities and warned consumers about the company. That was in June 2021. Subsequently, however, Binance worked out a deal with a London-based firm that enabled it to get back into business, leaving the FCA to rue that, despite its continuing concerns, it lacked the authority to block the arrangement.

Zhao had pulled off a similar ruse in the US, after Binance was blocked there in 2019.  He simply set up a new company Binance.US which continues to operate by complying with existing laws and regulations. Even so one bitcoin advisor notes “Binance.US doesn’t offer any information about how your investment will be secured, stored, or protected by the firm, unlike other cryptocurrency exchanges.”

Financial opacity is the quality most often associated with Zhao. He refuses for example to say how much of Binance he actually owns, though analysts say it is probably 90%. He neither confirms nor denies how much he is worth (some figures put his net worth at US$96 billion) deflecting the question by saying “I went from being an entrepreneur to somebody telling me I have tens of billions.” A more telling comment may, however, be this one about bitcoin: “This is the first time in human history that we can collectively agree and maintain a record, and no one person is in charge. That has profound implications.”

Some of those profound implications became apparent with the spectacular crash of Sam Bankman-Fried and FTX.  He is accused of massive fraud with at least US$1 billion of investors’ money simply gone up in smoke. A co-conspirator has already pled guilty to seven charges including wire fraud, money laundering and security fraud.

Reuters, who has done in depth investigations of Zhao’s Binance, noted that as the storm gathered around Bankman-Fried:

Zhao, who declines to disclose the location or entity behind his own exchange, accelerated his rival’s fall by announcing that Binance would sell its holding of FTX’s digital token. This sparked a surge of user withdrawals, ultimately forcing FTX to file for bankruptcy.

In a blog post several days later, Zhao wrote that Binance “must lead by example” going forward. “We cannot let a few bad actors sully the reputation of this industry,” he wrote.

Despite the many questions and concerns surrounding bitcoin, Bahrain could scarcely contain its delight at wooing and welcoming Binance. The Bahrainis are competing with Dubai which has its own  vision of becoming the world’s crypto capital. And Zhao who was forced to move his business from Shanghai barely a year after he launched it after the Chinese government clamped down, is nothing if not adept at finding new homes for Binance. In November the company signed a deal with Abu Dhabi that would make the Emirate “the engine room powering growth and reinforcing the UAE’s status as a rapidly accelerating global crypto market place,” according to Ahmed Jasim al-Zaabi, the chair of Abu Dhabi Global Market (ADGM).

The year previously Zhao had caused much speculation when he bought what Bloomberg described as “his first home” in Dubai sparking a round of speculation that he would headquarter his crypto empire there.

Manama, Dubai, Abu Dhabi: three cities all competing for the same crown with CZ playing a game of ‘I tease and you please.’ What he wants is a jurisdiction that won’t dig too deep, ask too many awkward questions and that will let him get on with his game plan of becoming the most powerful money-man, crypto or otherwise on the planet.

Given that legislators across the world are increasingly demanding tight regulation with reverberations from Bankman-Fried’s fall from grace ricocheting through the bitcoin world (the latest to collapse was crypto lender Genesis) all three may find that like those FDX investors, their fondest crypto wishes may vanish in the haze.

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