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Binance chief says crypto storage puts off users
Written by Paul Amery on December 10, 2020
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The founder of the world's largest cryptocurrency exchange says crypto adoption may stall if consumers can't find safer, more convenient ways to store their digital money.
Outpacing stock exchanges
Founded little more than three years ago, Binance is one of the outstanding business success stories of the latest cryptocurrency bull market. Activity on the exchange now surpasses that on some traditional stock markets.
Binance users traded a total of $176bn in cryptocurrency in November, according to CryptoCompare, more than the €123bn turnover of Germany's 354-year-old stock exchange.
Last week Binance's founder and CEO, Changpeng Zhao, said the crypto exchange was on course to make up to $1bn in profit this year, nearly double last year's figure.
According to Zhao, his exchange's success rests on fortune and an early decision to allow users to trade a wide range of cryptocurrency tokens.
"We got really lucky with the ICO craze"
"In 2017 we got really lucky with the ICO craze," Zhao told attendees at an online event hosted on December 10 by Encode Club, a community of university blockchain enthusiasts.
ICOs—initial coin offerings—played a large part in the 2017 cryptocurrency boom.
"We are a crypto-to-crypto exchange and we engineered our platform to be able to support a large number of cryptocurrencies," said Zhao.
"This caught the traditional bitcoin exchanges by surprise. They took a while to react. Due to the ICO craze we ramped up very quickly and we got a lot of users."
"I see thousands of blockchains and millions of tokens in the future," said Zhao.
A bottleneck for crypto adoption
For cryptocurrencies like bitcoin to build on their initial success there's one key bottleneck, says Zhao—achieving safe and easy storage for the private keys that confer ownership.
Losing your private key—or having it stolen—means you lose your money.
"The number one friction we have today is wallets," said Zhao.
"Today, most people are not able to store a private key securely. If you grab a thousand people off the street, probably only one guy can do it."
"To store the key securely, you have to protect from hackers, which means you should never use a device that's connected to the internet." Zhao said.
"The number one friction we have today is wallets"
"You can use hardware wallets, but you could lose the device or it might break," said Zhao.
"So you have to have a secure back-up, which means you have to encrypt the seed onto, say, a USB drive, and you have to have multiple copies of those in different places. If your apartment gets burned, you don't want to lose that back-up or the device."
A seed phrase is a list of words which store all the information needed to recover cryptocurrencies if the wallet is lost. Wallet software will typically generate a seed phrase and instruct the user to write it down on paper.
"Finally, you need to set up your inheritance mechanism," Zhao said.
"When you get into that depth, 99.9 percent of people on the street cannot hold cryptocurrencies securely. This is why most people use a centralised solution."
Digital payment firms have been rushing into cryptocurrency to meet client demand. In October, PayPal followed Square's Cash app and Revolut into the sector.
However, clients of these firms do not have access to their private keys, meaning they are not free to make full use of their cryptocurrency or dispose of it with another entity.
"We've got to have real, secure, decentralised custody solutions that are easy to use," said Zhao.
"And the last part—easy to use—is really, really hard. That's the biggest bottleneck. All the other factors like regulation are much better now and I'm not too worried about those things."
Shifting cryptocurrency regulations
After Binance launched its operations in 2017, the firm changed its head office several times, reportedly moving between China, Japan, Hong Kong and Malta, some say in an attempt to head off regulatory scrutiny.
In the past, Binance clients have been able to sign up without any anti-money-laundering or other formal identity checks.
Although Binance is now registered in the Cayman Islands, its website is still cagy about the exact location of its activities and services, and to whose, if any regulations those activities would be subject.
"They purposefully incorporate in jurisdictions renowned for lax anti-money-laundering enforcement and tell their employees not to put Binance on LinkedIn biographies," Tim Swanson, head of market intelligence at Clearmatics, said last month.
Recently, Binance has been playing it more by the book.
This summer, Binance acquired a regulated UK financial services firm to expand its activities in the country.
In November, Binance banned US-based users from accessing its main website, Binance.com, directing them to use a US-only website instead, Binance.US.
"We are not going to be able to fight regulators"
During the December 10 online event, Zhao said he would take a wait-and-see approach to further rules for cryptocurrency.
"As a centralised entity, we are not going to be able to fight regulators," said Zhao.
"At the same time, the regulations in the crypto space are not very complete or thorough. Most countries don't have very clear regulations even today. Most new technologies and new businesses operate in a grey area and that's where a lot of the opportunities are."
"Over the next couple of years, the first versions of regulations in almost all countries are going to be overly restrictive," said Zhao.
"The regulators are going to copy the banking regulations and try to apply them to crypto. But that's not going to work. Crypto works differently and can do different things."
Meanwhile, said Zhao, the exchange would continue to shift course as needed.
"I don't try to predict the future. We let users decide for us," he said.
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