After the setbacks in the U.S. market, the three major institutes face conflicts among compliance, innovation, and revenue

Binance, Huobi, and OKEx, as the three major exchanges with a domestic background, hold a leading position in the global cryptocurrency trading market. However, this does not mask a significant embarrassment: they have consistently failed to make breakthroughs in the important U.S. market and have faced frequent obstacles.

First, Huobi's partner HBUS announced its closure after operating for more than a year. Then, Binance was exposed by Forbes for taking extensive measures to evade U.S. regulatory scrutiny and may face investigation. Although Binance denied these allegations, it still reflects an unfriendly public opinion environment for the exchange. An industry insider familiar with the U.S. compliance market, Lu Yi (pseudonym), told Chain Catcher that the three major exchanges appear to be "high-risk" enterprises in the mainstream U.S. cryptocurrency market.

Looking at trading volume, as of 12 PM on November 18, Binance US had a 24-hour trading volume of $42.28 million, and OKCoin had a 24-hour trading volume of $38.58 million. In contrast, the U.S.-based compliant exchanges Coinbase and Kraken both exceeded $1 billion in 24-hour trading volume. This data also indicates that Binance and OK have a significant gap compared to local exchanges in the U.S. market after more than a year of expansion.

From top to bottom are the trading volume trends of Binance.us, OKCoin, and Kraken over the past year, data from Coingecko.

Why do the three major exchanges encounter "adaptation issues" when entering the U.S. market? What are the main difficulties in the U.S. exchange industry? After extensive interviews and investigations, Chain Catcher believes that the main dilemma for the three major exchanges exploring the U.S. market lies in the triangular conflict of compliance, innovation, and profit.

According to Chain Catcher, the three major exchanges' exploration of the U.S. market can be divided into two parallel paths: providing services to U.S. customers directly on their main sites and establishing local compliant exchanges to serve U.S. customers.

1. The first path is blocked

In the early stages of the three major exchanges, their main sites could accept registrations and trading from U.S. customers. However, as U.S. regulators introduced stricter policies, the three exchanges announced in early 2018 that they would stop serving U.S. customers and instead provide services through independent compliant exchanges, such as HBUS, Binance.US, and OKCoin International.

The reason the three exchanges went to great lengths to adopt this approach largely stems from the strict regulatory policies in the U.S. "The U.S. has always been a very inclusive, very strict, and also very domineering country in global cryptocurrency asset regulation," Lu Yi told Chain Catcher.

As early as June 2015, the New York Department of Financial Services (NYDFS) officially launched the regulatory framework for digital currency companies, BitLicense, and subsequently, dozens of companies obtained this license. This year, the Office of the Comptroller of the Currency (OCC) publicly allowed U.S. banks to custody mainstream cryptocurrencies like Bitcoin and Ethereum for customers. In September of this year, the agency even allowed banks to legally provide services to stablecoin issuers (such as Circle).

"The U.S. cryptocurrency regulatory policy is very clear: as long as you operate within the legal framework, not only will exchanges not be 'blocked,' but many policies will be introduced to 'unblock' the market, providing legal fiat deposit and withdrawal methods. However, the problem lies in that cryptocurrency asset contract trading, leveraged trading, and other products are in a regulatory gray area in the U.S.," Lu Yi said. "After all, the cryptocurrency industry has developed too quickly, and regulators find it difficult to keep up with such rapid business development."

For the three major exchanges, they have successively launched leveraged trading, contract trading, options trading, as well as innovative products like IEOs, platform tokens, and leveraged tokens over the past few years, exploring ways to provide users with as rich a product and asset type as possible to consolidate their market position. However, most of these innovative and exploratory products far exceed the permissible scope of U.S. regulators. Coupled with the long-arm jurisdiction laws in the U.S., if the three major exchanges provide services to U.S. customers through their main sites, the consequences will be quite severe once they are investigated and accused by U.S. regulatory authorities.

BitMEX serves as a precedent. In early October of this year, several senior executives of BitMEX were criminally charged by the CFTC for executing futures trades without registration, providing illegal options, failing to register as futures commission merchants, failing to register as designated contract markets, and failing to implement appropriate KYC rules, among other charges. Its CTO, Samuel Reed, has already been arrested.

Previously, BitMEX did not require customers to undergo KYC procedures, meaning customers could anonymously trade contracts and withdraw funds without restrictions on the exchange, which facilitated money laundering to some extent, likely including clients from the U.S.

Therefore, the three major exchanges have long been improving their KYC mechanisms. For instance, Binance founder Zhao Changpeng recently stated in an interview with Bloomberg that although Binance has been blocking access to the U.S., users sometimes indeed find feasible ways to bypass the blockade, and Binance will come up with a smarter way to improve this channel.

It can be concluded that the path for the three major exchanges to expand into the U.S. market through their main sites is completely unfeasible unless they are willing to cease operations related to contracts, platform tokens, etc. Otherwise, they cannot escape the severe crackdown from regulatory authorities in the U.S. market.

2. Exploring the path of compliance

In summary, the second path has become the main exploration area for the three major exchanges, launching independent compliant exchanges to serve U.S. customers. In this regard, the earliest attempt came from Huobi.

In January 2018, Huobi announced the appointment of Cai Kailong as the Chief Strategy Officer and U.S. Acting President of Huobi Group, fully responsible for the business expansion of Huobi Group in the U.S. Two months later, Huobi announced that it had obtained the U.S. MSB license and officially launched the HBUS exchange in early July of that year. At the same time, Huobi invited Fu Shengfang, former Managing Director of Meitu's international business and former President of Kingsoft Software U.S., to serve as CEO.

However, in various promotional statements, Huobi emphasized that HBUS and Huobi are not parent-child companies or have a subordinate relationship; they are merely "exclusive strategic partners." "In the U.S., there is a so-called long-arm statute, and exchanges need to be isolated when operating and serving in the U.S.," Fu Shengfang told Chain Catcher. "Huobi has also conducted a thorough separation from HBUS; Huobi is not the actual controlling party, and if we were to hide it, we couldn't."

In the following year, HBUS obtained cryptocurrency trading licenses in 43 of the 50 U.S. states, and some states even allowed fiat trading. Achieving this data is not easy, as most U.S. states have different licensing rules for cryptocurrency exchanges, and the application process is quite complicated. In addition to obtaining the MSB license, separate applications for each state's MTL or trust license are required to obtain fiat trading business licenses.

In March 2019, HBUS also formed a new team to launch its institutional products and services, such as lending and OTC trading. In early November 2019, Huobi Global announced that it would fully freeze all U.S. users' accounts and urged users to withdraw all remaining assets as soon as possible. The announcement also stated that U.S. users could choose to open accounts with Huobi's exclusive strategic partner HBUS and transfer their assets to that platform.

However, a month later, HBUS announced that it would cease trading services and planned to "return in a more complete and comprehensive manner," which meant that a significant amount of Huobi's previous investments and resources in the U.S. market had largely "gone to waste," leaving the market feeling sudden and unexpected. Fu Shengfang expressed to Chain Catcher, "The compliance costs in the U.S. market are very high, and shareholders, as investors, have their own considerations; they believe this may not be the most efficient way."

In other words, continuous losses may be an important reason for HBUS's decision to cease operations. "Compared to applying for a license, the subsequent compliance operations may actually require more effort and investment, needing to strictly adhere to the guidelines set by the license. If a user conducts a transaction without undergoing KYC, it could lead to litigation, and the license could also be jeopardized." Lu Yi told Chain Catcher.

HBUS has thus maintained significant investments for a long time, but this has not garnered recognition from U.S. market users. HBUS's daily trading volume has mostly hovered around a million dollars, and based on a standard fee rate of 0.2%, this means HBUS's annual fee income is only in the hundreds of thousands of dollars. In the absence of other income sources such as listing fees and contract trading fees, it is difficult to cover its high compliance, team, and market investment costs. Although Huobi is willing to invest heavily in the U.S. market, the decision to suspend trading services is understandable given HBUS's unfavorable development trajectory, which has become almost a "bottomless pit."

At the same time that HBUS announced the cessation of trading services, Binance's partner exchange in the U.S., Binance US, had already been online for several months. In June 2019, Binance announced that it would license its matching engine and wallet technology to its U.S. partner BAM Trading, with the latter as the operating entity. Binance US officially launched in mid-September.

It is noteworthy that although the official identity of BAM Trading has not been disclosed, there is still public information indicating that it is closely related to a U.S. startup cryptocurrency company that Binance Labs invested in back in August 2018. At least three key team members of this company previously held important positions at Huobi U.S., including Chief Compliance Officer.

At the same time, Binance also invited former Ripple executive Catherine Coley to serve as the CEO of Binance US. These various measures allowed Binance US to develop relatively smoothly in its early stages, with daily trading volume exceeding $10 million just one month after its launch.

However, in the following year, Binance US did not achieve significant breakthroughs, hovering around $20 million for a long time, until recently when it surged significantly with the Bitcoin bull market.

OKEx's exploration in the U.S. market was conducted through OKCoin, which announced in July 2018 that it had obtained the U.S. MSB license and simultaneously provided services to U.S. customers. Since then, it has gradually opened cryptocurrency trading services in 46 states and fiat trading services in 42 states.

According to data from CoinMarketCap, OKEx's daily trading volume during most of 2018-2019 was in the millions of dollars, stabilizing at $20-30 million only in the second half of this year. However, compared to Binance US's trading volume, OKCoin's trading volume includes not only the U.S. market but also trading volumes from many countries such as Singapore and Malta, meaning that the actual trading volume data for OKCoin in the U.S. market is likely lower.

3. The future of the three major exchanges in the U.S.

Regardless, the U.S. market, as the center of the cryptocurrency industry and even the entire financial market, has created a relatively favorable development environment for the cryptocurrency industry, and the public's understanding of cryptocurrencies is relatively sufficient. Earlier this month, Acting Comptroller of the Currency Brian Brooks stated in a report that approximately 60 million U.S. citizens hold some form of cryptocurrency, with a total market value close to $430 billion. Cryptocurrencies have become a popular mechanism for sending and receiving payments for goods and services.

"The U.S. market still holds great prospects," Fu Shengfang stated. "Although there are regulatory risks, these risks differ from domestic regulatory risks. U.S. regulatory risks involve saying, 'I will tell you that this business cannot be done, and if you do it, I will investigate and enforce the law.' In contrast, domestic regulations may not have such detailed legal provisions; you can start doing it first, but if you do it improperly, I will come to regulate you."

Therefore, the U.S. market should be an indispensable part of the international layout for Huobi, Binance, and OKEx. Currently, exchanges like Coinbase and Kraken dominate the U.S. market, but the three major exchanges still have opportunities.

"Anyone who has used Coinbase knows that its user experience is not as good as that of domestic exchanges. The three major exchanges also offer more diverse options. If they can let U.S. users feel their convenience and localization, there is still a chance. This market will always have phase winners and phase losers, mainly depending on who can get closer to the users." Lu Yi said.

In terms of fees, Binance US and OKCoin also have advantages in trading fees, with the official websites of Coinbase and Kraken showing maximum rates reaching 0.5% and 0.26%, respectively.

"The three exchanges need to embrace Western culture and thinking, and even adopt Western ways of doing things. They need professionals who understand the local political environment and laws to move faster," Lu Yi further stated.

Binance and OK are making efforts in this regard, and Huobi has not completely given up on the U.S. market. In April of this year, Huobi Group's Vice President of Global Business, Ciara Sun, stated to the media that Huobi plans to cooperate with local compliant platforms to restart trading operations, which would allow it to operate compliantly at a lower cost, potentially returning to the U.S. market as early as that month.

"Huobi has been in talks with a cryptocurrency brokerage for potential strategic cooperation, which may involve acquiring a minority stake in the other party," Ciara Sun said. "By collaborating with a fully regulated local partner, we do not need to apply for trading licenses in each state. We will return to the U.S. market under the Huobi Group identity, rather than as an independent entity like Huobi U.S. (HBUS)."

However, seven months later, there are still no public signs of the restart mentioned by Ciara Sun, which may indicate that the cooperation progress is not smooth, and the timeline for returning to the U.S. will continue to be delayed. From previous statements, it appears that Huobi plans to return to the U.S. market through a different path than Binance and OK, leveraging a mature local compliant platform, which may also have the opportunity to achieve new breakthroughs.

Under the conflict of the three major factors of compliance, innovation, and revenue, Huobi, Binance, and OKEx have experienced a tumultuous few years in the U.S. market. As the market scale expands and the three exchanges adopt more effective strategies in the future, one of these exchanges may break through, warranting long-term attention from the market.