But his true love—even after FTX, even after Bitcoin cratered by two-thirds—is crypto. Over the years, Runefelt, who goes by the Twitter handle TheMoonCarl, has posted a steady stream of QR codes, imploring followers to sign up as his affiliate members and dip their toes into trading on his favorite exchange, Binance. Hey, if this onetime grocery clerk can win a king’s ransom betting on crypto, why can’t you?

Most casual observers think of Binance, the world’s biggest crypto exchange, as a trading-tech titan, a data-driven juggernaut run by the ubiquitous Changpeng Zhao, or CZ for short. But an army of Runefelts—who gain kickbacks with every newbie they sign up—have powered a surprising share of Binance’s explosive growth. 

This influencer network is largely invisible to those who aren’t Binance power-users. That’s in contrast to CZ himself, who in recent years has become crypto’s most visible spokesman. Though he has recently reduced his public appearances, Zhao has cumulatively, logged countless appearances on cable business networks, released myriad statements touting the health of his business, and appeared at live events worldwide, professing that users’ crypto is secure in their Binance accounts. His role as the public face of crypto trading has only been emphasized this week, as he has stepped forward to defend Binance in the wake of a new lawsuit from the U.S. Commodity Futures Trading Commission (CFTC).

It’s crucial that the cryptoverse believes CZ’s assurances, because Binance is its cornerstone. The company has built an empire on low fees and a laissez-faire, all-traders-welcome culture. Over half of all spot and futures trades in crypto run over Binance, according to digital data outfit Arcane Research; Coinalyze, another data provider, estimated that the exchange now handles over 90% of spot Bitcoin transactions. Binance has expanded its dominance even further since the collapse of Sam Bankman-Fried’s FTX. As Arcane wrote in a recent report, “Binance is the crypto market.”

 But look under the hood, and things get murky fast. CZ has recently said the company is “still profitable” and has “fairly large cash reserves.” But he offers no hard numbers. Binance is a private company and isn’t obligated to disclose how much money it makes or how. What’s more, Binance’s giant global exchange, Binance.com, isn’t licensed in the nations that require the toughest public financial disclosures. (In the U.S. Binance has avoided reporting requirements by running a small, relatively limited exchange called Binance.US that’s regulated under “money transmitter” licenses in 46 states.)   

In the absence of such transparency, we did some digging. Through several weeks of reporting, examination of financial filings, and interviews with investors, Fortune assembled a wide-ranging picture of Binance’s business.

Some of what we found should give users and investors pause. The exchange’s broad edifice includes two surprising and potentially shaky pillars. The first is the Runefeltian world of paid influencers who entice young traders to try crypto—a tactic which, while perfectly legal, is an expensive and erratic way to grow. Second is Binance’s reliance on its “native token,” the Binance Coin or BNB. Some experts who’ve studied the company believe that the BNB on its balance sheet accounts for most of its net worth. “The big risk is that Binance may need to turn BNB into fiat currencies that can be used for paying its operating expenses,” says Matt Sekerke, an economist at Johns Hopkins. If a crisis forces Binance to sell BNB, its price could collapse, putting the company at risk.

Binance says that neither its recruiting program nor its BNB holdings is central enough to its business model to be a vulnerability. In a written statement, a spokesperson says the affiliate program “represents far too small a portion of our new ­users” to be thought of as a pillar of its stability. She also says that “the premise … that Binance will dump (or need to dump) BNB is wrong. We have a very strong balance sheet independent of our BNB holdings.” Still, the company declines to be more specific about how big either program is in relation to its business as a whole. And that leaves customers and investors with fodder for some sleepless nights. 

Those stakeholders may have bigger things to worry about. In the wake of the FTX collapse, regulators are circling, investigating various allegations about Binance’s business ranging from intermingling of customer assets to money laundering. For two years, Binance had been attempting to forge a settlement with the CFTC. A Binance spokesman said in mid-February that Binance expected to pay large fines in acknowledging that it had violated the agency’s rules through careless oversight of its customers in pursuit of breakneck growth.

But the CFTC has apparently found Binance’s infractions far too serious for a negotiated agreement. On March 27, the agency issued an extraordinarily detailed, 74-page civil complaint alleging that the Binance companies, CZ, and former chief compliance officer Samuel Lim knowingly allowed Americans to trade on its global exchange, in violation of rules requiring that U.S. nationals transact in futures, derivatives and cryptocurrencies, officially deemed “commodities,” only on registered, regulated marketplaces. The CFTC also alleges that Binance violated U.S. money laundering and “know your customer” laws, and helped American customers skirt its own compliance protocols. In a statement released on March 27, a top CFTC official labeled Binance’s compliance initiatives as “a scam.” 

The CFTC is seeking to permanently ban Binance from operating in the U.S. It’s also demanding that the companies disgorge all trading revenues and fees illegally obtained from users in the U.S.This could be a big number. The CFTC estimates that the Binance global exchange was getting 18% to 20% of revenues via unlawful trades by U.S. nationals in parts of 2019 and 2020, though it doesn’t cite figures for later years. The loss of stateside customers could undercut Binance’s revenues. As we’ll see, maintaining big and growing trading volumes is crucial to boosting the value of its native BNB coin. In the two days following the release of the CFTC complaint, BNB dropped only modestly, by 6%, shedding $3 billion in market cap. Still, the current CFTC and possibly future crackdowns threaten BNB’s value, which is highly dependent on the perception that Binance will keep reaching new heights. 

More dramatic regulatory actions against the company, either in the U.S. or foreign jurisdictions, could certainly clobber any and all of its revenue streams. The ominous climate “doesn’t mean that Binance is in danger of a collapse anytime soon,” says Mike Alfred, head of hedge fund Alpine Fox and a longtime investor in digital assets and Bitcoin mining ventures. “But it shows that Binance is a much riskier enterprise than its ‘crypto bro’ customers believe.” He adds, “Over time, if a regulatory crackdown doesn’t bring it down, an unsustainable model likely will.”  

Born in China, and raised from age 12 in Canada, where he’s still a citizen, CZ began his career as a specialist in financial-­trading software. He switched gears in 2013 to go all in on crypto, famously selling his apartment to buy Bitcoin, and eventually launching Binance in Hong Kong in 2017. When China cracked down on crypto trading, CZ moved the exchange multiple times, eventually making Dubai its home base. (Binance says it is “in discussions with various jurisdictions about setting up regional hubs/HQs.” )

In public forums, CZ, now 45, makes two arguments about Binance’s inner workings that are somewhat contradictory. He states that the investing world shouldn’t be concerned that Binance does not disclose an official headquarters and answers to no central regulator. But he acknowledges that his industry is experiencing a crisis of confidence, and that to restore trust, exchanges must provide a much fuller picture of their standing. In a November “fireside chat” alongside Mike Novogratz, head of crypto hedge fund Galaxy Digital, for example, CZ asserted that crypto marketplaces should show “financial transparency” and “work closely with regulators and auditors.” 

Since little or none of that openness currently exists, it takes a careful analysis of Binance’s fee schedule and other available sources to estimate its key metrics.

We’ll start with overall trading activity. In the past, Binance has put out statistics about its Binance.com transactions. In 2020, it reported $1.4 trillion worth of trades, up from $1 trillion in 2019. Then, in late 2020, crypto prices exploded. Binance rode a moonshot as volume multiplied to a staggering $34 trillion for 2021, a figure cited by CZ in an interview last June.

In 2022, as the crypto market tanked, CZ did a great job taking market share, eliminating fees on some of the most popular trades to siphon sales from Coinbase, Kraken, and other rivals. FTX’s demise in November pushed an even bigger share of the world’s trades to Binance. For 2022, volumes posted by outside data providers like Arcane and ­CryptoCompare show that Binance handled around $23 trillion for trades. That was a substantial drop from 2021—but a smaller decline than that posted by its biggest competitors.

What about revenues? CZ has stated that Binance derives roughly 90% of its top line from trading. The rest flows from sources including deposit, withdrawal, and margin lending revenues, and “staking” fees on its native blockchain. Spot trades account for around one-fourth of the trading total, while futures transactions constitute the remainder.

On the spot book, Binance charges a standard commission of 0.1%, or 10 basis points, or bps (one bp equals one-hundredth of 1%). Futures commissions range from just one bp to five bps. On top of those already low fees, Binance grants layer upon layer of discounts. Retail customers get 25% off spot trades and a 10% reduction in futures transactions if they pay the fees using its native BNB coin. Institutional “whales” get extra breaks if they hold lots of BNB.

Binance has never disclosed its revenues. But in January, data firm CryptoQuant reported an estimate of $12 billion for 2022, and Binance published the report on its website, a tacit endorsement. For 2023, daily activity is on par with last year’s levels, implying that Binance is again on pace for $12 billion in revenues. That figure may err on the high side, however: The $12 billion rate implies an average commission per trade of around five bps. Binance’s commission schedule, and the array of deep discounts it offers, suggest a lower figure.

On the profit front, Binance hasn’t always been as secretive as it is now. For the years 2018 through 2020, CZ revealed either precise or approximate annual figures, mostly in blog posts. According to CZ, sales exceeded costs “between $800 million and $1 billion” for 2020. Based on trading volumes, it’s likely that Binance’s revenues totaled in the low single billions that year, which implies that it generated huge profit margins. And since its volumes multiplied 24-fold from 2020 to 2021, it’s highly probable that sales wildly outran costs for tech gear, software, and a payroll that grew from 3,000 to 8,000.

For Binance, the black box within the black box is its referral program, which incentivizes existing traders to attract new customers. Other marketplace businesses offer such programs, but Binance’s grants unusually generous benefits, making it analogous to a multilevel marketing (MLM) platform such as Amway or Herbalife. The recruiters’ reward: huge kickbacks based on the commissions those newcomers generate.

Most exchanges, including Coinbase and Kraken, also provide these incentives, as did the avant-le-déluge FTX. But according to Joseph Edwards, an investment advisor at London-based crypto firm Enigma Securities, Binance provides by far the most aggressive programs. Edwards believes they’re a major part of Binance’s growth and component of its expenses. “Binance was behind FTX in spending on the likes of sports sponsorships, but it was far more active and brazen in these retail-focused referral plans,” Edwards says.

Binance does plenty of conventional marketing, too: It’s a huge soccer sponsor, for example, and last summer it engaged Khaby Lame, the world’s most followed TikToker, to promote its blockchain innovations. But the affiliate program gets a huge amount of emphasis, too.

On its website, Binance provides reams of detail on how the arrangements work. The first plan is the Standard Referral Mode, available to all investors. The size of the reward depends on the amount of BNB that the “inviter” holds in a Binance custody account. If the host’s wallet has fewer than 500 BNB, he or she collects a 20% kickback on the spot trading commissions generated by anyone they bring to Binance. (“Kickback” is the language Binance often uses on its site.) If a Standard member holds 500 BNB—worth about $170,000, at mid-March prices—that share rises to 40% for spot trades, and 30% for futures.

The bigger plan is the one officially tagged the Affiliate Program, which enlists prominent names in social media. Binance’s website provides a list of who’s eligible. It includes influencers with over 5,000 followers; financial and opinion leaders with communities of 500-plus members on groups such as Facebook, Reddit, or QQ; analyst-gurus getting over 5,000 daily visits; and crypto funds. The hosts pocket 41% kickbacks on recruits’ spot trades if they start with fewer than 500 referrals; at over 500, their take hits a stunning 50%. 

50%

Maximum share of recruits’ commissions that an influencer can earn through the Binance Affiliate Program. Source: The company

Binance provides strong incentives for those hosts to keep building their clubs. To keep the 41% kickbacks, an inviter must attract at least 10 new customers every 90 days that together generate at least the equivalent of 50 Bitcoin, or around $1 million, in new trades. 

To entice those recruits to keep trading, the influencers can split their BNB commission discounts with the newbies. That’s a particularly big perk in some of the lower-to-­middle-income nations where Binance is seeing strong customer growth—Nigeria, say, or Poland, or the Philippines—where new users may be particularly eager for any additional financial boost.

The generosity of the Binance programs is striking compared with those of its competitors. Kraken rebates 20% of the commissions affiliates attract from their invitees. Coinbase pays 50%, but only for the first three months. Thereafter, all fees go to Coinbase. By contrast, once a Binance affiliate lures someone to click on their QR code, that host gets a share of the recruit’s spot commissions forever.

We don’t know how much Binance spends on the affiliate program, or how much it generates in commissions. But Binance provided a hint of the affiliates’ importance in October 2019. In a tweet, the exchange revealed that the top earner had made $10.5 million since the program began two years earlier, while the second- and third-best earners had amassed $5 million to $6 million each. And those numbers came before the 2021 crypto boom supercharged demand. 

The program itself appears to be perfectly legal, experts tell Fortune. Still, it carries liability risks. “A legal problem would arise if the host is falsifying their own qualifications or their own trading record,” says Kevin Thompson, an MLM attorney at Thompson Burton in Nashville. “This kind of program creates a compliance burden for the company.” The SEC has also targeted crypto firms that work with influencers who don’t disclose that they’re being paid.

The profligate generosity of the programs could also pose problems by cutting into profits. And anything that might scare the influencers away—another crypto crash, or regulatory action against Binance itself—could shut down this new-customer pipeline. 

All those risks are potentially minor, however, if the program is relatively small. Binance says it is, telling Fortune, “The program is an important way to bring in new users,” but that it wouldn’t disrupt the company “if we were to discontinue it (which, it is important to note, we have no plans to do).” 

The second shaky element of Binance’s business is its reliance on its BNB coin.

Binance created BNB at its launch in July 2017, issuing it through an initial coin offering (ICO) for 200 million tokens. In an August 2019 podcast on the Nomics site, CZ stated that his main goal was to boost the value of BNB. Zhao was voicing one of the core tenets of crypto culture—that people who find a blockchain product useful should profit from its growing popularity. “Equity is a virtual concept inside somebody’s head,” he said. “Tokenomics, this new way of having a token, is much better … People who think they will trade a lot on Binance will buy the BNB right now; the price will go up because more and more people join.”  

As is typical in ICOs, the founders got a big chunk for free. CZ and his team received 40%, or 80 million BNB. Binance sold the public 100 million tokens to raise funds for building the platform and marketing it, and the remaining 20 million went to the firm’s original investors. 

Then, as now, BNB’s primary use is as a currency that secures discounts. Only by paying commissions in BNB, or holding lots of it, do customers get breaks on their trades. BNB is also the exclusive coin for “staking” on Binance’s BNB Chain, where customers can fashion smart contracts and NFTs. 

As part of its ICO, Binance pledged to gradually purchase and “burn,” or eliminate from circulation, 100 million BNB, or half the number originally minted. The purpose was to get people excited about the coin’s future value, since increasing rarity should keep the price rising. (Burn pledges are common in ICOs.) In mid-2019, CZ made an amazing announcement, declaring that members of the founding team were “giving up” their BNB share and would burn their own coins, getting no compensation. He later added that any additional burns would come only from the company’s holdings. 

The strategy appears to have substantially helped boost the price of the native coins. At the time CZ launched the big team burn, BNB traded at around $30. As the broader market took off, the tokens went on one of the greatest tears in the annals of crypto, reaching $670 by November 2021. Even at its late-March price of $337, BNB stands as the world’s fourth-most-valuable crypto coin, sporting a market cap of $53 billion.  

 The soaring price tracked a shrinking supply. Since June 2019, the founders have erased 24 million of their original 80 million coins—which, at the different times they were burned, had a cumulative value of $4.5 billion. (We know the quantity because CZ has made public the addresses of the “wallets” holding the founders’ coins.) 

$12 billion

Binance’s estimated 2022 revenue. Source: CryptoQuant

In a nutshell, the Binance strategy appears to be: boost demand for BNB by offering discounts for transacting with it and holding it; shrink the supply through burns; and collect coins that flow in from trading. At the same time, analysts say, much of Bitcoin’s circulatory system runs on BNB. In a 2019 blog post, CZ declared that “our income is mostly in BNB.” The company tells Fortune, “We hold BNB and we continue to hold BNB.” Binance deploys some BNB for salaries and bonuses for employees who elect to be paid that way. Still, it appears that the inflow of BNB to Binance is much larger than the outflow.

That tees up an urgent question: How much BNB does Binance hold on its balance sheet? A forensic review of crypto wallets by an anonymous analyst using the Twitter handle @cryptohhipp65 recently concluded that at least 60 million BNB—worth more than $20 billion, at mid-March prices—are sitting in Binance’s war chest. Multiple specialists told Fortune that the findings are credible, because the analyst was able to isolate coins held in customers’ accounts and the team’s wallets—meaning that the remaining balance, held in Binance-linked wallets, most likely belongs to the company directly. 

The company’s large hoard has implications that could knock Binance off its throne. The intrinsic value of a BNB is real, due to its role in earning discounts and rebates, but it’s modest: The coin’s sky-high market price is largely a testament to faith in CZ. If clients start seeing BNB as grossly inflated, some analysts say, they could dump it. “It would be a kind of bank run where Binance’s custody clients unload their BNB en masse,” says Will Luther, an economist at Florida Atlantic University. A major piece of negative news—a criminal charge against Binance, say, or a big turndown in trading volumes—could conceivably trigger such a run, zapping Binance’s balance sheet. If its other reserves waned, Binance could need to convert BNB into dollars, yen, or euros to pay expenses. If that happened, the coin’s value could plummet, and Binance’s cushion could experience its own burn. 

Binance refutes the idea that this could happen. “Binance does not use BNB to cover its operating expenses,” nor will it in the future, the company says, because its balance sheet includes substantial assets other than the coin. Binance did not comment on what share of its balance sheet is made up of BNB, however—and that remains a pivotal issue. If Binance’s reserves are vast and diverse, any risk from BNB is smaller; if reserves are more BNB-centric, the danger is larger. For now, a definitive answer is elusive.

In a sense, the influencer and BNB strategies that have helped power Binance’s rise share one crucial design flaw: They’ve trapped CZ and his team in a box of their own making, where the ripple effects of a crisis of confidence could have an outsize impact. Little wonder that CZ spends so much time talking about Binance’s safety: If customers and investors lose faith, the box could quickly come apart.

A version of this article appears in the April/May 2023 issue of Fortune with the headline, “Inside the Binance black box.”