The fact that founder Sam Bankman-Fried’s (now former billionaire) second largest cryptocurrency exchange faced insolvency within days and must be rescued by industry leader Binance through a takeover shows just how unstable the exchange and the business as a whole is. From a $32 billion valuation to bankruptcy in 10 months, FTX is setting negative records.
And now all eyes are on Binance. While FTX and Bankman-Fried were actually promoted in the media as saviors of the collapsed crypto industry in recent months (Voyager purchase; BlockFi purchase option; Bankman-Fried joins Robinhood), the situation has completely changed in a couple of weeks.
Bankman-Fried loses 94% of his $16 billion fortune and billionaire status in a matter of days, and the only one who can save him is his first investor, Zhao. Binance CEO Changpeng Zhao is partly to blame for the competitor’s collapse because he publicly questioned the value of the FTX FTT token (a kind of voucher for cheaper FTX deals).
Binance is the last major pillar of the crypto market
Binance seems to be the last surviving player on the list of companies that collapsed after the cryptocurrency collapse due to high inflation. First the crypto fund Three Arrows Capital (3AC) collapsed due to the Terra/LUNA crash, then Voyager Digital, Celsius Network, BlockFi, Vauld or Nuri went bankrupt. They all had access to the Terra ecosystem. Then Bankman-Fried came into the spotlight with FTX and prepared to buy some of these companies (and thus get their users first). But now FTX itself is bankrupt. There is one strong player left on the market, Binance.
But how stable is Binance? With a trading volume of $45 billion per day and 16 million user visits per week, the cryptocurrency exchange has about ten times more relevant figures than competitors such as Coinbase, Kraken or FTX. The market share among centralized crypto exchanges is 50% or more.
In addition, BNB’s own token (a service token similar to FTT to pay fees on the Binance exchange) with a market capitalization of $50 billion is the largest cryptocurrency in the world after bitcoin, Ethereum and Tether stabelcoin. Binance also owns the third largest stablecoin in the market, BUSD, and is trying to take market shares away from the two market leaders USDT and USDC.
Binance also became a major investor in Twitter with $500 million and created its own fund with another $500 million to bail out bitcoin mining companies. Theoretically, if Binance were also in trouble, it would be a threat to the entire crypto industry.
Binance itself is by no means unstable. For months, the company has been in the process of acquiring subsidiaries and licenses in dozens of countries, including Austria, Italy, Germany, and France.
So far, the crypto-exchange has operated from a virtual space and cannot even specify where the company’s headquarters are located. Meanwhile, the head of Binance constantly moves between Paris and Dubai, promoting its business at conferences such as the Lisbon Web Summit.
The example of the Netherlands shows how dangerous this state of uncertainty is for Binance. There, the central bank imposed a fine of three million euros for Binance offering its services without the necessary permission from local authorities – and thus violating anti-money laundering regulations. The Netherlands could set a precedent, and so Binance is seeking more legal certainty in as many countries as possible. At the moment, it looks like Paris will become the company’s European headquarters.
In the sight of the authorities
Regulators have long focused their attention on Binance. For example, the powerful U.S. authorities. In September 2022, it was announced via Reuters that U.S. judicial authorities had allegedly challenged the documents of the world’s largest cryptocurrency exchange regarding anti-money laundering measures back in 2020. The issue is particularly sensitive because Binance is said to have violated sanctions against Iran. According to Reuters, Binance helped Iranian companies trade for $8 billion despite the sanctions.
Money laundering and terrorist financing and related charges have been a long-standing problem at Binance anyway. Cryptocurrencies are popular with cybercriminals because of their perceived anonymity for moving value internationally. Also via Reuters in the summer of 2022, it was revealed that Binance was allegedly being used by hackers, fraudsters and drug dealers to launder $2.35 billion in crypto assets. Binance never denied this, but pointed out that the facts and figures in the report were wrong, adding, “Neither our industry nor Binance is perfect.”
The U.S. Securities and Exchange Commission is also interested in details about the Binance BNB token, which traders can use to get cheaper commissions for trading on the exchange – a kind of digital voucher. But is it really just a service token or is it more of a security representing a virtual stake in a crypto exchange? If it were, Binance would have illegally dumped the shares on the market.
Zhao tries to calm the market
Founder Zhao is fully aware that Binance is now in the spotlight because of a complaint against the exchange by French investors. He is eager to prove that all user deposits really exist and that there can be no stoppage of payments, as in the case of FTX. “SAFU Insurance Fund” (SAFU stands for “Safe Asset Funds for Users”) will hold $1 billion in the form of BTC, BUSD and BNB.
Zhao is also trying to show that Binance is not like FTX. His company will not use user tokens as collateral, and they also will not provide crypto assets – all the things FTX, Celsius Network, Voyager Digital, and other bankrupt companies did.