What would occur if Binance were to fail?
Regulatory Challenges Faced by Binance
In light of the various regulatory obstacles encountered by Binance, the largest cryptocurrency exchange in terms of trading volume, investors have approached the exchange with caution.
The first hurdle came in March 2023, when the US Commodity Futures Trading Commission (CFTC) took legal action against Binance for violating the Commodity Exchange Act (CEA). This lawsuit had a significant impact on the crypto market, with the price of Bitcoin (BTC) dropping from $27,700 to $26,600.
Despite Binance and its CEO Changpeng Zhao’s (CZ) attempts to dismiss the CFTC’s lawsuit, a survey conducted in collaboration with BTC Peers, which involved 1,273 crypto traders from around the world, revealed that 45% of traders believe there is a credible possibility of Binance collapsing.
However, the remaining 55% of survey participants expressed confidence in Binance’s market dominance despite the intense competition and strict regulatory scrutiny.
Regulators vs. Binance
On June 5, the US Securities and Exchange Commission (SEC) filed a lawsuit against Binance and CZ for violating securities laws, alleging that Binance had encouraged customers to trade digital assets on unregistered platforms in the US.
Data from Santiment showed a significant increase in social discussions around the possibility of Binance collapsing on June 6, coinciding with a drop in the price of BTC below $26,000. However, since June 9, the attention around the exchange’s potential shutdown has subsided.
Social volume for «Binance collapse» | Data source: Santiment
Gokhshtein, a prominent investor and founder of Gokhshtein Media, believes that regulatory compliance is crucial for the crypto industry to build long-term trust. Crypto exchanges need to comply with regulators while prioritizing transparency.
Following the SEC’s lawsuit, BinanceUS removed crypto-fiat trading pairs from its platform and encouraged investors to convert their US dollar holdings to stablecoins. The exchange even hinted at discontinuing USD withdrawals.
A Wall Street Journal (WSJ) report revealed that Changpeng Zhao was aware of and involved in wash trading activities at BinanceUS. The report also claimed that Binance engaged in wash trading for approximately 46% of its global trading volume.
In addition, Binance was under investigation by French authorities for alleged money laundering. A report on July 23 revealed that Binance France held approximately €1 billion in crypto assets.
The Impact on the Crypto Market
According to the survey, 60% of respondents believe that if Binance collapses, it could have a significant impact on the crypto market, as the exchange holds over $63.1 billion in digital assets. CoinGlass data shows that there are 555,502 Bitcoins on Binance, worth roughly $16.26 billion at the time of writing.
Gokhshtein warned that if the assets held by Binance are lost due to hacks or mismanagement, it could result in significant losses for users. The extent of these losses would depend on the specific circumstances.
Furthermore, the collapse of Binance could have a profound effect on the Binance Smart Chain (BSC) and its associated projects. Currently, there are 571 decentralized finance (DeFi) protocols built on or connected to BSC with a total value of around $3.35 billion, according to DeFi Llama.
Data from Dapp Radar shows that 4,898 decentralized applications (dApps) have been developed on BSC.
Gokhshtein emphasized that any negative event affecting BSC could lead to a loss of trust and value for the assets built on the platform.
When asked about the possibility of Binance’s collapse, a spokesperson for BSC stated that they operate as a separate entity and their responsibility lies in ensuring the integrity and functionality of the BNB Chain blockchain.
Crypto Investors’ Decisions
The BTC Peers survey also revealed that if Binance fails, 55% of respondents would migrate to other centralized exchanges (CEXs), while 45% would prefer to switch to decentralized exchanges (DEXs). Additionally, 65% believed that Binance’s collapse would put the broader crypto ecosystem’s innovation and growth at risk, while 35% saw it as an opportunity for new possibilities.
Furthermore, 75% of respondents stated that they would continue to stay in the crypto market even if Binance collapsed, while 25% would leave the industry temporarily.
Binance did not respond to a request for comment from crypto.news.
In conclusion, it remains uncertain whether Binance will collapse or not, but the mounting pressure from governments and regulators appears to be inevitable.