What happens if Binance collapses?

August 1, 2023 at 10:04 am

Edited by Lena Bozhkova

Feature

With all the regulatory hurdles Binance, the largest cryptocurrency exchange by trading volume, has faced over the past months, investors have taken a cautious approach toward the exchange.

It all started with the US commodity futures trading commission (CFTC) taking legal action against Binance for violating the Commodity Exchange Act (CEA) in March 2023. The initiation of the lawsuit shook the crypto market, with the Bitcoin (BTC) price falling from $27,700 to $26,600.

Despite Binance and its CEO Changpeng Zhao’s (CZ) attempt to dismiss CFTC’s lawsuit, a survey taken in collaboration with BTC Peers — involving 1,273 crypto traders internationally — shows that 45% of the traders believe there’s a credible possibility of Binance’s collapse.

However, 55% of the remaining survey-takers voted for Binance’s market dominance despite the high competition and tight regulatory scrutiny.

“Binance’s future is uncertain. It might not collapse if it can address regulatory concerns, improve security measures, and maintain users’ trust. On the other hand, if it fails to do so, a collapse is possible.”
David Gokhshtein, the founder of Gokhshtein Media, told crypto.news.

Regulators vs. Binance

On June 5, the US Securities and Exchange Commission (SEC) filed a lawsuit against Binance and CZ for violating the securities law — claiming that Binance has allegedly requested customers to trade digital assets on unregistered platforms in the US.

According to data provided by Santiment, the social volume for the term “Binance collapse” skyrocketed on June 6 while the BTC price fell below the $26,000 mark. Since June 9, the heat around the possibility of the exchange’s shut down has dropped significantly.

What happens if Binance collapses? - 1 — Social volume for “Binance collapse” | Data source: Santiment

Gokhshtein, who is also a prominent investor, believes that “an essential consideration is the need for regulatory compliance in the crypto space.” To build long-term trust in the industry, crypto exchanges need to comply with the regulators while taking transparency into account.

Moreover, after the SEC’s lawsuit, BinanceUS has 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 “directed” the wash trading activities at BinanceUS. Per WSJ, Binance has also wash traded around 46% of its global trading volume.

Moreover, the exchange was under investigation by French authorities for alleged money laundering. On July 23, a report revealed that Binance France has been holding roughly €1 billion in crypto assets.

“If the money laundering and other accusations against Binance turn out to be true, it could have serious consequences for the exchange and the crypto ecosystem. There might be regulatory crackdowns and a loss of confidence from users and investors.”
David Gokhshtein, the founder of Gokhshtein Media.

It’s not only the US that Binance has been struggling with. On July 5, the Australian Securities and Investments Commission (ASIC) raided the offices of Binance Australia’s derivatives division.

Furthermore, Binance withdrew its crypto license application in Germany on July 26 due to the country’s tight regulations.

On the other hand, Binance announced to re-enter the Japanese market in August after the acquisition of the locally regulated Sakura Exchange BitCoin in November last year. It’s important to note that the exchange was forced to leave Japan due to high regulatory scrutiny in 2018.

Following the regulatory scrutiny worldwide, Binance has laid off 1,000 employees with a possibility of 3,500 people losing their jobs before 2024.

The domino effect on the crypto market

Per the survey, 60% believe that Binance’s collapse could put the crypto market on fire since the exchange has over $63.1 billion in digital assets. According to data by CoinGlass, there are 555,502 Bitcoins on Binance — worth roughly $16.26 billion at the time of writing.

“The future of Bitcoin is uncertain, but having over 550,000 BTC in an exchange can potentially impact its price. If a significant portion of those Bitcoins are sold off, it could lead to a temporary drop in price.”
David Gokhshtein, the founder of Gokhshtein Media.

In addition, 70% of the respondents to the survey expect a massive Bitcoin price crash, while 30% believe it “would remain stable.”

Gokhshtein claimed that if assets held by Binance are lost due to “hacks or mismanagement,” it could result in “significant losses for users.” “The extent of the loss would depend on the specific circumstances,” he added.

Moreover, the collapse could significantly affect the investors’ sentiment around the Binance Smart Chain (BSC) and its associated projects. Currently, there are a total of 571 decentralized finance (DeFi) protocols built and/or connected on BSC with a total value of around $3.35 billion, per DeFi Llama.

Data provided by Dapp Radar shows that 4,898 decentralized applications (dApps) have been developed on BSC.

Gokhshtein added that if something happens to BSC, it would have a negative impact on all the cryptocurrencies developed on it and the BNB ecosystem. “Depending on the severity, it could lead to a loss of trust and value for those assets,” he concluded.

The BSC team denied commenting on the possibility of Binance’s collapse while calling itself a completely “separate entity.”

“Our responsibility lies in ensuring the integrity and functionality of the BNB Chain blockchain and supporting the community of projects built on it. In addition, the BNB Chain ecosystem is decentralized and built to operate independently of specific entities.”
A BSC spokesperson for BSC told crypto.news.

Crypto investors’ decisions

The BTC Peers survey also revealed that 55% would migrate to other centralized exchanges (CEXs) if Binance fails. The remaining 45% would prefer to switch to decentralized exchanges (DEXs) if the largest CEX ever collapses.

Per BTC Peers, 65% of the respondents claimed that the broader crypto ecosystem’s innovation and growth would be put at risk if Binance fails, but the remaining 35% say the shut down could open new opportunities.

75% say they would still stay in the “crypto market even if Binance collapsed,” while 25% prefer to leave the industry “at least temporarily.”

Binance did not reply to a request for comment from crypto.news.

Ultimately, it’s hard to tell whether Binance collapses or not, but the hard pressure from the governments and regulators has proven to be inevitable.