When FTX, the crypto exchange, went down, $250 billion was wiped off the entire crypto market cap. FTX's influence on the crypto ecosystem was such that some companies filed for bankruptcy after the behemoth crypto exchange crashed.
FTX was worth $32 billion before the series of unfortunate incidents that led to its untimely death. Easily one of the largest crypto exchanges by trade volume, it recorded $1.02 billion in revenue in 2021.
FTX's fall shook the market to its foundations, but the death of a certain crypto exchange could very well uproot the market's foundations for good.
FTX's fall would be a tremor compared to Binance's earthquake; it would send aftershocks through the entire crypto ecosystem.
Binance is worth an estimated $300 billion and its trading volume was $34 trillion in 2021. The exchange holds more crypto than the next ten largest exchanges combined.
Don't be alarmed, Binance isn't going down. However, it is currently navigating a tumultuous lawsuit against the U.S. Commodities Futures Trading Commission (CFTC).
In this article, I'm looking at what could happen if things end badly for the world's largest crypto exchange.
Why is CFTC suing Binance?
Binance is no stranger to regulatory troubles. It has faced government woes from several countries, including the US, UK, Germany, Thailand, Japan, China, and South Korea.
However, things are different this time around. The CFTC filed a lawsuit against Binance, its CEO, Changpeng Zhao (CZ), and Chief Compliance Officer from 2018 to 2022, Samuel Lim.
The CFTC's problem with Binance is that it failed to register as a “futures commission merchant” — an entity that solicits to buy and sell a futures contract — while offering unregistered crypto derivatives options to U.S. customers. This accusation simply means that Binance allegedly bypassed regulations to make money off US citizens.
CZ says the allegations are “an incomplete recitation of facts.”
According to this CoinDesk article, the CFTC could simply impose fines and bar Zhao from being an officer at a futures commission merchant (FCM) in future, but there are other allegations in the CFTC suit with grounds for criminal penalties.
These allegations are that Binance knew that groups like Hamas, a Palestinian militant group, were using its platform and didn't do anything about it. If these allegations are proven, the US Department of Justice (DOJ) could take an interest in the case.
In addition to this case being a potential blow to Binance's revenue, it comes as the crypto market is still recovering from the many blows it received in 2022.
How badly can this end for Binance?
According to the 74-page court filing, the CFTC has some damning evidence such as chats between Binance employees and Lim that show the company prioritising its competitive edge over know-your-customer (KYC) protocols.
The chat per the CFTC filing read:
"[Because you attended a telephone conference on which Zhao participated] then
you will also know that as a company, we are probably not going to remove no
kyc (email registration) because its too painful . . . i think cz understands that
there is risk in doing so, but I believe this is something which concerns our firm
and its survivability. If Binance forces mandatory KYC, then [competing digital
asset exchanges] will be VERY VERY happy."
The CFTC also has Lim on record falsely misrepresenting Binance's compliance controls. In 2019, he sent an email to a financial regulator in the US saying, "Our program provides for AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism) controls to ensure the safe and legitimate use of our platforms."
However, there was a message to his colleague where he admitted that “.com doesn’t even do AML namescreening/sanctions screening.”
Perhaps the most damning evidence of all was a chat between Lim and a colleague that made it clear the company was well aware of criminals using the platform for illegal activities.
"And with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: 'Like come on. They are here for crime.' Binance’s MLRO agreed that “we see the bad, but we close 2 eyes.”
Experts like Adam Cochran tweeted that "this is the CFTC attempting to strike *fatal* blow to Binance, and at first read through... I think they actually have really strong chances here of succeeding in toppling the Binance empire."
Can Binance's empire really fall?
In the crypto ecosystem, Binance is the combined equivalent of JP Morgan, Goldman Sachs and Citigroup — the too-big-to-fail banks in the US. This is because a significant amount of crypto activity happens on the exchange.
However, Binance wasn't just amassing the largest user base ever seen in a crypto exchange over the years, it has also been involved in strategic acquisitions and investments within and outside the cryptocurrency space.
In early 2020, it acquired CoinMarketCap a crypto data company for $400 million. The platform provides users with valuable insights into the entire crypto-economy such as best-performing assets and exchanges.
In February 2022, it participated in Forbes' $200 million corporate funding round. It also invested in Twitter's $7.2 billion post-IPO equity round, and non-custodial wallet service, Trust Wallet for an undisclosed amount in 2018.
The company also has a decentralised network known as BNB chain that houses various decentralised projects.
Essentially, Binance is so deeply rooted in the centralised and decentralised world of crypto that if it fails, many crypto entities will fail, which makes the catastrophe even worse.
We saw this with FTX, right after the company went under. Other companies it invested in or acquired, either shutdown or filed for bankruptcy.
But can Binance end up like FTX with this CFTC suit?
"I think there is a decent chance that this could land as a death blow for Binance." Cochran says.
However, Christopher W. Smithmyer, Founder of kiroscoin.com believes the CFTC does not have standing against the exchange. He says. "In this case (and the Coinbase case) the government seems to be punishing a company for not following laws that are not there.
"There is no legislated law that crypto is a security or a commodity for that matter. Therefore, the exchange of cryptocurrency should not be covered by anything other than simple contract law."
What will become of the crypto market if Binance fails?
Senator Ihenyen, Lead Partner and Head of Blockchain & Virtual Assets Practice at Infusion Lawyers says, " a Binance collapse will have a significant impact on the entire crypto industry."
He adds that "the level of confidence and trust in the crypto industry may hit an all-time low, triggering serious FUD (fear uncertainty and doubt) and disruptive volatility in the crypto market."
Panic sell-offs during a Binance meltdown will be enormous. It may very well be the largest in crypto history and there's a fair chance that this will decimate the crypto market.
Constantin Kogan, Co-founder of BullPerks and GamesPad says he does not see Binance going down. Citing the company's vast wealth he says, "Binance's revenue amounted to around $20 billion in 2021, BNB Smart Chain's TVL dominance equalled 8.66%. They are a profitable business and I don't foresee them going under."
Ihenyen also mentions that companies Binance has invested in through its investment arm, Binance Labs, could be negatively affected if the company were to go bankrupt.
Binance Labs has invested in notable African startups like Bundle and Xend Finance. When FTX went bankrupt, an African startup it invested in — Nestcoin — had to layoff a significant part of its workforce to survive.
Interestingly, Ihenyen also believes that if the crypto exchange, Binance goes under, the Binance ecosystem could be unaffected.
"Binance has quickly grown into a diverse and robust ecosystem in the crypto industry, spreading freedom of money and building the infrastructure for the blockchain ecosystem. Today, Binance boasts an investment & fundraising arm, a token launch platform, a research platform, and an academy.
"It also has an NFT marketplace, a charity, and even a decentralised wallet. So if Binance crypto exchange — the major arm presently getting all the regulatory and investigatory attention — cease[s] to exist, it is possible that the Binance ecosystem will survive."
Regulation is meant to protect, in the case of Binance vs CFTC, the regulator wants to protect the interest of users and if it does that in a way that ends with Binance going under, it'll cause more harm to investors globally.
Ihenyen echoes this by saying if the goal of the CFTC and other regulators is to protect customers, "I do not see why the consequences should be disastrous for the crypto industry."