Binance Risk Reshapes Crypto Landscape

The recent Forbes article and a letter by US senators suggest a new attack on Binance. It looks like major crypto exchanges cannot remain unregulated for much longer, and I see Coinbase as a likely winner in a new regulatory landscape.

New Attack on Binance

Last week there was a new attack on Binance. Forbes published the article titled “Binance's Asset Shuffling Eerily Similar To Maneuvers By FTX”, saying that the exchange used users’ USDC stablecoins for its own purposes. Forbes suggested that USDCs held on the exchange and its smart chain had been transferred for speculative trading without informing clients (Forbes article may be gated, but CoinDesk provides a free summary available here). Binance rigorously defended itself, saying that it has “never invested or otherwise deployed user assets without consent under the terms of specific products. Binance holds all of its clients’ assets in segregated accounts which are identified separately from any accounts used to hold assets belonging to Binance.” Binance CEO Changpeng Zhao replied more firmly, tweeting that “Our users also must deposit to Binance first to be able to withdraw, which are also easily traceable on the blockchain. The article conveniently ignores the deposit transactions.” I don’t know whom to trust, but I doubt that Binance perfectly separates client assets. Still, using client assets by the exchange, if any, has likely been much less significant than that of FTX.

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A few days after the Forbes article, a group of US senators published a harsh letter to Binance, pressing the company for information on its finances and an internal compliance policy (the letter is available here). The senators made a lot of accusations against Binance, particularly focusing on its opacity and lax controls. “It appears that money laundering is central to Binance’s business strategy,” – the senators said. Importantly, there is a request to “provide the requested documents and answers to the following questions no later than March 16, 2023.”

Binance’s token price (BNB/USD)

Source: TradingView

The recent failure of Silvergate was predated by a direct warning by US officials that banks should not engage in crypto (Silvergate was legally a US bank). Thus, the Silvergate crash seems to be an example made for others that they should respect US regulators’ views on crypto. Will Binance be made an example like Silvergate?

A Battle of the Exchanges

Binance remained successful during the last year’s crypto winter, almost doubling its market share in 2022. I’m not sure whether Binance's success reflects its superior business model or indeed a lot of money laundering.

Monthly exchange volume market share

Source: The Block

Coinbase, which is the only US-regulated major crypto exchange, has failed to replicate Binance's success. Just as a reminder, Coinbase’s stock is traded on the US exchanges, so the company discloses full financial reports, and has a clear ownership structure and tighter internal controls. It complies with a relevant US regulations, including sanctions against rogue regimes.

Given a stagnating market share, its revenue plunged by more than 2 times in 2022 and the company became unprofitable even on the operational level, having negative EBITDA in 2022. The consensus forecast suggests the company will have zero EBITDA in 2023 and will slowly return to 2020-level EBITDA in the years ahead.

Coinbase financials (USD million)

Source: Bloomberg

Coinbase share price was decimated, dropping even more than Bitcoin last year.

Coinbase Stock Price (USD)

Source: TradingView

I think Coinbase’s poor performance reflects its business issues rather than compliance limitations and costs. Coinbase typically overcharges retail clients and is less convenient to use (at least for my taste). However, in the current situation, it’s easy to pitch Coinbase’s issues as a result of its over-compliance compared with Binance. I would go as far as suggesting that the new attack on Binance may be indirectly supported by Coinbase.

New Regulatory Landscape

The new attack on Binance suggests that major crypto exchanges cannot remain unregulated for much longer. Major exchanges are likely to be forced to either become transparent or quit the US market and possibly USD transactions too. Coinbase may be a winner in the current situation because it has already adapted to tougher regulation and may take a market share from Binance after Binance increases internal controls or faces severe issues with the US regulators.

Coinbase may be a safe haven in a coming regulatory crackdown, and Coinbase-backed assets like USDC look much safer than peers. It might make sense to invest in Coinbase stock and use only USDC instead of other stablecoins.

Interestingly, a rally of the OKX’s exchange token suggests that OKX may be a winner too (although I caution that the token market pricing is not as transparent as in the case of stock exchanges).

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