November 29, 2023

Binance is currently riding a wave of FUD (fear, uncertainty, doubt) as the exchange faces multiple controversies, including a potential investigation for money laundering and a steep rise in customer withdrawals since the weekend. With rumors swirling of bad finances, the world’s biggest crypto exchange has begun to worry the industry.

The personal behavior of CZ is also causing some concern. In a tweet on December 7, CZ referred to their recent proof-of-reserves report as “Audited proof-of-reserves.” He also implied this amounted to “transparency” despite the report being neither transparent nor an actual audit. Reports of increased user withdrawals and a potential investigation for money laundering have only compounded concerns.

It is not just traders and Binance users worried about the exchange’s collapse. The company is easily the largest exchange in the industry, with an exchange volume of $7.7 trillion in 2021 and $15 billion in trade volume in the past 24 hours. While there are no imminent signs of the company’s demise, talk is turning to what would happen if it did. And it doesn’t look good.

Is Binance ‘Too Big To Fail’?

In 2008, the world watched as the global banking system almost collapsed due to the failure of some of the world’s largest financial institutions. Governments had to step in to bail them out to stop a domino effect that threatened to engulf the entire economy. This perceived necessity led to the term “too big to fail.” 

If a company is “too big to fail,” it is so large that its failure would devastate the economy. This is because the government, or the surrounding industry, believes that any effort to save the company would be less destructive than the damage done by allowing the company to go under. In other words, if a company goes bankrupt and its assets are liquidated, the amount that would be left over would not be enough to cover its debts. 

If this company was an investment bank, for example, then its clients would almost certainly be unable to get their money back from it. If this happened, it could lead to a contagion effect that could put other banks out of business and cause a major economic crisis.

In the case of Binance, any collapse would not just threaten user deposits. But because of its size and central position, any implosion would threaten confidence in the industry as a whole. Many retail investors would likely be scared off of crypto altogether, and institutional investors would move their cash into older and safer industries.

Binance Is Not A Bank, Although It’s Acting Like One

First of all, it’s important to point out that centralized exchanges like Binance are not banks. Unlike traditional financial institutions, crypto exchanges are not as woven into the wider economy. This presents a less systemic risk to the financial system as a whole. 

However, as they hold billions in user funds, their collapse will have a knock-on effect on the rest of the industry. CZ appears to appreciate this, having briefly considered bailing out the flailing FTX last month.

Shortly after, Binance proposed an “industry recovery fund.” The Industry Recovery Initiative (IRI), as it is officially known, is open for applications to firms facing difficulty through no fault of their own. Worryingly, this positions Binance as a sort-of central bank or lender of last resort. A charitable interpretation would be that an industry with financial fail-safes is beneficial for everyone. Binance is simply trying to stabilize an industry it plays a significant role in. Good for them, right?

Of course, a less favorable view is that this positioning makes Binance itself look more stable. After all, why would a company with poor financials make such a bold gambit? Either way, this makes any Binance collapse significantly worse. In the event of a collapse, who would bail out Binance? 

Judging by the lack of exposure to the wider economy – and politicians’ decidedly mixed opinion on crypto – it probably won’t be a government.

“BNB Isn’t FTT” Say Binance Defenders

In the ensuing Binance FUD, many observers have made uncomplimentary comparisons between Binance’s native token, Binance Coin (BNB), and the FTX token (FTT). Since November 27, the price of BNB compared to USD has dropped approximately 13% to around $273.

FTT was a token issued by recently arrested Sam Bankman-Fried’s disgraced exchange, FTX. The company promised a suite of benefits, and for a time, the token was a massive source of revenue for the exchange. But unbeknownst to the outside world, FTX was artificially inflating the cost of that token and then using it as collateral for loans. Essentially, using fake money to gain access to real money. A situation that could hold only as long as investors held confidence in FTT. 

Following reports from CoinDesk’s Ian Allison in November, Binance’s CZ announced it was liquidating all FTT on its books. This almost single-handedly sparked a mass sell-off of FTT and $6 billion of withdrawals from FTX in 72 hours. 

However, unlike FTT, BNB is not just an exchange token but a gas token for the Binance Smart Chain (BSC). Not only does it provide the typical exchange-token utilities such as lowered trading fees, but it is also the core token for the world’s third most popular layer 1. They are not equivalents. Unlike FTT, BNB is not being borrowed against – that we know of. Following the FTX collapse, CZ himself said: “Never use a token you created as collateral.”


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