Binance in cross hairs.

8 min readOct 21, 2023

Is Binance heading towards a name driven liquidity crisis?

Porportion of investors holding a stable coin for over a year.

There are two camps when it comes to answering this question. The chart above is used as evidence by both.

The first camp, in favor of Binance, speaks of Binance’s resilience to withstand recent regulatory and legal stress events, ability to engage high powered securities lawyers for representation with US regulators, capacity to survive post FTX liquidity crunch, multiple SEC missteps including recent disengagement with XRP and general perception that Binance is better run than FTX, 3 Arrows Capital, Terraform (TerraUSD, Luna), Genesis and other predecessors that failed last year.

For the Binance pro camp, the increase in proportion of BUSD holders (Hodlers) who have held on to their coin for over a year is proof that Binance believers are rising. The force is strong in this one.

The alternate school emphasizes a different take.

US currency, AML, KYC and counter terrorism finance regulators cast deeper and wider nets. Unlike the SEC’s recent attempt, which misfired, currency regulators don’t miss their mark. When the world’s largest banks including HSBC, SCB, Barclays, BNP Paribas, Credit Agricole and JP Morgan couldn’t escape OFAC penalties and had to pay up, what chance would someone like CZ have when they come for him?

CZ’s case is even more convoluted when viewed from a US specific lens. Murky crypto world, viewed as a proxy for Chinese and other allied non-US interests, multiple violations of custodial rules, misrepresentation, and declared public enemy number one by the Chair of the US securities regulator.

In simpler terms, borrowing from that scene from Oppenheimer:

a) There is a non zero probability of significant negative outcomes if Binance is sanctioned on account of AML / KYC / CFTC violations.

b) And there is a non-zero probability of a significant regulatory action.

Where is liquidity from BNB going? Post SEC actions there is now a clear divergence in price and capitalization trends for the two coins.

Beyond immediate US regulatory action risk, negative outlook for Binance also stems from multiple other financial counterparty risk assessment red flags:

1. Primary market decline.

Consecutive monthly declines in spot market trading volume share for Binance in general. While Binance leads market share across crypto exchanges and it will take a significant shift before it drops from the number one spot. Two pairs associated with Binance, BUSD and BNB, have taken big hits in market share, capitalization and value.

The BUSD reduction is linked to the end of Paxos-Binance relationship and SEC restrictions on BUSD as an unregistered security. Followed by the subsequent Binance decision to stop supporting the coin. As more holders redeem or convert their coin to other pairs, market share and capitalization will continue to reduce and the concentration in holding will continue to rise.

2. Senior exits.

Layoffs of a third of Binance US staff and the exit of its CEO in September 2023. Followed by resignations by senior executives from Binance entities in other markets. Multi regional senior talent departure often represents a marker for trouble in the waters. It also precedes regulatory action.

3. Nature of charges.

If found guilty of charges levied by SEC or by other US regulators , Binance, the exchange and CZ would face significant reputational risk from charges which may also drain liquidity. Then there is larger fines or penalties for market manipulation, misuse of customer funds and compliance violations. Market manipulation that results in direct losses for US consumers by external non US actors is a red line that US regulators don’t like being crossed. They may make exceptions for US actors but they draw a hard line on non-US players. CZ and Binance are as non-US an actor as you can be.

4. Bad news comes in threes.

Regulatory challenges in other parts of the world, e.g., in UK where it has discontinued its services for new UK customers, in France where it has been accused of committing acts of money laundering, in Brazil where CZ faces an upcoming indictment. A probable result of these challenges is the termination of its Visa cryptocurrency debit card and an end to its relationship with Mastercard in Latin America.

While UAE and Dubai appear to be a safe heaven for Binance, current challenges with the FATF grey list as a country create uncertainty on their own regulatory outlook. Could FATF compliance force and push them for greater disclosure of regulated entities and deal flow as it has in other markets?

5. Fall out.

While these markets may not represent significant share of Binance revenues or profits, each regulatory action increases the counterparty risk profile of Binance as a financial intermediary and isolates it. If this wave of exits and withdrawals continues, its ability to connect and function as a part of the global financial system may be restricted or threatened. Financial intermediaries and regulatory licensing applications use internal risk assessment frameworks. Binance is slipping on those score sheets.

We use financial partners for for settlement, clearing and market access. Access to USD and Euro clearing and settlement is a key requirement for most international investors. If this is impeded, restricted or even indirectly threatened in any fashion, there will be a rush for the exits.

6. Counterparty risk assessment.

Absence of transparent, audited financial statements that may be used to evaluate capital base, reserve strength, exposure to volatile coins and sanctionable counterparties. While taken as a given in the financial services world, a different set of rules have allowed Binance to operate without sharing key financial strength data with its customers, counterparties and regulators. In smaller markets that are illiquid and open to manipulation this may have been a wise and sane choice. Since large positions in small markets are open to coercion and manipulation. However in order to address the storm of uncertainty and allegations against Binance, it will have to share a sanitized version of its financial profile, exposure and relationships.

It’s just a question of when and how. And if it would be on Binance’s terms or the terms of an external party.

Irrespective of what the balance sheet says and when it is released, the initial reaction to it is likely to be negative.

7. Timing.

The timing of that release is key. If it happens much ahead of a negative event, it will calm fear, uncertainty and doubts around the Binance brand. If it happens lockstep with a regulatory action or is leaked or released as part of an action, it will lead to the end of the Binance brand. Financial entities don’t survive a named liquidity crisis without regulatory support. While Binance presents itself as a reformed exchange with no exposure (declared) to staking, lending and borrowing coins, absence of published audited financials leave an element of mistrust. If and when a crisis occurs, there is no lender of last resort in or outside the crypto world that Binance can turn to for support.

Binance can ride out some of these risks. But it can’t tackle or take on all of them at the same time.

So then, what is the case for Binance.

The case for Binance.

The positive view stems from Binance’s 150 million strong world-wide registered customer base. A community allegedly insensitive to regulatory disruptions and inelastic in switching to other platforms. This is also evident from BUSD’s hodler proportion which has increased over recent months to levels seen by stable coins Tether (USDT) and USDC.

Binance has also been cleaning up shop, locking down hatches and is getting ready to face the storm. Unlike some of its predecessors, it is not in denial. There is clearly a sense of urgency and proactive engagement before the proverbial storm makes landfall. There is a feeling in the market that Binance is addressing issues that have restricted it earlier from release financial information. Once that process is complete we may actually see data and financials.

CZ and his inner circle believe the negative outlook is all FUD (Fear, Uncertainty, and Doubt). Their take is that the current turbulence will help weed out weak players, strengthen cryptocurrency markets, and help nascent regulations mature and evolve and enable rather than impede crypto market development. If Binance is the only exchange left standing once the clouds clear, so be it.

To be fair, the exchange makes money. BNB is backed by exchange revenues and their buy back and burn program is robust and successful.

Binance has continued to support new DeFi projects on its platform and recently listed new cryptocurrency spot trading pairs on its exchange to replace the BUSD pairs being phased out. CoinMarketCap.com, which ranks and scores exchanges based on traffic, liquidity, trading volumes, and confidence in the legitimacy of trading volumes reported, still lists Binance as the number one exchange for Spot and Derivatives markets. Other aggregators too, continue to list it as the number one exchange.

What’s the verdict?

Irrespective of how we spin it, market capitalization plot for BNB and BUSD shows a negative trend. BUSD is dead in the water. BNB is probably on its way to the same destination. SEC compliance driven lawsuits have got to hurt. And this is before penalties and sanctions.

In limited ways BNB and BUSD were sources of non-exchange related profitability and revenues. BNB is Binance’s network token and is likely that Binance and CZ are the two largest owners of the coin. While Binance says BNB is not used as a collateral, some part of both Binance and CZ’s wealth, capital and liquidity is tied to BNB. By concentrating liquidity and restricting ownership, there is additional risk associated with this token. If you have significant exposure or large positions, most risk teams will advise you to liquidate or reduce exposure to both coins.

From a balance sheet perspective, similar to the links between FTX, SBF and Alameda, there is a link between CZ’s wealth, persona, liquidity and how Binance is perceived as a financial entity. The core questions now are:

a) What part of CZ’s wealth is tied to the BNB token?

b) What part of Binance’s profitability was tied to BUSD and BNB transactions?

c) Given current operating restrictions in multiple markets what is CZ’s plan to integrate Binance within the financial services world?

d) Given the volatility BNB has already experienced and (a) above, if any anticipated shocks identified above are realized, will CZ or Binance remain upright and viable. Is there sufficient capital available to ride that storm? What part of that capital is tied to BNB?

CZ’s inner circle already has the answers. We don’t.

Given the uncertainty and risk associated with the name, we end up with the age old risk trade. Is the upside big enough to take the bet?

This is the question risk teams across the world will ask themselves as they evaluate working with Binance as a crypto counterparty or with BNB as a coin. While the impact of this assessment or these questions may not be immediate it is going to continue dragging down Binance’s profitability and stature.

With USD treasuries earning 21 basis points per annum and markets awash with free liquidity, risk capital and risk appetite were open ended. That world is no longer around us.

USD 10 year Treasury paper is inching towards 5% and BTC-USD is flirting with $30,000 every day. The incentive to hold BNB erodes as BTC continues its rise. The upside is shrinking. And we have already seen the pitch book on risk.