Digital assets: Changpeng Ciao
The world’s largest exchange, Binance, and its Chief Executive Officer, Changpeng Zhao (CZ) have, admittedly, pleaded guilty to criminal charges in the United States. Regulatory headwinds arising from these events will likely increase, but overall, we do not believe that they will hinder the long-term developments of the asset class. There will likely be further strain on crypto-wide liquidity as the arising distrust towards unregulated, centralised custody solutions will drive users towards other regulated or self-custody solutions. Overall, for digital assets, we believe that headwinds from monetary tightening should start fading, as we do not expect further interest increases from the US Federal Reserve.
The world’s largest exchange, Binance, and its Chief Executive Officer, Changpeng Zhao have, admittedly, pleaded guilty to criminal charges in the United States. These charges are sanctions violations and, more importantly, anti-money laundering probes. The company will have to pay around USD4.3bn in charges. The deal included the Treasury Department, the Department of Justice, and the Commodity Futures Trading Commission, amongst a handful of other organisations. It is important to mention that the sanctions violations encompass the repeated failures to prevent suspicious transactions that were potentially linked to terrorist organisations. Binance will have to pay one of the largest corporate penalties in the history of the United States. At the same time, one of the key points the US Government made during the case is that Zhao knew that almost 25% of Binance’s clients were US clients, which would represent a major violation to policy.
Binance’s token, BNB, has had its price slip since the news came across. Other digital assets have slipped as well, but the declines have been marginal. The major effect of the news has been that almost USD1bn of customer assets have exited the exchange. To put things into perspective, it is important to understand that Binance accounts for almost 40% of crypto’s spot volumes, and even if the effects on prices are still marginal, the demise of Binance in the United States and the increasing regulatory constraints will heighten pressure on crypto markets. The exchange provides not only access to spot and derivatives trading, but is also one of the largest holders of Bitcoin. Regulation on the asset class will certainly increase.
Looking forward, the newly designated CEO, Richard Teng, will have plenty of work to do to prevent further outflows. It turns out that the series of recent exits from Binance’s senior managers were, in fact, accounted for. Beyond its dominance in spot crypto trading, Binance also accounts for around a third of the open interest on Ethereum and Bitcoin futures. At the same time, it would not be too far-fetched too believe that the market depth for crypto will further decrease and that liquidity constraints will be widespread; this is likely to be firstly evidenced in the order books, were bid-ask spreads will broaden and slippage will increase.
The effects can potentially spill over to the favoured stablecoin in Binance, TUSD, where violently moving markets could put pressure on the peg. Overall, for digital assets, we believe that headwinds from monetary tightening should start fading, as we do not expect further interest increases from the Fed. Regulatory headwinds arising from this series of events will likely increase, but overall, we do believe unlikely that the events will hinder the long-term developments of the asset class.
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