Binance Faces Mounting Challenges Amid Regulatory Scrutiny and Risky Business Model

Binance, one of the world’s largest cryptocurrency exchanges, is facing multiple challenges as regulatory scrutiny continues to mount, and questions arise about its risky business model.

BTC/USD Spikes to Nine-Month Highs but Traders Remain Cautious

Despite the bullish sentiment in the cryptocurrency market, Bitcoin (BTC) traders remain cautious. BTC/USD spiked to $29,170 on Bitstamp, setting a new nine-month high. However, this move faced rejection, causing market participants to call it a “fakeout.” Traders like Credible Crypto and Crypto Chase have referred to the move as a “deviation,” with the latter calling for $29,000 to hold before considering long positions. Crypto Tony is slightly more optimistic, hoping that the short-term range high could still be flipped to new support. The volume and trading activity of BTC is at its lowest for 2023, with potential warning signs of the last time this was observed being in June 2022. Derivatives exchanges note that shorts currently have the upper hand, with short perps being paid by longs to keep their positions open.

Former Binance.US CEO Catherine Coley Hires a Former Federal Prosecutor to Represent her in US Investigations into Binance.

Catherine Coley, the former CEO of Binance.US, has hired former federal prosecutor James McDonald to represent her in US government investigations into Binance. McDonald is a partner at New York law firm Sullivan & Cromwell and appeared as Coley’s attorney of record in separate civil litigation against Binance.US in January 2022. The CFTC recently charged Binance and its CEO Changpeng Zhao with willful evasion of US laws for operating an “illegal” exchange and a “sham” compliance program. The Justice Department is also investigating Binance over money laundering and sanctions violations. The Justice Department and Securities and Exchange Commission have sought records and communications involving Coley from Binance and Binance.US. McDonald’s representation of Coley comes as pressure mounts on Binance due to the ongoing investigations.

Binance’s Business Model and Regulatory Issues Put It at Risk

Binance has built an empire on low fees and a laissez-faire culture, handling over 90% of spot Bitcoin transactions. However, its business model includes two shaky pillars: paid influencers and its reliance on its native token, the Binance Coin or BNB. Experts believe that BNB holdings account for most of its net worth and could put the company at risk if its price were to collapse. The U.S Commodity Futures Trading Commission (CFTC) issued a 74-page civil complaint against Binance, its companies, and CEO CZ for violating rules and knowingly allowing Americans to trade on its global exchange.

The ongoing regulatory actions against the company in the US or foreign jurisdictions could affect its revenue streams. Mike Alfred, a hedge fund head, believes that Binance is a riskier enterprise than its customers believe, and an unsustainable model may eventually bring it down.

Binance’s Affiliate Program and Reliance on the BNB Coin Could Pose Risks

Binance’s Affiliate Program enlists social media influencers, financial leaders, analysts, and crypto funds to recruit new customers. Hosts can earn up to 50% kickbacks on recruits’ spot trades forever and can split their BNB commission discounts with new customers. The top earner in Binance’s Affiliate Program made $10.5 million in two years.

The program is legal but could carry liability risks if hosts falsify qualifications or trading records.

Binance’s reliance on the BNB coin, which is primarily used for securing discounts and staking, could pose a risk to profits. Binance pledged to gradually purchase and burn half of the originally minted 200 million BNB tokens to boost rarity and price. The strategy appears to have substantially helped boost the price of BNB, currently the world’s fourth-most valuable crypto coin with a market cap of $53 billion.

CZ’s Contradicting Statements Raise Concerns

Binance was founded by CZ, who sold his apartment to buy Bitcoin and launched the platform in Hong Kong in 2017. The company has since moved its home base to Dubai and is in discussions with other jurisdictions about setting up regional hubs/HQs.

CZ makes somewhat contradictory statements about Binance’s inner workings, stating that the investing world shouldn’t be concerned that Binance does not disclose an official headquarters and answers to no central regulator. CZ acknowledges that exchanges must provide a fuller picture of their standing to restore trust.

Binance’s trading activity in 2020 was reported at $1.4 trillion worth of trades, which increased to $34 trillion in 2021. In 2022, it handled around $23 trillion for trades, which was a substantial drop from 2021 but a smaller decline than its biggest competitors.

CZ has stated that Binance derives roughly 90% of its top line from trading, while the rest comes from sources including deposit, withdrawal, and margin lending revenues, and “staking” fees on its native blockchain. Binance charges a standard commission of 0.1% or ten basis points on spot trades, and futures commissions range from one bp to five bps.

Conclusion

In conclusion, regulatory challenges continue to mount for Binance as investigations into compliance issues and questionable business practices put the company’s revenue streams at risk. Its reliance on paid influencers and the volatile nature of its native token also raise concerns about the long-term sustainability of its business model. As pressure mounts on the company and its top executives, it remains to be seen how it will respond to these challenges and whether it will be able to weather the storm.

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