As more liquidity accumulates on centralised crypto exchanges, the risk for larger wipeouts during times of volatility is steadily increasing, according to a new report.
Research firm Kaiko said on Tuesday that there is a “clear risk of concentration” in crypto markets, with liquidity collecting on a small number of platforms.
The report highlighted that over-reliance on Binance — the largest crypto exchange by trading volume — was especially risky for the industry.
“Despite its central role in the ecosystem, it’s important to remember that Binance is not officially regulated, has been convicted in the United States for failing to fight money laundering, and does not hold a MiCA license in Europe,” the report said.
“This presents significant structural, operational, and legal risks for the crypto sector,” it added.
$4.3 billion in penalties
Following a crypto price crash in October that wiped out a record $19 billion in open interest, crypto exchange centralisation is back in the spotlight.
During the crash, tokens on Binance experienced price dislocations and some traders were unable to access their accounts. The exchange has since said it would give traders hundreds of millions of dollars in compensation.
The failure of centralised exchanges has caused severe volatility in an already volatile market in the past.
After crypto exchange FTX went bankrupt in November 2022, the price of Bitcoin and several significant digital assets crashed, dragging several crypto firms with it.
Now, spot trading volume on Binance currently stands at over $15.3 billion, CoinGecko data shows. In the derivatives market, Binance also dominates, with over $27 billion in open interest, making it the second-largest platform.
Kaiko researchers said that any “operational, legal, or technical shock at Binance could trigger significant market wide price disruptions.”
Binance has already weathered significant legal turmoil.
In 2023, founder Changpeng Zhao pleaded guilty to violating the Bank Secrecy Act. Specifically, he admitted Binance had failed to prevent criminals, sanctioned entities, and other bad actors from laundering billions of dollars in dirty money under his leadership.
Binance pleaded guilty to similar charges and agreed to pay $4.3 billion in penalties.
But the exchange has also made an effort to show it is willing to comply with global regulations.
Binance has nearly two dozen licenses from jurisdictions worldwide. Most recently, it secured a license from Abu Dhabi Global Market.
‘Pioneers find their way’
Despite concerns around centralisation, some suggest the exchange has handled crypto’s irregularities well.
“When nothing exists, there’s nothing to regulate — and pioneers must find their own way,” CEO and founder of CryptoQuant, Ki Young Ju, told DL News. “Binance launched in 2017 when no rules existed, spending eight years essentially writing its own playbook.”
He added that “Binance survived and maintained credibility” when other exchanges failed.
