In the wake of the sudden crash FTX experienced, several questions have been asked about how safe crypto exchanges are, and many have also worried about the fate of the biggest cryptocurrency exchange—Binance—if it will crash and what will happen if it does.
The exchange, which was founded in 2017, has been under a lot of scrutiny and questions have also been asked about its future. Is Binance going to collapse?
3 Issues That Can Lead to Binance’s Collapse
Here are three possible issues that may lead to the collapse of Binance.
1. Strict Regulations
Cryptocurrency regulations are unclear in many areas of the world. Some countries have banned cryptocurrencies, and regulators are keeping a close eye on crypto exchanges, including Binance. Singapore, for example, has launched a fraud investigation into Binance for allegedly breaking local payment service regulations.
In 2021, the United Kingdom banned Binance from operating within its territory due to the exchange’s refusal to meet the Financial Conduct Authority’s (FCA’s) anti-money laundering requirements. If these bans and strict regulations continue, they can hinder Binance’s operation and cause a major reduction in the exchange’s trading volume and liquidity.
2. Cybersecurity Threats
Exchanges face a lot of cybersecurity threats, and a number of them crash due to security breaches and hacks. Mt. Gox, a leading crypto exchange between 2010 and 2014, eventually crashed in 2014 after being hacked. Before the eventual collapse of FTX in November 2022, the platform was reportedly hacked, which eventually led to a loss of $477 million.
In late 2022, Binance’s CEO admitted that the exchange got hacked, and $570 million was stolen. If this persists and gets severe, users of Binance will start losing trust in its security and ultimately start searching for a crypto exchange with better security.
3. Misappropriation of Funds
Fund misappropriation was one of the major pitfalls of FTX, leading to its crash. With that in mind, on February 27, 2023, Forbes accused Binance of embezzling $1.8 billion worth of B-peg USDC, which the Binance CEO vehemently denied. This allegation has also raised alarm among many investors. However, the exchange has been able to calm down the allegation.
Continuous allegations about fund misappropriation can easily damage the reputation of Binance and make users unconvinced about their financial policies. This can also lead to massive withdrawals and an eventual crash.
Is Binance Going to Crash?
Based on the above scenarios and the conditions surrounding the crash of exchanges, we cannot categorically say that Binance is bound to crash. Besides, Binance is carrying out measures to avoid a similar fate as that of FTX.
Binance’s CEO has stated the platform carries out some measures, summarized in six principles, to maintain users’ trust. These principles are: being risk-averse, not using the native token as collateral, sharing proof of assets, maintaining strong reserves, avoiding excessive leverage, and making security protocol stronger.
The best we can say is that Binance seems to be taking measures to avoid a crash. However, we cannot say for sure if they are enough to keep it from going bankrupt or how faithful the company is to keep to its safety measures.
What Will Happen to Crypto Assets if Binance Collapses?
Binance’s sudden collapse, depending on the factors leading to it, may result in users finding it difficult to access their funds. A collapse that is triggered by misappropriation of funds or security threats leading to loss of users’ trust or the inability of the exchange to continue its activities may have more severe effects on users’ funds than a collapse triggered by regulatory issues.
If an announcement about a possible fold-up is released, arrangements could be made for users to withdraw their funds, as Binance claims to have a Secure Asset Fund (SAFU), which ensures that users’ funds are safe and secure in case of any sudden crash.
In addition, a Binance collapse could set back the growth of the crypto industry by many years. We also believe that the shockwave of such a collapse will affect the growth of many cryptocurrencies and exchanges, ultimately leading to them going bankrupt.
Take Safety Measures
No one can say for sure that Binance will collapse. However, it is advisable to put some measures in place to reduce its effect on your funds if it happens. One of the best measures is to minimize the amount you store in hot wallets and centralized exchanges and keep your funds in hardware crypto wallets.