Binance Monopoly: How CZ is trying to 'own' crypto

Muhammad Naeem

Blogger

A true centralized powerhouse, Binance is showing that centralization is the most threat to cryptocurrencies. Binance, the world's largest cryptocurrency exchange, is often thought of as a trailblazer in the crypto industry. But as the company and its charismatic CEO, Changpeng Zhao (CZ), continue to expand their reach and influence, some are beginning to question whether Binance is becoming too powerful and whether CZ is trying to "own" the crypto space.

Binance is moving toward creating a monopoly in the cryptocurrency sector. To win over traders, investors, stakers, non-fungible tokens (NFT) users of non-fungible tokens (NFT), and other counterparties, the organization run by Changpeng "CZ" Zhao has enhanced its product and subsidiary offerings.

Crypto Monopoly

Binance considers itself to be one of the select few winners from FTX's historic crash. The sudden resignation of one of the exchange's biggest rivals is expected to strengthen Binance's market domination, which already accounts for 55.1% of all spot trading of digital assets.

The brand has so far managed to escape from a dark period in the history of digital assets without drawing too much criticism, despite being one of its main offenders. This is reasonable from one angle; after all, FTX's books weren't manipulated by Binance.

But it was Binance's choice to publicly disclose the liquidation of all of its holdings in FTT, FTX's worthless token, that ensured the collapse of FTX would be as spectacular as possible, with no chance of any rescue or recovery. Regardless of how Binance intended to carry out the liquidation, the market as a whole followed its lead after its announcement, effectively sparking a run on FTX and bringing the problem of its insolvency to the forefront.

Whatever way you look at it, Binance has unquestionably benefited from FTX's losses—and as a result, from the losses of its consumers. What should be made of Binance's and its CEO Changpeng Zhao's involvement in the catastrophe that has destroyed thousands of investors, then?

Binance unquestionably benefits from FTX's loss

Putting aside Changpeng Zhao's involvement in the FTX run, Binance has benefited greatly from FTX's destruction.

For starters, it has made sure that FTX has been and will continue to be featured prominently on the main page of news regarding digital assets. Binance is ecstatic about this because it comes less than two months after the publication of a shocking Reuters investigation into the company, which revealed that under Changpeng Zhao's direction, the company was fabricated documents to avoid legal obligations, had fired its compliance team to speed up onboarding, and had helped Iran avoid U.S. sanctions.

More important, though, is the fact that the level of competition amongst digital asset exchanges shrunk significantly virtually overnight. With just a few keystrokes sent to Zhao's Twitter, the fourth-largest exchange and one of the few companies that competed with his own in terms of brand recognition were eliminated. Binance was already the largest exchange by volume.

With that outcome, it is reasonable to wonder why Binance announced it would be liquidating the FTT on its balance sheet.

After an FTX balance sheet was leaked to CoinDesk and revealed that the Sam Bankman-empire was essentially bankrupt, supported only by the holdings of its own worthless token FTT, Changpeng Zhao sold the liquidation to Twitter as risk management. According to Zhao, the prudent course of action was liquidating its entire FTT holdings.

In addition, he emphasized that the action was not intended as a criticism of FTX, even as he appeared to accuse Bankman-Fried of disparaging him and Binance in interactions with regulators.

However, the truth is that Binance had a variety of other options to unload its FTT bags if Zhao had been as concerned about the industry's health and confidence as he stated in internal staff emails. To prevent a panic, Binance could have gradually unwound its FTT holdings. If Zhao had honestly wished to play the role of savior to FTX the larger industry, he could have secretly started talks for a parachute plan rather than publicly stating that Binance would rescue FTX only to publicly revoke the arrangement hours later.

Instead, Zhao decided to start a domino chain that would ultimately eliminate his major opponent, Sam Bankman-Fried and the FTX empire, as well as many of the industry's biggest players.

Creating an illegal monopoly

It's not surprising that Bankman-Fried doesn't believe Zhao's story because once it became evident that Binance had no plans to finish its acquisition of FTX, he referred to Zhao as his "sparring partner" and tweeted, "you won."

Legislators also don't buy it. At a meeting, last week to discuss the FTX crash, the Treasury Committee of the UK Parliament requested input from companies that deal in digital assets. Binance informed the the committee that, rather than any actions it had taken, the CoinDesk disclosure was to blame for the demise of FTX. Harriett Baldwin, the chairwoman of the the committee appeared to see through it, saying, "It must have been obvious when that decision was reached that it was likely to trigger the collapse of FTX, one of your major competitors."

At the beginning of the crisis, U.S. Senator Cynthia Lummis stated she had "many questions surrounding Binance acquiring FTX, including potential market manipulation, lending activities, and whether customer funds and assets were appropriately safeguarded."

The legislator has probably been aware of Binance's expanding market share for some time. One estimate estimated Binance's predicted market share at over 80% when the FTX acquisition was first announced; even though the deal fell through, the outcome has been the same.

As Binance's market share increases and approaches 100%, it resembles a monopoly more and more. Simply cornering the market with a better product is completely okay; it is not criminal in and of itself for a corporation to possess an effective monopoly. But how that monopoly was established and the work put into maintaining it counts, which is why Binance's part in the FTX crash is so crucial.

The FTX downfall is in the Binance playbook

That Binance was ever in a position to overtake the fourth-largest exchange in the business is proof of the power such a strong position allows. Such market dominance is valuable well beyond the PNLs.

This is not by chance. Binance had concentrated on getting as much market share as possible even before the FTX incident. Zhao remarked to the crowd gathered at the Web Summit 2022 in Lisbon that bear markets present "a lot of chances" and enable businesses like Binance the option to "buy smaller competitors" because of falling values.

Binance acquired CoinMarketCap in 2020, one of the most popular information resources for digital assets at the time. Before being outbid in 2021, it was in the running to purchase Voyager Digital's remaining assets (coincidentally, FTX).

Binance's desire for market power even goes beyond pure hard power. After Forbes published a controversial article about Zhao's jurisdiction-hopping "tai chi" approach, the corporation briefly tried to sue the publication for libel. Binance eventually acquired a $200 million interest in Forbes in February. The lawsuit was never filed, most likely because the Forbes report proved to be accurate and Reuter's most recent exposé supported the same claims.

Binance contributed $400 million as one of the financial sponsors of Elon Musk's bid for Twitter.

Its choice to aid in the demise of FTX was only the most recent in a series of actions geared at concentrating control inside the sector, bringing Binance closer to monopoly status. Monopolies are bad for competition and, ultimately, for consumers. This is true even if the person who benefits from them had nothing to do with the development of the monopoly. Binance is the de facto gatekeeper for all digital assets in this situation because it owns 80% of the total volume of all digital assets. A coin loses access to the majority of its market if Binance decides to delist it. As a result, the executive team of Binance controls a large portion of the sector.

When Binance stated that it will no longer support the well-known stablecoins USCD, TUSD, and USDP, and would forcefully convert all client holdings in these assets to Binance's stablecoin, BUSD, in September, it made this point. There are now only two stablecoins available on Binance – BUSD and Tether – and those are used by almost the entire industry, including Binance.

Despite Binance's claims that the move was made to "improve liquidity and capital-efficiency for consumers," it is obvious that the move was an attempt to capture the enormously valuable stablecoin market. Stablecoins make up just 5%, approximately, of all digital assets, according to Gary Gensler, but more than 75% of all digital asset transactions in 2021 featured stablecoins. There is a very limited place for stablecoins to coexist because their principal use is their connection to real-world dollars. As a result, the competition between BUSD and other stablecoins is a zero-sum game.

The company in charge of USDC recently disclosed in its S-4 filing that the conversion was partially to blame for $3 billion of the $8.3 billion decline in USDC circulation between June and the end of September 2022. This statement serves as an example of the impact that Binance's move had on its rivals.

Conclusion

Binance and CZ have undoubtedly played a major role in the growth and development of the crypto industry. However, as the company's power and influence continue to expand, it's important to keep a watchful eye on the potential negative consequences of its centralization. The crypto industry should strive for a decentralized ecosystem where no single player has too much control and competition is healthy. As Binance continues to expand its reach, it should also make sure that it is staying true to the principles of decentralization and transparency that underpin the crypto space.