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Binance’s Decline is Fueling Smaller Exchanges: Good for Crypto?

Published August 16, 2023 3:00 PM
Omar Elorfaly
Published August 16, 2023 3:00 PM

Key Takeaways

  • Top-tier exchanges such as Binance have lost considerable ground in the market
  • Smaller exchanges capitalized on key exchange losses
  • Customers don’t care about crypto exchange ratings

Binance, the world’s biggest crypto exchange by trading volume, has been experiencing several critical struggles in 2023. The exchange was hit with two lawsuits from two separate regulating bodies in the US, severely impacting its operations and credibility. On top of that, Binance has been struggling to keep its business afloat in Europe.

CCData  classifieds Binance as a “top-tier” exchange, while exchanges such as Huobi Global and KuCoin fail to receive the same rating.

However, reports  show that smaller exchanges managed to capitalize on Binance’s decline.

Binance’s Decline

Binance, created in 2017, has been enjoying immense growth since its founding despite the crypto ban in its country of origin, China, in 2021. Binance even has its own post  where it explains how it managed to succeed in becoming the world’s biggest crypto exchange.

While it still holds its position as the world’s leading crypto exchange, Binance has been on a downward trend throughout 2023.

Troubles started when Binance was sued by the US Securities and Exchange Commission (SEC) for allegedly committing thirteen different crimes, including wash trading and commingling customer funds.

The exchange’s situation worsened after it became a defendant in another lawsuit filed by a US regulating body, the Commodity Futures Trading Commission (CFTC). The governmental entity claims that Binance acquired US clientele through illegal ways.

The lawsuits put the company in a situation where it had to limit the services it provides to customers. Moreover, the exchange lost considerable ground regarding its reputation as a result. 

Later on, Binance started facing trouble in Europe as local regulators investigated the exchange on the grounds of anti-money laundering regulations leading its license to be revoked/canceled in key countries, such as Germany, the UK, and the Netherlands. 

‘Smaller’ Exchanges Surge In Popularity

CCData  shows that “top tier” exchanges such as Binance have gone from owning about 80% of global crypto trading volume to 68%. 

Exchanges such as Binance and Coinbase achieve their “top tier” status by implementing high-level techniques to manage customer funds, security, and anti-money laundering standards, something smaller exchanges have yet to achieve.

However, according to data, Huobi, a “smaller” exchange, increased its market share by over 6% in 2023. Simultaneously, DigiFinex and KuCoin increased their share of the pie by 3.5% and 1.3% respectively, throughout the year.

Tom Robinson, chief scientist and co-founder of blockchain tracing firm Elliptic, reports , “For a large portion of crypto traders, anonymity and the ability to exchange funds that may have come from a high-risk source is more important than trading on an exchange with a reputation for compliance.”

Robinson points out that clients just want to be able to trade their digital assets in a simple manner, regardless of the exchange’s reputation. On top of that, Binance’s reputation is currently in jeopardy, considering the aforementioned legal issues.

CK Zheng, co-founder, and chief investment officer at crypto hedge fund ZX Squared Capital, also says  that “It may be an opportunity for smaller exchanges because they’re still operating under the radar, and they haven’t been sued by regulators,” which is a point to be considered.

Binance had to halt many of its services, such as USD transactions, and OTC trades due to litigation. In the meantime, smaller exchanges get by scot-free simply because their scale is not big enough to attract the attention of regulators.

Huobi and KuCoin did not immediately respond to a request for comment.

Competition Drives Innovation

Seeing the growth of exchanges such as Huobi and KuCoin, major exchanges such as Binance and Coinbase are forced to improve their services to maintain their clientele.

Both “top-tier” exchanges announced the integration of the Bitcoin Lightning Network, a technology that promises faster transactions and lower transaction costs.

So, perhaps the more exchanges operating in the market, the better the outcome would be for the market in its entirety. Different exchanges can innovate and learn from each other, and the result would almost certainly be in the favor of customers.

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