Binance Exec breaks down the single biggest crypto market risk in 2023

• Patrick Hillmann is head of strategy at Binance, the world’s largest crypto exchange by volume.
• The leader explained how poor regulation can lead to increased volatility in the crypto market.
• Binance has faced a number of US investigations into its operations by the DOJ and SEC.

Cryptocurrency markets have made significant strides to recover from crises in 2022, with bitcoin rising roughly 50% since the beginning of the year and the total crypto market capitalization returning to over $1 trillion.

But a top executive at crypto exchange Binance said more volatility could be in store in 2023. One of the biggest market risks, according to Chief Strategy Officer Patrick Hillmann, is an increasingly strict and poorly executed US regulatory crackdown.

“The United States has always been a place that has really fostered great innovation. [The country] has led from the front when it came to smart regulation [as well]”, Hillmann told Insider. “Unfortunately, I think [what] we now see is going to have a real price [to investors] overtime.”

Earlier this month, the New York Department of Financial Services demanded blockchain platform Paxos stop minting Binance-branded stablecoin BUSD. The regulator claimed that BUSD is an unregistered security and told the company to stop issuing tokens, according to the Wall Street Journal.

New York’s enforcement letter against Paxos comes as the US Securities and Exchange Commission cracks down on stablecoins.

For years, stablecoins were seen as a way for investors to safely park their assets in crypto because tokens are usually backed by real assets such as cash, bonds or exchange-traded commodities.

But the narrative changed after the collapse of algorithmic stablecoin TerraUSD last May, which wiped out billions worth of investor money and largely affected retail participants.

SEC Chairman Gary Gensler said in September that stablecoins “have characteristics similar to and potentially compete with money market funds, other securities and bank deposits, and raise important policy questions.”

But Hillmann warned that making stablecoins unavailable due to regulation removes “safeguards” for crypto investors.

“When you take that away from the users at a time like this, that safety net disappears,” he said. “At the same time, we are seeing a pressure campaign on American banks not to serve crypto either. Not only [investors] do not have the option of moving their money to a safe [place]nor are they able to withdraw it from the exchanges easily.”

Hillman said that enforcing poor regulation would lead to some “real market volatility” as a result.

In addition to stablecoins, US regulators could crack down on exchange tokens, such as FTX’s FTT, as well as bitcoin and ethereum. Hillmann warned that this could “choke out” the nascent space.

If enforced incorrectly, increased regulatory scrutiny could also lead to industry players taking their business elsewhere. This could cause the US to lag behind in innovation, he added.

“We really hope this is not going to be a continued escalation [by regulators]but all characters [say] that it is,” Hillmann said. “As a result, businesses that are legal and want to be regulated in the United States… have no option but to move offshore.”

Binance has reportedly faced a number of US regulatory and law enforcement scrutiny of its own, including investigations by the Department of Justice, the SEC and the Commodity Futures Trading Commission in recent years. Binance expects to pay monetary penalties to resolve US investigations, Hillmann has told the Wall Street Journal.

Meanwhile, Binance secretly accessed a bank account belonging to its allegedly independent US partner, Reuters reported earlier this month. The crypto giant reportedly transferred $400 million from the account of trading company Merit Peak, which was managed by Binance CEO Changpeng Zhao.

“Although there was a market-making firm named Merit Peak operating on the Binance.US platform, it stopped all activity on the platform in 2021,” Binance.US tweeted after the Reuters story was published.