What the Binance-FTX fallout tells us about the future of crypto
In a year that has seen one high-profile crypto crash after another – including TerraUSD, Three Arrows and Celsius – FTX is the sector’s most visible meltdown of all.
At its peak, FTX was valued at $32 billion, but $6 billion in withdrawals in three days was enough to spook the markets. After bitter dispute over reports questioning FTX’s liquidity, Binance, the world’s largest cryptocurrency exchange, announced discussions to acquire its rival.
Binance subsequently walked away from a deal to bail out FTX, citing “misappropriated customer funds and alleged US agency investigations.” But FTX’s demise leaves a significant pool of investors that could be picked up by other exchanges. There is an opportunity for the remaining players, including Binance, to grow.
Concentration looks more likely
Even without a Binance-FTX tie-up, the sector has for some time seemed likely to concentrate. Already in March of this year, CryptoCompare predicted the emergence of “an oligopoly of exchanges dominating trading volumes as their traction accelerates and smaller players are left behind”.
Downtimes – or “winters” – have a habit of shaking out weaker players. And the current crypto winter has been going on for a while.
The experience of traditional financial exchanges also shows that investors tend to crowd into arenas that offer the greatest liquidity, where traders have the greatest chance to buy and sell at an acceptable price.
Investor nervousness can provoke a “flight to safety”, with investors looking to trade in the biggest and seemingly most stable arenas.
Market data tends to confirm a move towards concentration. In August of this year, Binance accounted for more than 50% of spot transactions on CEXs – up from 30% just five months earlier.
Where does antitrust come in?
Antitrust agencies are responsible for reviewing M&A activity, with powers to block, terminate or impose remedies on deals that harm competition. A concentrating sector, characterized by increasingly large players, is the type of space that attracts attention.
Several deals involving traditional trading venues have been blocked or subject to invasive legal remedies in the past decade: Deutsche Börse/NYSE Euronext, Deutsche Börse/LSE and LSE/Refinitiv to name a few. Will crypto be different?
Crypto exchanges are already comparable in size to traditional exchanges – in 2021, the revenue and EBITDA of Binance and Coinbase exceeded the corresponding figures achieved by NASDAQ, Euronext and others. Like traditional exchanges, crypto exchanges seem to be characterized by competition for liquidity and network effects.
That doesn’t mean crypto deals will necessarily be blocked – agencies may be convinced targets will go out of business unless they’re procured, or don’t pose a constraint on larger players. And they may see disruptive threats to centralized exchanges from rapidly growing decentralized alternatives. But they have to be convinced.
Courts and bodies will also be asked to consider complaints about the stock exchange’s conduct. Earlier this year, an application was made to the UK Competition Appeal Tribunal to bring a class action against Binance, Bittylicious, Kraken and Shapeshift regarding the removal of BSV coins.
Get ahead of the storm
At its best, antitrust policy can support innovative and fast-moving industries like crypto. It can serve as a “critical friend” of free market capitalism, rather than trying to regulate every aspect of market behavior.
To lay the foundations for the best possible antitrust environment, exchanges should not wait for cases against them to land on the desks of enforcers. Instead, they should proactively approach enforcers, provide technical explanations of how the sector works, and participate in more formal reviews of the sector that agencies may choose to run. Doing so will contribute to well-informed assessments of mergers and behavior when they occur.
For their part, agencies should be encouraged to explore the workings of the sector and make full use of their ‘competition champion’ role, to ensure that new legislation, regulation or rules do not undermine competition or consumer choice. Rulemaking should not be reserved for financial regulators alone.
If they take this path, crypto exchanges have a chance to secure an antitrust policy that promotes the sector’s development. Doing nothing will leave a void that crypto’s critics will be only too happy to fill.
