Will Binance Collapse?
In the wake of the sudden crash experienced by FTX, several questions have been asked about how secure crypto exchanges are, and many have also worried about the fate of the largest 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 the future. Will Binance Collapse?
3 issues that could cause Binance to collapse
Here are three possible issues that could 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 closely monitoring crypto exchanges, including Binance. Singapore, for example, has launched a fraud investigation into Binance for allegedly violating 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) anti-money laundering requirements. If these bans and strict regulations continue, they could hamper Binance’s operations and cause a large reduction in the exchange’s trading volume and liquidity.
2. Cyber security threats
Exchanges face many cyber security 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. Prior to the eventual collapse of FTX in November 2022, the platform was reportedly hacked, ultimately leading to a loss of $477 million.
In late 2022, Binance’s CEO admitted that the exchange was hacked, and $570 million was stolen. If this persists and becomes severe, users of Binance will start to lose confidence in its security and eventually start searching for a crypto exchange with better security.
3. Misuse of funds
Misuse of funds was one of the biggest 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 claim has also raised alarm among many investors. However, the exchange has managed to calm down the claim.
Continuous allegations of misappropriation of funds can easily damage the reputation of Binance and leave users unconvinced of their financial policies. This can also lead to massive withdrawals and a possible crash.
Will Binance Crash?
Based on the above scenarios and the circumstances surrounding the crash of exchanges, we cannot categorically say that Binance is bound to crash. Also, Binance is taking steps to avoid a similar fate to FTX.
Binance’s CEO has stated that the platform takes some measures, summarized in six principles, to maintain user trust. These principles are: be risk-averse, do not use the original token as collateral, share proof of assets, maintain strong reserves, avoid excessive leverage, and make the security protocol stronger.
The best we can tell is that Binance seems to be taking measures to avoid a crash. However, we cannot say for sure whether they are enough to prevent it from going bankrupt or how faithful the company is to complying with its security measures.
What will happen to crypto assets if Binance collapses?
Binance’s sudden collapse, depending on the factors leading to it, may cause users to find it difficult to access their funds. A collapse triggered by misuse of funds or security threats leading to a loss of user confidence or the inability of the exchange to continue its activities may have more serious effects on users’ funds than a collapse triggered by regulatory issues.
If an announcement of a possible fold-up is released, it could be facilitated 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 the event of .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, eventually causing them to go 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 the effect on your funds should this happen. 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.
