As the cryptocurrency market continues to concentrate liquidity on a small number of centralized exchanges, serious risks are once again coming to the forefront across the sector.
A new report released by crypto data and research firm Kaiko says that over-reliance on Binance in particular poses “significant structural, operational and legal risks” to the market.
Kaitaka pointed out that the crypto market poses a “clear concentration risk”, noting that if most of the liquidity is accumulated in a few centralized exchanges, larger on-chain losses can occur during periods of volatility. The report said this situation exacerbates the risks, despite Binance’s central role in the space as the world’s largest crypto exchange by trading volume.
The report noted that Binance is not a formally regulated entity, has been convicted in the US for failing to adequately combat money laundering, and does not hold a MiCA license in Europe. According to Kaiko, this situation poses serious operational and legal vulnerabilities to the cryptocurrency ecosystem.
The dominance of centralized exchanges in the market is once again under debate following October’s sharp market crash that wiped out about $19 billion in open positions. During this crash, some tokens on Binance experienced price fluctuations, and some investors were reported to have faced problems accessing their accounts. Binance later announced plans to pay hundreds of millions of dollars in compensation to investors.
It has been pointed out that past problems experienced by centralized exchanges have led to large market fluctuations. FTX’s bankruptcy in November 2022 caused a sharp decline in Bitcoin and many major crypto assets, crippling many crypto companies as well.
According to current data, Binance’s daily trading volume in the spot market is over $15.3 billion. It is one of the most powerful players in the derivatives market, with positions of approximately $27 billion. Kaiko analysts warn that operational, legal, and technical shocks to Binance could result in significant price fluctuations across the market.
*This is not investment advice.
