As regulators in the US and abroad go after the world’s largest crypto exchange we are compelled to wonder how far the shrinking of Binance will go. Our musings brought to mind a 1957 movie in which a person is exposed to radiation and insecticide and begins to shrink. In the end he is threatened by mice and then spiders and then shrinks even more. That was The Incredible Shrinking Man. Will Binance deal with their regulatory issues, regroup and find a new niche in the crypto business world? Or are we going to see the incredible shrinking Binance?
Is Binance Too Big to Fail?
Binance is a big crypto business. They are also a business that is under increasing pressure from regulators. If they have to comply with regulations that they have been skirting, that could be quite expensive. To the extent that they have legal problems with regulators, they will be barred from doing business in jurisdictions around the world. We are already seeing a flight of customers away from Binance. Binance’s market share is going down in their offshore markets. Binance’s offshore market share has fallen this year from 90% to 73% with no sign of stopping. Regarding big companies failing, FTX was a major player in the crypto world and then it collapsed, went bankrupt, and saw its boss charged with fraud.
The concept of a business being too big to fail does not have to do with size but rather with economic importance to those with the wherewithal to bail them out. The government bailed out General Motors during the Financial Crisis. They also bailed out banks that were important to the US and global economy. Decrypt quotes what Fed Chair Ben Bernanke said about institutions that were too big to fail.
“A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.”
While many in the crypto world may worry about Binance going under, others will simply come in to pick the pieces, serve their customers, and take their profits. If there were a concern about the demise of Binance disrupting crypto, there is no central agency with the desire or wherewithal to bail them out. This is not AIG during the Financial Crisis or GM. Thus the US Treasury is not going to come to the rescue and Congress is not going to vote to bail out a foreign business.
How Much Will Binance Shrink?
If Binance shrinks down to be a smaller company it would not be the first time that happened. For example, Eastman Kodak was a large and successful company for almost all of the 20th century. Then digital photography made the film business shrink and the heart of Kodak’s business plan made no sense. Binance still has a viable business plan in the crypto world so they are not Kodak in that sense. However, they will need to deal with coming regulations. They are in trouble in the EU, US, China, Nigeria, South Africa, and Australia and the list is growing. Our opinion is that Binance will either change how it does business to satisfy regulators or shrink significantly more that to the 72% of the market it how holds. If it does comply with regulators the changes it makes will likely reduce its income farther.
What About Binance Legal Problems?
Legal issues related to regulatory compliance are one thing but legal issues relating to fraud and other criminal issues like money laundering are something else. The one thing that could spell the demise of Binance is if regulators uncover and prosecute Binance and its CEO for criminal matters that end with the financial death of the company.
Incredible Shrinking Binance – SlideShare Version