Beleaguered crypto exchange Binance continues to capture the headlines for all the wrong reasons. This week, Brian Shroder, the CEO of Binance.US, resigned amid news that the company would lay off a further 100 staff. It’s the second round of layoffs this year, and according to The Wall Street Journal, the latest cuts represent about a third of its workforce. Chief Legal Officer Norman Reed will take the helm on an interim basis.
In June, the Securities and Exchange Commission (SEC) filed charges against various entities in the Binance empire, including Binance; its founder, Changpeng Zhao; and Binance.US. In addition to the SEC charges, the Commodity Futures Trading Commission (CFTC) has charged Zhao and entities connected to the Binance platform with willfully evading U.S. law.
Binance.US was founded in 2019 to serve U.S. investors who are unable to access the Binance international exchange. In theory, it is a distinct company from Binance, but one of the SEC’s allegations is that the two exchanges were not as separate as they say.
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Regulatory issues are impacting Binance.US’s operations
The layoffs and Shroder’s resignation are both signs that Binance’s regulatory issues are affecting its business. According to Bloomberg, the platform’s trading volumes have shrunk dramatically. It may take some time for these cases to play out in court, but in the meantime, the exchange faces significant obstacles in terms of its image and the services it can offer.
For example Binance.US says it will become a “crypto-only exchange.” It is readying itself for the point where users cannot make deposits or withdrawals from their bank accounts. The regulatory issues have made its banking partners wary (and it needs them to process dollar deposits and withdrawals). Binance.US initially suspended U.S. dollar withdrawals following the SEC’s announcement. It was later able to reintroduce the service, but has warned customers this may not last forever.
Finally, it’s worth noting that the SEC initially wanted to freeze Binance.US’s assets, arguing that the funds could be moved offshore. The exchange told the court that this would cause the company to shut down completely. Following court-ordered mediation, the two sides reached a compromise. The deal means that U.S. customer assets will be ring fenced and kept in accounts that can only be accessed by U.S. personnel.
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What it means for investors
Binance.US may well find a way through its regulatory issues, but the departure of its CEO is yet another warning sign. As an investor, if you have crypto on the Binance or Binance.US platform, consider moving it elsewhere. Sure, Binance and Binance.US may survive. But why take that risk? If you leave your funds on the platform and it collapses, you could lose everything.
As we touched on above, Binance.US may not be able to maintain its U.S. dollar withdrawals and deposits indefinitely. If you might want to convert your crypto to dollars and cash out, it makes sense to do this sooner rather than later. Otherwise your only option would be to move your crypto to another platform or an external wallet.
If we only take one lesson from the recent crypto crashes, whether that’s FTX, BlockFi, or Celsius, it is that centralized exchanges are not bank accounts. They are not safe places to keep your money. Here are two reasons why:
- If an exchange fails, your money won’t be protected by FDIC insurance. Cryptocurrency is a relatively new and unregulated industry and there is very little in the way of investor protection.
- If you have funds on a cryptocurrency exchange when it fails, the money you deposited may get tied up in lengthy bankruptcy proceedings. You may recover some of it, but there are no guarantees.
The revelations about what happened behind the scenes at FTX are scary. Putting aside the mismanagement and lack of controls, customer funds were siphoned off without their knowledge. That doesn’t mean we should assume that all cryptocurrency exchanges are doing similar things. But lack of regulation means we can’t always know for sure what these centralized exchanges are doing with our money.
Finding a safe place for your crypto
One of the questions I’ve been asking myself this year is how to store my crypto in a way that’s safe and accessible. I used to keep my assets on a centralized crypto exchange where it was easy to stake and earn interest on my holdings. But this year I moved the majority of my crypto off platform.
Putting funds in a crypto wallet is a good way to protect yourself against exchange failure. The biggest upside is that you’re in complete control of your crypto. The biggest downside is that if you lose your security phrase, you may never be able to access your crypto. Wallets also aren’t as simple as centralized exchanges — you’ll need to do some research to understand how they work and what the fees are.
Cryptocurrency investing carries many risks. From the platform you use to buy it to where you chose to store it to the volatility of the assets themselves, there is a lot to think about and manage. If you’re not comfortable with the risks involved, there are plenty of other investment opportunities out there.
For example, if you have cash to invest, open a top brokerage account and stick to less-risky assets like stocks and bonds. If a brokerage account fails, SIPC insurance kicks in to protect your securities and cash up to a certain point. The same is not true for crypto holdings.
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