Can FTX learn from Binance’s past mistakes to justify its $18Bn valuation?
There are two contrasting stories playing out in crypto right now. You have the positive stories of expansion, big sponsorship deals and a multi billion dollar valuation from FTX, the relative newcomer to the competitive central exchange space and then you have the negative stories of regulatory and banking clamp downs and criminal investigations from Binance, the largest central exchange in the world.
However if you look closely there isn’t a big difference between the two operators. Both are run by larger than life mavericks, both are domiciled in opaque jurisdictions and both are unregulated, dodging local regulation as best they can. The main difference is that FTX has recently received backing for it’s strategy in the form of cash from the world’s leading VCs whilst Binance has an overworked legal team handling a deluge of inquiries, complaints and legal actions. So what makes FTX worth $18 billion and Binance the bad boy of crypto? And how can FTX avoid the storm clouds that threaten to engulf Binance?
Compare and Contrast
Binance is an unregulated centralized exchange for trading various cryptocurrencies. It was founded in 2017 and is domiciled in the Cayman Islands. Binance is the number one exchange by daily trading volume.
FTX is number four, just behind Coinbase and a tenth of the size of Binance. Started in 2019 it was recently valued at $18 billion in a $900 million funding round which included the Japanese technology investor SoftBank. It is headquartered in Hong Kong and domiciled in Antigua and Barbuda
Both have their own native cryptocurrency, BNB and FTX, and both offer derivatives to their client base.
The US Market
There is one interesting difference however. Binance has been operating in the US from the very beginning of its existence. Unlike Coinbase it took a laissez faire approach ignoring all regulation and focusing solely on maximizing growth and revenue. That scorched earth strategy in the US is coming back to bite them. In what form is still to be determined but it is likely to be a massive fine as a bare minimum and in the worst case criminal proceedings.
FTX doesn’t need to worry about that, it took a more conservative approach blocking US users from accessing it’s main platform and setting up a separate company in the US which is fully compliant with regulation.
Recent reports suggest however that there are thousands of US citizens accessing both the FTX and Binance international platforms using VPNs however it is uncertain if this leaves both companies open to US action at some point, one would think not if they use their best endeavors to prevent such actions.
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Outside of the US
Binance is in the firing line. Only the other day HSBC announced it is blocking UK customers from using credit cards to make payments to Binance. Similar action has been taken by Barclays and Santander.
The decision follows the UK Financial Conducts Authority’s June announcement that Binance’s UK subsidiary was not allowed to conduct any activities in the country.
China, Japan, Italy, Malaysia, Thailand and Cayman Islands have banned or have issued legal proceedings against Binance and India is looking at Binance’s legal status very closely.
One of the most significant setbacks was the crypto bank Silvergate announcing it was cutting ties with Binance’s non-US business. This prevents Binance’s clients from converting their crypto into fiat.
Pretty much everyday has seen a new negative news story regarding Binance. But as yet this news flow has had limited impact on its core business. Binance still holds its number one spot a long way ahead of Huobi Global with daily volumes 4 times higher.
However whilst Binance has blocked US citizens from accessing its international platform will it do the same for the other countries which have or are expected to institute bans? Ignoring the US Government is tantamount to commercial and potentially personal suicide. The US will go to the end of the world to track down offenders who break their laws. However it is unlikely that the same could be said for Malaysia and Italy for example.
One has to ask, will Binance block users from countries like the UK, and Thailand from accessing its international website if asked to do so? Binance claims to have blocked Chinese investors from accessing their website although there are reports that Chinese based investors can still open new accounts on their platform.
The crucial question is what is it going to take for regulators to stop Binance? And, can it be stopped? It is claimed the platform lives on the internet and it is difficult to pinpoint how it operates and where. It seems as though its biggest markets are Russia, Turkey, South Korea, Brazil and the UK with 75% of their traffic coming direct. Banning advertising isn’t going to stop them. The only way for Binance to be dislodged as the top exchange is if countries demand that Binance block its citizens with a threat of criminal prosecution. That is a possibility but it is going to take some time for this to play out.
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FTX is another story. They are new to the game and don’t have the baggage that Binance carries around with them. They do however imitate Binance’s gung ho approach to regulation outside the US, currently only restricting trade with the US, North Korea, Iran, Cuba, Syria, Sevastopol, Antigua and Barbuda. FTX targets similar countries as Binance although its audience are slightly more sophisticated crypto investors. Whilst CZ Binance’s founder talks about his willingness to cooperate with regulators it is unlikely regulators will be interested in cooperating with him, he has already burnt his bridges. FTX on the other hand hasn’t. It is still early to the game and probably hasn’t ruffled too many feathers just yet.
FTX, unlike Binance has outside shareholders now. It therefore has a fiduciary obligation to follow laws and regulation. If FTX follows the same approach as Binance it won’t be long before regulators start banning FTX in the same way as they are doing with Binance. The big question is, is it realistic that FTX can continue to operate in the long run by allowing citizens of countries which are either instituting heavy regulation or banning crypto all together to access their platform? In order for FTX to justify its current valuation it will have to start regulating its activities in its main markets or it is going to go the same way as Binance.
No Financial Advice
This report does not constitute financial advice or a recommendation to buy in any way. Always do your own research and never invest more than you can afford to lose. Investing in cryptocurrencies is a high risk, and you could lose 100% of your investment.