What the Binance-FTX fallout tells us about crypto’s future

In a year that has seen one high-profile crypto casualty after another – including TerraUSD, Three Arrows and Celsius – FTX is the sector’s most visible meltdown of all.

At its height, FTX was valued at US$32bn, but $6bn of withdrawals in three days was enough to spook the markets. After bitter feuding over reports that questioned FTX’s liquidity, Binance, the world’s largest cryptocurrency exchange, announced discussions to acquire its rival.

Binance subsequently walked away from a deal to bail out FTX, citing “mishandled customer funds and alleged US agency investigations”. But FTX’s demise leaves a sizeable pool of investors to be picked up by other exchanges. It is an opportunity for the remaining players, including Binance, to grow.

Concentration is looking more likely

Even without a Binance-FTX tie-up, the sector has, for some time, seemed likely to concentrate. As early as March this year, CryptoCompare predicted the emergence of “an oligopoly of exchanges dominating trading volumes as their traction accelerates and smaller players are left behind”.

Recessions – or ‘winters’ – have a habit of shaking out weaker players. And the current crypto winter has been ongoing for some time.

The experience of traditional financial exchanges also shows that investors tend to crowd into venues that offer the greatest liquidity, where traders have the best chance of buying and selling at an acceptable price.

Investor nervousness could provoke a ‘flight to security’, with investors looking to trade on the largest and seemingly most stable venues.

Market data tends to confirm a movement towards concentration. By August this year, Binance accounted for more than 50% of spot transactions on CEXs – up from 30% just five months earlier.

Where does antitrust come in?

Antitrust agencies are responsible for reviewing M&A activity, with powers to block, unwind or impose remedies on deals that harm competition. A concentrating sector, characterised by ever-larger players, is the type of space that draws attention.

Several deals involving traditional trading venues have been blocked or subject to invasive remedies over the past decade: Deutsche Börse/NYSE Euronext, Deutsche Börse/LSE, and LSE/Refinitiv to name a few. Will crypto be any different?

Crypto exchanges already have a comparable size to traditional exchanges – in 2021, revenues and EBITDA at Binance and Coinbase outstripped equivalent figures achieved by NASDAQ, Euronext and others. Like traditional exchanges, crypto exchanges appear to be characterised by competition for liquidity and network effects.

That doesn’t mean crypto deals will necessarily be blocked – agencies may be persuaded that targets would go out of business unless acquired, or don’t pose a constraint on larger players. And they may see disruptive threats to centralised exchanges from fast-growing decentralised alternatives. But they will need to be convinced.

Courts and agencies will also be called upon to assess complaints about exchanges’ conduct. Earlier this year, an application was filed at the UK Competition Appeal Tribunal to bring a class action against Binance, Bittylicious, Kraken, and Shapeshift regarding the delisting of BSV coins.

Getting ahead of the storm

At its best, antitrust policy can support innovative and fast-moving industries such as crypto. It can serve as a ‘critical friend’ of free-market capitalism, rather than trying to regulate every aspect of market conduct.

To lay the groundwork for the best possible antitrust environment, exchanges should not wait for cases against them to land on enforcers’ desks. Instead, they ought to approach enforcers proactively, provide technical explanations of how the sector works, and participate in more formal reviews of the sector that agencies may choose to run. Doing so would contribute to well-informed assessments of mergers and conduct when they arise.

For their part, agencies should be encouraged to explore the sector’s workings and make full use of their ‘competition advocacy’ role, ensuring that new legislation, regulation or rules do not undermine competition or consumer choice. Rule-making should not be reserved to financial regulators alone.

If they take this path, crypto exchanges have a chance to secure an antitrust policy that promotes the sector’s development. Doing nothing will leave a void that crypto’s detractors will be only too happy to fill.

About the author

Alexander Waksman is Competition Law Partner at international law firm gunnercooke. An expert on crypto and antitrust issues, he is the author of the paper ‘Antitrust and Crypto Exchanges: Time to HODL’.