Coinbase and Binance are getting ever
more dominant in the crypto trading space. The two giant exchanges boast of
1.37million and 1.14 million visitors respectively. Notably, no other exchange
gets anything above half a million.
In an industry that was supposedly
great for decentralization, the concentration power in the hands of the two is startling.
Accordingly, it is probably time to examine the factors behind these trends and
implications for the industry moving forward.
Threat of Centralization
Cryptocurrency is both an economic tool as well as a political one. This is because other than a way to transact, it also serves the function of giving power to its users through consensus building. Naturally, centralized institutions ignored Bitcoin hoping it would die a natural death. Slightly over a decade later, cryptocurrency is still going strong. It is now not only a virtual currency but also has many other dynamic uses. Blockchain technology has taken a life of its own with the application in different sectors because of immutability and transparency. Rapid transaction platforms like XRP are now getting attention from banks and mainstream institutions.
As such, the fact that these two
exchanges have such a large footprint is a threat. This is because, in the
event that a large bank like JP Morgan decides to acquire on of these, the
control over crypto trading is concentrated. Moreover, banks could decide to
enter into the exchange business themselves.
In this scenario, a bank can lower the floor on trading fees and push these exchanges to the edge of bankruptcy. The battle for control in terms of trading fees is on the side of banks. This is because the financial might of these banks can simply lower prices for as long as necessary. As such, the centralization of crypto is a real systemic threat that puts things in perspective. The nature of banks is so that they will want to exert control over the financial world. This means that the bigger crypto gets, the more overt these steps will be.
The Systemic Risk of The Exchanges
These exchanges themselves raise issues on
sustainability and risk to the system. Binance, for instance, has been on the
move a lot recently because of China’s ban on trading. The exchange needs to
have an established jurisdiction and the people who control the exchange have
not made their intentions exactly clear.
Binance also has IEOs which will be the subject of regulatory issues in many countries going forward. The fact that Coinbase has also decided to add a similar Launchpad is noteworthy. The SEC announced recently that it would put crypto platforms that conduct crowdfunding in their cross-hairs because of alleged securities law violations.
The exchange decided to abruptly delist BSV from its trading pairs. This goes to show the influence of the mega-exchanges on the market and pricing because BSV prices took a hit. Binance and Coinbase have an all-powerful stake and have become power brokers in the market. In a truly fair crypto market, they should be neutral arbiters.
Coinbase and Binance have done well to get to where they are. Nonetheless, their unexpectedly powerful position makes them indispensable to crypto-sphere. The risk of harm to crypto because of mismanagement, regulatory crackdown or sabotage is very high. This is something all crypto enthusiasts should deliberate on for the sustainability of the industry.