Binance Plans to Break Its Decentralized Structure

Aug 3, 2021 0 comments


Binance, the world’s largest cryptocurrency derivatives exchange with $1.7 trillion volume in June, recently announced that it would close its European derivatives and futures business amid intense regulatory scrutiny.

The decision to close the most lucrative derivative product in Europe began after the cryptocurrency exchange received significant regulatory pressures from the U.K., Japan, Italy, Hong Kong and many others. Last month, the U.K.’s financial watchdog issued a warning against the cryptocurrency exchange, and numerous U.K. banks have restricted customers from moving money to the exchange.

Binance has already slashed its daily withdrawal limit for unverified users from 2 BTC to just 0.06 BTC. The measure was meant to outline the “active steps we’re taking to build upon our efforts to be more compliant with local regulations everywhere,” Binance CEO Changpeng Zhao said.

In addition to derivative products, margin trading that involves the Australian dollar, Euro and Sterling has also stopped at Binance. The exchange has also ended services related to trading with tokens linked to shares and highly leveraged bets.

Binance to adopt a centralized corporate structure

Founded in 2017, Binance plans to completely break its decentralized structure. The issuer of the Binance Coin plans to fully comply with the regulatory guidelines. It has decided to move towards adopting a centralized corporate structure.

"We want to be licensed everywhere...From now on, we're going to be a financial institution," Zhao said in a news conference last week.

“Longer term, playing within the rules, 100% compliant, it’s much better to play within the confines of that,” Zhao added. “That trade-off is very, very clear.”

Binance aims to set up several regional headquarters around the world and will seek licenses wherever they are available, Zhao said. He has previously noted that Binance has no official headquarters.

The exchange also plans to appoint regional CEOs, another step in its shift to the centralized structure. Binance's current management also seeks to boost its compliance department by hiring experts in the field.

Lastly, Zhao announced that he is open to stepping down from his role when he finds a better person to take his place.

"This is not a situation where I am forced to step down," Zhao said.

"I'm a technology entrepreneur,” he added. “We are doing this pivot to be a regulated financial institution and I would be very open to looking for a leader with a strong regulatory background."

Can Binance prosper with a centralized structure?

Binance, which believes decentralization means security, ease-of-use and freedom, will now operate like a centralized exchange that follows regulatory policies and other operational requirements.

Coinbase, which went public early this year, is one of the best examples of a successful crypto exchange complying with regulatory policies.

The distribution of authority and power within an organization is known as centralization. In this system, the decision-making and planning mechanisms are distributed within the system.

While the long-term impact of shifting to a centralized structure would be positive, the cryptocurrency exchange could lose its trading volume and user base in the short term.

The end of derivative and high leverage products across Europe could also have a negative impact on overall volume.

"Binance has crowded out large sections of the derivatives market over the last couple of years - if their retreat from said market deepens, the medium-term impact is unlikely to be positive," said Joseph Edwards, head of research at Enigma Securities.

This year has been eventful for crypto. Bitcoin, the world’s biggest coin, at one point hit an all-time high of nearly $65,000. It has since contracted sharply but is now hovering near the $40,000 range for the first time in nearly seven weeks.

If Bitcoin holds up, the next target is its 200-daily moving average (DMA), which stands at $44,600.

A break above that 200-daily moving average line could see the crypto in bullish territory rather quickly. A break above the highs from late May and early June would create a technical indicator known as a “higher high.”

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