Binance Crackdown Can Pressure Crypto Liquidity & Spreads Says Julius Baer

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Swiss investment bank Julius Baer says the departure of one of the most enigmatic bosses of one of crypto's most enigmatic companies won't harm the broader industry, although near-term pressures must be navigated.

"Regulation on the asset class will certainly increase. Looking forward, the newly designated CEO, Richard Teng, will have plenty of work to do to prevent further outflows," says Manuel Villegas Franceschi, who is part of Julius Baer's Next Generation Research team.

According to the analyst, the outflows from the world's largest crypto exchange are where issues are likely to arise for broader liquidity and flows.

Of the more serious charges, Changpeng Zhao (CZ) admitted to presiding over Binance's facilitation of trades on behalf of individuals in sanctioned jurisdictions, including Iran.

After admitting to the compliance and operational breaches, Binance has been hit with a ~$4.3BN charge in a deal concluded with the Treasury Department, the Department of Justice, and the Commodity Futures Trading Commission. CZ has meanwhile departed the organisation.

"It is important to mention that the sanctions violations encompass the repeated failures to prevent suspicious transactions that were potentially linked to terrorist organisations. Binance will have to pay one of the largest corporate penalties in the history of the United States," says Franceschi.

Following the developments, Binance’s native token, BNB, has slipped in price, and other digital assets have declined in a sign of nerves rippling through the crpyto-sphere.

Franceschi says losses have been marginal, but the major effect of the news has been that almost $1BN of customer assets have exited Binance.

"To put things into perspective, it is important to understand that Binance accounts for almost 40% of crypto’s spot volumes, and even if the effects on prices are still marginal, the demise of Binance in the United States and the increasing regulatory constraints will heighten pressure on crypto markets," says Franceschi.

He explains that Binance not only provides access to spot and derivatives trading but is also one of the largest holders of Bitcoin.

"Investors should expect further distrust towards centralised exchanges and opt for regulated solutions or selfcustody," says Franceschi.

Julius Baer says investors can also expect the market depth for crypto to decrease further and that liquidity constraints will be widespread.

"This is likely to be firstly evidenced in the order books, were bid-ask spreads will broaden and slippage will increase. The effects can potentially spill over to the favoured stablecoin in Binance, TUSD, where violently moving markets could put pressure on the peg," says Franceschi.

But near-term pressures relating to Binance are unlikely to have a lasting impact on the sector.

Julius Baer expects the end of the Federal Reserve's rate hiking cycle to be instrumental in supporting crypto assets from here, even as regulatory headwinds continue to blow.

"Overall, we do believe unlikely that the events will hinder the long-term developments of the asset class," says Franceschi.