The increasing concentration of liquidity in a smaller number of centralized exchanges in the cryptocurrency markets has brought serious risks back to the forefront across the sector.
According to a new report published by cryptocurrency data and research company Kaiko, excessive reliance on Binance, in particular, poses “significant structural, operational and legal risks” for the market.
Kaiko noted that a “clear concentration risk” has emerged in the crypto markets, pointing out that the accumulation of a large portion of liquidity in a few centralized exchanges could lead to larger, on-chain losses during periods of volatility. The report stated that despite Binance’s central role in the sector as the world’s largest crypto exchange by trading volume, this situation exacerbates the risks.
The report noted that Binance is not a formally regulated institution, has been convicted in the US for failing to adequately combat money laundering, and does not hold a MiCA license in Europe. According to Kaiko, this situation creates serious operational and legal vulnerabilities for the crypto ecosystem.
Following the sharp market crash in October, which wiped out approximately $19 billion in open positions, the dominance of centralized exchanges in the market has once again become a subject of debate. During that crash, it was reported that some tokens on Binance experienced price deviations, and some investors faced problems accessing their accounts. Binance subsequently announced plans to pay hundreds of millions of dollars in compensation to investors.
It is pointed out that past problems experienced by centralized exchanges have led to major market fluctuations. The bankruptcy of FTX in November 2022 triggered sharp declines in Bitcoin and many major crypto assets, dragging down numerous crypto companies as well.
According to current data, Binance’s daily trading volume in spot markets exceeds $15.3 billion. In the derivatives market, it is one of the most dominant players with approximately $27 billion in open positions. Kaiko analysts warn that any operational, legal, or technical shock to Binance could lead to significant price disruptions across the market.
*This is not investment advice.
