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Several hedge funds have backed away from trading and other activities on Binance in response to the accelerating regulatory crackdown on the crypto exchange, deepening the strain for a group already cut off by a clutch of banks and payments companies.
Crypto specialist Tyr Capital said it had “significantly decreased its exposure” to the group, one of the world’s biggest crypto companies, while fellow hedge fund ARK36 said it was also reducing its activity on the venue after “what feels like an orchestrated regulatory attack”.
The pullback indicates that while regulators often struggle to stop crypto exchanges from conducting unauthorised business in their jurisdictions, they can still have a chilling effect.
“Our primary concern is protecting our investors from unknown unknowns that may pop out of the current multi-jurisdictional regulatory clampdown on the exchange,” said Ed Hindi, chief investment officer and co-founder at Tyr Capital.
The global regulatory pushback “should raise red flags for anyone keeping serious capital at the exchange”, said Ulrik Lykke, executive director at ARK36, adding that the fund has “scaled down” exposure.
Traders on Binance typically hold balances in cryptocurrencies that are used as “margin” deposits for leveraged trading. Binance also offers a broad array of programmes in which investors can earn often high rates of interest through lending out their coins on the venue.
Lykke described it as “especially concerning” that the recent moves against Binance “involve multiple entities from across the financial sphere”, such as banks and payments groups.
Binance, which is led by crypto mogul Changpeng Zhao and has no formal headquarters, has been the subject of censures by a series of global regulators this summer. Market supervisors in financial centres including the UK, Hong Kong and Japan have all issued warnings and restrictions over the past month.
In addition, several big UK high street banks, such as Barclays, NatWest and Santander, have recently barred retail customers from sending money to the exchange. At least two of Binance’s payments partners — regulated groups that provide a gateway between the conventional and crypto financial systems — have also cut ties.
A further crypto specialist hedge fund that was due to start spot and derivatives trading on Binance has also backed out of those plans after it became difficult to withdraw sterling directly from the exchange. “One does get the sense it’s perhaps best to leave Binance a bit, there are many other exchanges,” said a person familiar with its decision.
Memories of the 2014 implosion of bitcoin exchange, Mt Gox, in which investors lost access to hundreds of millions of dollars worth of digital tokens, also loom large as institutional investors weigh counterparty risks, he added.
Binance told the Financial Times it has “not seen a slowdown in institutional activity. On the contrary, we have seen continued interest in our institutional offering from not only crypto native firms, but also traditional finance institutions that have entered the crypto space”.
Regulators’ concerns have broadly focused on Binance’s practice of allowing residents of many countries where it is not authorised to operate to use its service. It has also struggled to build up its anti-money laundering oversight in line with its rapid growth, people familiar with its practices have said.
David Fauchier, a fund manager at Nickel Digital, noted that Binance and other exchanges in the sector are making “enormous amounts of money” and could therefore make customers whole if they lose money due to regulators’ interventions.
Hindi at Tyr Capital echoed this sentiment, saying Binance has “one of the biggest war chests in crypto and can easily afford the extra measures that regulators may require them to undertake in order to continue operating globally”.
While Binance has a very large consumer customer base, the exchange is a major trading venue for financial companies. Binance offers these big players, which it calls VIPs, a suite of special perks such as lower transaction fees and access to ultrafast connections to its systems.
The exchange is a top market for many of the most actively traded crypto derivatives. Last month, for example, it recorded about $1tn in trading in bitcoin futures, more than Bybit, Okex, Huobi and FTX combined, according to Bybt data collated by The Block Crypto. Activity has slowed down since then, however.
“While Binance facilitates the bulk of trading around the globe today, liquidity is very agile and the leading exchange changes roughly every 12 to 18 months,” said one crypto hedge fund executive.
Additional reporting by Chelsea Bruce-Lockhart and John Burn-Murdoch