A top exec at the world's largest crypto exchange breaks down the single-biggest risk for the market in 2023
- Patrick Hillmann is the chief strategy officer at Binance, the world's largest crypto exchange by volume.
- The exec explained how poor regulation could lead to increased crypto market volatility.
Cryptocurrency markets have made significant strides to recover from 2022' crises, with bitcoin soaring about 50% since the start of the year and the total crypto market value edging back above $1 trillion.
But a top executive at crypto exchange Binance said more volatility could be ahead in 2023. One of the biggest market risks, according to Chief Strategy Officer Patrick Hillmann, is an increasingly stringent and poorly executed US regulatory crackdown.
"The US has always been a place that has really fostered great innovation. [The country] has led from the front when it came to smart regulation [as well]," Hillmann told Insider. "Unfortunately, I think [what] we're seeing now is going to come at a real cost [to investors] over time."
Earlier this month, the New York Department of Financial Services demanded blockchain platform Paxos cease minting Binance-branded stablecoin BUSD. The regulator claimed BUSD is an unregistered security and told the company to stop issuing tokens, according to the Wall Street Journal.
New York's enforcement letter against Paxos comes as the US Securities and Exchange Commission cracks down on stablecoins.
For years, stablecoins were seen as a way for investors to park their assets safely in crypto because the tokens are typically backed by real-world assets like cash, bonds or exchange-traded commodities.
But the narrative changed after the collapse of algorithmic stablecoin TerraUSD in May of last year, which wiped out billions worth of investor money and largely impacted retail participants.
SEC Chair Gary Gensler said in September that stablecoins "have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues."
But Hillmann warned that making stablecoins inaccessible because of regulation removes "safeguards" for crypto investors.
"When you take that away from users at a time like this, that safety net disappears," he said. "At the same time, we're seeing a pressure campaign on US banks to also not service crypto. Not only do [investors] not have the ability to move their money to a safe [place], they also aren't able to pull it off the exchanges easily."
Hillman said enforcing bad regulation will cause some "real market volatility" as a result.
In addition to stablecoins, US regulators may clamp down on exchange tokens, like FTX's FTT, as well as bitcoin and ethereum. Hillmann warned this could "choke out" the nascent space.
If improperly enforced, increased regulatory scrutiny could also cause industry players to take their business elsewhere. This could result in the US lagging in innovation, he added.
"We're really hoping that this is not going to be a continued escalation [by regulators], but all signs [say] that it is," Hillmann said. "As a result, it's left businesses that are legit and want to be regulated in the US... with no other alternative other than to move offshore."
Binance has reportedly faced a slew of US regulatory and law-enforcement scrutiny of its own, including probes from the Justice Department, the SEC, and Commodity Futures Trading Commission in recent years. Binance expects to pay monetary penalties to resolve US investigations, Hillmann has told the Wall Street Journal.
Meanwhile, Binance had secret access to a bank account belonging to its purportedly independent US partner, Reuters reported earlier this month. The crypto giant reportedly transferred $400 million from the account to trading firm Merit Peak, which was managed by Binance CEO Changpeng Zhao.
"While there was a market making firm named Merit Peak that operated on the Binance.US platform, it stopped all activity on the platform in 2021," Binance.US tweeted after the Reuter's story was published.