[Twisting Bitcoin] Is Binance's Termination of KRW Service a Loss for Us?

Suspension of KRW Spot Trading Service... Binance's Core Focus is Futures and Derivatives Trading
Attempts to Crack Down on Risky Binance Not Only in Korea but Most Countries
Fundamental Question: Is Cryptocurrency Futures Trading Offered by Binance Really Necessary?

Cryptocurrencies are sweeping across the globe. It is even likened to a so-called 'frenzy.' However, the more intense the frenzy, the more necessary it is to pause and observe. If problematic aspects are swept away together, they are bound to manifest as bigger issues someday. This is a time to calmly review the cryptocurrency market, titled 'Twisting Bitcoin.'

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Gong Byung-sun] On the 13th, Binance, the world's largest cryptocurrency exchange, ended its Korean won spot trading service. It discontinued the Korean language support service it had been providing and removed the Korean won (KRW) from the service currency settings. Additionally, the Korean won trading pairs within peer-to-peer (P2P) trading were also terminated.

The reason Binance withdrew from the domestic cryptocurrency market is due to the amendment of the Specific Financial Information Act (Special Act on Reporting and Using Specified Financial Transaction Information, or Special Act) set to take effect on September 25. According to the amendment, exchanges must obtain real-name account issuance and Information Security Management System (ISMS) certification before they can initiate the Financial Services Commission's reporting procedure. Exchanges that fail to report will no longer be able to provide cryptocurrency trading services using the Korean won. Binance appears to have judged that meeting the Financial Services Commission's requirements would be difficult.

This has raised concerns that the domestic cryptocurrency market might become isolated globally, essentially becoming a Gal?pagos syndrome. This is a reasonable concern. Binance is the undisputed number one exchange boasting the highest trading volume worldwide. As of 8 p.m. on the 21st, Binance's 24-hour trading volume was $25.74816 billion (approximately 30.4729 trillion KRW), about three times that of the domestic cryptocurrency exchange Upbit.

But does Binance's exit really only bring harm to the domestic cryptocurrency market? In fact, countries sending negative views toward Binance are increasing one by one. Binance operates in a manner that is difficult for almost all governments to accept, not just failing to meet the standards required by Korean financial authorities. So why do governments around the world dislike Binance so much?

Binance Dreaming of Decentralization

Binance is one of the exchanges that best realizes decentralization, the core value of cryptocurrencies. To avoid national regulations as much as possible, it has endured multiple relocations. Binance was established in Hong Kong but could not withstand pressure from the Chinese government and moved to Japan. However, Japan was struggling with a series of hacking incidents at major cryptocurrency exchanges, including the Coincheck hack involving 58 billion yen (about 626.2 billion KRW). As Japan's regulations tightened, Binance, unable to endure, relocated to Malta, an island nation in Southern Europe.

The apparent reason for Binance's move to Malta, which is about half the size of Seoul, is that Malta is a cryptocurrency-friendly country. In 2017, Malta officially declared its intention to become the first country to embrace cryptocurrency and blockchain technology, and subsequently, the parliament enacted the Virtual Financial Assets Act (VFA). According to the VFA, companies seeking to raise capital through Initial Coin Offerings (ICOs) must disclose white papers and financial structures.

However, the actual purpose is presumed to be to evade regulations. Malta is a representative tax haven with many paper companies established there. In fact, in 2017, Song Seong-hee, known as the second-generation patriotic entrepreneur from North Korea, set up a paper company in Malta. There were suspicions that Song used Malta to finance the North Korean regime while evading financial sanctions.

Nevertheless, Binance denied that its headquarters are in Malta. Last year, Josh Goodbody, head of Binance's business division, said, "Binance operates in a decentralized manner, so the headquarters location is not clear." Changpeng Zhao, CEO of Binance, also stated that there is no headquarters in Malta and called such claims fake news. In fact, Malta does not want Binance either. The Malta Financial Services Authority stated that even if Binance were operating in Malta, it would not have the authority to operate in that country.

Governments Worldwide Do Not Leave Binance Alone... Protect Investors

[Image source=Reuters Yonhap News]

However, the decentralization that Binance aimed for seems to be a stumbling block. Not only Korea but governments around the world have begun to expel Binance one after another. In June, the UK announced that Binance cannot operate without approval from financial authorities. Germany warned in April that Binance might have to pay fines for violating European Union (EU) securities laws. The US, Japan, India, Thailand, and even Hong Kong, where Binance was born, have either not authorized Binance or have pressured it.

However, these governments are not tightening regulations on the entire cryptocurrency market. Germany still allows the US-based cryptocurrency exchange Kraken to operate. In the US, Coinbase is already listed on Nasdaq, and Kraken has also pursued listing on the New York Stock Exchange. In other words, Binance is uniquely targeted for regulation.

The reason governments regulate Binance is that investor protection is not ensured. Binance does not provide mechanisms for investor protection, citing decentralization. Avoiding requirements such as real-name account issuance and ISMS certification requested by the Financial Services Commission can be interpreted as a refusal to actively protect investors.

In fact, during Bitcoin's sharp drop in May, the Binance application (app) was down for an hour, causing many victims. However, the path for victims to receive compensation is long and difficult. Because of decentralization, Binance's location is unclear, making it impossible to hold it accountable. Above all, Binance has not shown any active moves to compensate victims.

Investor Protection Is Difficult... The Extremely Risky Binance Futures Trading

[Image source=Yonhap News]

Investor protection is difficult, yet the services Binance offers are risky. Unlike domestic cryptocurrency exchanges that only provide spot trading services, Binance allows futures trading. Futures trading refers to buying and selling contracts that set the price of a specific product at a future point in time. In other words, it is not trading the item in front of you now but predicting the future price of the item and placing long or short positions.

For example, if one predicts that the future price of coin A at a certain time will be 1,000 KRW and places a long position, it means expecting coin A to rise above 1,000 KRW in the future. If coin A rises above 1,000 KRW, the investor gains the difference. If it falls below 1,000 KRW, the investor loses that amount.

However, futures trading is risky because it does not require a large amount of money to start. Unlike spot trading, which requires the amount corresponding to the product's trading price, futures trading only requires a margin as proof of participation, so the amount needed is less than the Bitcoin price.

Also, Binance's leverage is too high compared to other exchanges. When trading Bitcoin futures on Binance, leverage can be set up to 125 times. This means that the same amount of money lost can result in losses 125 times greater than others. Kraken also offers futures trading but only up to 50 times leverage. Therefore, cryptocurrency futures trading is often compared to betting or gambling rather than sound trading based on future price predictions.

The problem is that the driving force behind Binance is derivative trading, including futures trading. According to the cryptocurrency market data site CoinMarketCap, as of the 21st, Binance's derivatives trading volume was $65.32178 billion (approximately 77.3083 trillion KRW). This exceeds twice the spot trading volume.

It is presumed that most domestic investors trading through Binance joined for futures trading. Since domestic exchanges such as Upbit, Bithumb, Coinone, and Korbit sufficiently provide spot trading, there is no reason to switch to Binance. These investors have previously participated in futures markets using cryptocurrencies like Tether and Ripple rather than Korean won.

Professor Hong Ki-hoon of the Department of Business Administration at Hongik University said, "The termination of Binance's Korean won spot trading service will certainly have some impact on the domestic cryptocurrency market, but they traded futures by purchasing cryptocurrencies from domestic exchanges and sending them. Futures investors who traded on Binance will continue to use Binance without significant impact."

Even Without Regulations, Doubts Remain... Is Cryptocurrency Futures Trading Necessary?

In conclusion, since governments worldwide are pushing out the risky Binance to protect investors, the termination of Korean won spot trading service does not only bring losses. Also, since futures trading is their core, it is expected not to significantly affect the domestic cryptocurrency market.

However, a fundamental question remains: why is cryptocurrency futures trading necessary? The original purpose of futures trading is risk hedging. Usually, hedging is known as a way to cover risks from price drops, but if we analyze the essence, it is not just that.

Simply put, a baker worries that wheat prices will rise due to drought-induced poor harvests. At this time, a farmer in urgent need of money offers the baker a contract to buy wheat at a fixed price in advance. The baker promises to buy wheat at a set price to avoid paying more later. If wheat prices skyrocket, the baker benefits from the difference between the predetermined price and the market price. In other words, futures trading exists to hedge not only against price drops but also price increases.

However, cryptocurrencies are only positive when prices rise. Professor Hong explained, "Those who need cryptocurrency futures trading are miners who actually hold and produce cryptocurrencies, but even they do not want prices to fall. This is a contradiction arising because, unlike commodities like wheat, the use cases of cryptocurrencies are unclear."

There are also criticisms that excessively risky investment products are being traded for human greed. The actual value of cryptocurrencies is ambiguous, yet investment products are created based on them. Even if cryptocurrencies show high volatility or disappear suddenly, the damage falls on investors. Professor Lee Byung-wook of Seoul National University of Science and Technology said, "Even in Japan, where strong regulations such as the whitelist system are imposed on the cryptocurrency market, the cryptocurrency futures market has survived. Cryptocurrency futures trading, with its enormous risks, exists for human greed."