To be perfectly clear, while there are plenty of issues at Binance, from its regularly undercollateralized stablecoins and mixing of user funds with its pegged wallets, to alleged money laundering, it’s not at all clear that the cryptocurrency exchange will collapse in a manner similar to FTX (if at all).

But here’s how things could potentially play out if Binance runs into trouble and what it could mean for traders who continue to run the gauntlet at Binance, should the world’s largest cryptocurrency exchange fail.

As the largest cryptocurrency exchange with an alleged daily volume in excess of US$15 billion, Binance is easily 10 times the size of its nearest competitor.

And even if volumes are falsified, if just a tenth of stated volumes are actual, that’s still US$1.5 billion worth of cryptocurrencies traded daily.

So how could operations at the world’s largest cryptocurrency exchange come to a sudden halt if at all?

1. Top Management Disappears

The recent U.S. Department of Justice action against obscure Russian cryptocurrency exchange Bitzlato should be seen as a shot across the bow for so-called “Binancians” (Binance patois for its users).

On January 18, the U.S. Justice Department charged Bitzlato’s co-founder and majority shareholder Anatoly Legkodymov, a Russian national living in China, with operating an unlicensed money exchange business, that it alleges “fueled a high-tech axis of cryptocrime,” processing some US$700 million in illicit funds, the bulk of which was in Bitcoin.

Over half the amount that Bitzlato is alleged to have laundered, or some US$375 million, was funneled through Binance, which was the only major cryptocurrency exchange listed among Bitzlato’s top counterparties, according to FinCEN, the U.S. Financial Crimes Enforcement Network.

As an aside, analysis by blockchain intelligence firm ChainArgos also revealed that almost half a million dollars worth of USDT stablecoin was also found to be flowing between Bitzlato and Binance, with certain wallet addresses appearing to do nothing more than facilitate the movement of USDT between the two exchanges.

While a Binance spokesperson said via email to Reuters that it had “provided substantial assistance” to international law enforcement in support of the Bitzlato investigation, it’s unclear what that assistance consisted of.

To be sure, no law enforcement agency has accused Binance of any wrongdoing, but the U.S. Justice Department is said to have been investigating the cryptocurrency exchange since 2018.

And there have been rumors of a possible plea deal, though one wonders how that would be possible if the allegations of money laundering and sanctions evasion at Binance prove even half true.

According to Reuters, Binance helped Iranian firms trade at least US$8 billion worth of cryptocurrencies, in violation of sanctions.

Forbes (which is owned by Binance), reported earlier that a methamphetamine and cocaine gang operating across the U.S., Mexico, Europe and Australia also used Binance to launder tens of millions in drug proceeds and an ongoing investigation is under way by the U.S. Drug Enforcement Administration.

With law enforcement agencies circling, it’s hard to see a scenario where Binance and its key executives, come out unscathed, and that’s even assuming cooperation with authorities.

In any event, cooperating with law enforcement agenices may also put top officials at Binance, including its CEO Changpeng Zhao or CZ as he’s known, at personal risk from the parties he’s allged to help launder moeny and he’d need to be placed in some form of witness protection program.

Regardless of whether CZ and top brass at Binance cooperate or not, it’s hard to see how law enforcement officials globally would allow Binance to continue operations if indeed it is found to have facilitated money laundering and the evasion of sanctions.

In which case, something akin to what has happened with Bitzlato is possible — U.S. or other global law enforcement agencies, could seize Binance’s website and launch a global manhunt.

But a law enforcement seizure of Binance doesn’t necessarily mean that the funds which ordinary traders have on the cryptocurrency exchange are gone.

There’ll likely be a process established to prove that no criminal activity was perpetrated by traders with cryptocurrencies on Binance and an eventual withdrawal mechanism could be instituted.

But such any recovery procedure for innocent Binance users could take a substantial amount of time as it’s unlikely to be a priority for law enforcement officials.

If CZ and his lieutenants sense that law enforcement agencies are circling and the likelihood of incarceration increases, regardless of any possible plea deals, they may decide that just skipping town would be the best option, acquiring new passports and identitys and just disappearing.

In such a situation, where the top brass of Binance disappears, it’s not immediately clear that the exchange may stop operating either.

Repeated interactions with technical staff at Binance appear to suggest technical teams at the exchange often have no visibility into what the other departments are doing and that means the exchange could potentially continue to operate for some time powered mainly by momentum than anything else.

But it’s unclear how sustainable Binance’s operations without top leadership could be, especially given the exchange’s lack of a CFO.

Would salaries still be paid? Would service providers and suppliers have their invoices satisfied?

At some stage, it’s entirely plausible that those with the ability to do so, line their pockets with user funds on their way out the door and Binance users may find it either difficult or impossible to withdraw funds simply because they are either gone or no one is there to process them.

2. A Slow Burn

Whilst many expect a spectacular blowout at Binance, the odds of that happening are not high.

Globally, the cryptocurrency exchange continues to attract a high degree of regard, especially in emerging markets where Binance has done a good job in bolstering its reputation, especially in Latin America and Africa.

Which is why the odds of all users globally experiencing difficulties with withdrawals from Binance, akin to what happened at FTX, is unlikely.

There have already been reports that the Rio de Janeiro State Prosecutor’s Office has launched a civil investigation into allegations that Binance users in Brazil have been encountering issues with withdrawals.

Globally, there has been also no shortage of anecdotal evidence that suggests some users at least are facing additional hurdles when trying to get their funds off the exchange.

And while there is likely to be at least some users who will experience “issues” with their withdrawals from Binance, it’s highly unlikely that all users will experience issues simultaneously as that would spark a run on the exchange.

So why a slow burn?

A slow burn buys time for Binance.

Whether or not Binance has all user deposits is debatable at best, but one way to ensure that the exchange can be used to line the pockets of insiders before a potential criminal prosecution or collapse is to lean on its B-Token conduit.

Because Binance itself has admitted that it’s been playing fast and loose with its B-Tokens and the undercollateralization of its BUSD dollar-based stablecoin, one exit strategy for Binance insiders would be to use the B-Tokens and BUSD opportunity to pump and dump on retail investors on the way out.

How would that work?

Since Binance itself has already attested that its B-Tokens, that’s the equivalent tokens that are useable on Binance’s BNB Chain (the BNB Beacon Chain and BNB Smart Chain) use wallets which were mixed in with exchange assets, there is more than an outside chance that these B-Tokens are already undercollateralized.

And then it’s just a matter of stealing from Peter to pay Paul — sell unbacked B-Tokens on the BNB Chains and use the proceeds of those sales to then satisfy any withdrawals that continue to occur on the main blockchains or from the exchange.

Alternatively, issue undercollateralized BUSD (less likely because everyone is watching these wallets now) to orchestrate a couple of pumps and dumps as insiders pave their way out of Binance with gold.

But so long as it’s not entirely clear what the deal is with B-Tokens (Binance has said that they will be coming up with a new and more transparent system but has yet to do so), there is plenty of room for questionable transactions to be made, just to provide the appearance that withdrawals are continuing at pace.

Even with Bernie Madoff’s US$65 billion Ponzi scheme, it wasn’t until everyone withdrew en masse in 2008 because of the financial crisis, that things started to unravel.

As long as there are still traders willing to ply the order books at Binance, there will continue to be fresh funds coming into the exchange that allows it to satisfy withdrawals.

3. Investigations End Up as a Nothingburger

The final possibility, and one that is not entirely improbable is that the U.S. Department of Justice drags its heels on indicting Binance or that an investigation yields nothing because the cryptocurrency exchange has managed to stay one step ahead of the law.

Former Binance executives have shared the organization’s obsession with not keeping records, and encouraging its staff to use Telegram and other encrypted communication tools with disappearing messages so that records of conversations and correspondence are never kept.

Given the complexity of the matter at hand, the U.S. Department of Justice is understandably divided on whether and how to prosecute Binance.

The U.S. Department of Justice could bring indictments against Binance and its executives, negotiate a settlement (with no admission of guilt) or close the case without doing anything — all of these outcomes are possible.

As was the case with Bernie Madoff, years of investigations by the U.S. Securities and Exchange Commission that failed to find any wrongdoing actually burnished his credentials, allowing him to raise even more money for his Ponzi scheme.

Were it not for the 2008 Financial Crisis, it’s entirely possible that Madoff’s fraud could have continued on for some time.

Which is why a failure by the U.S. Department of Justice to act against Binance would be open season for the cryptocurrency exchange to essentially operate unfettered and outside of the shadow of law enforcement.

Nevertheless, this seems unlikely as well.

The two biggest banks serving the cryptocurrency industry, Silvergate Bank and Signature Bank have already dialed back their exposure to the sector, whether voluntarily or not is less clear.

Signature Bank recently required fiat transactions out of Binance to exceed US$100,000, and other banks with dollar rails may hold back on their servicing of the cryptocurrency exchange.

If Binance loses its fiat rails, it would severely hamper its ability to do business and the previous two outcomes become increasingly possible.

Conclusion

If Binance truly did facilitate money laundering and if lax AML and KYC controls were a feature not a flaw at the exchange, then the likelihood of most (if not all) user assets being on the exchange is high.

Those who look to launder money generally don’t appreciate the money not being there — that slip up would ruin the business model.

But there remain some seriously disconcerting issues at the cryptocurrency exchange — with Binance mixing user assets in wallets intended to back B-Token issuances sloppy at best, and potentially devious at worst.

Given the size of Binance, its alleged oversight in managing the collateralization of its BUSD stablecoin as well its B-Token wallets is more then slightly alarming, given the sheer size and volume of operations.

And there remains the possibility that no one working at Binance actually knows what the true state of the cryptocurrerncy exchange’s finances are — perhaps the most frightening prospect.

As investigators, lawyers and accountants plow through the wreckage of FTX, it’s becoming increasingly evident that top executives at the failed exchange were entirely oblivious to the true state of its finances.

Given that Binance has no CFO, it’s entirely plausible that no one really knows the true state of the exchange’s finances — who owns what and what is owed to whom.

With no external audits the way Coinbase Global and Kraken are subject to, and with no regulatory oversight, it’s impossible to say what’s going on at Binance, and that is truly frightening for users.