Key Takeaways:
- According to reports, market maker Sigma-Chain faced or mat face a shortfall.
- The hedge fund is owned by Binance CEO Changpeng Zhao (CZ).
- Since Sigma-Chain provides liquidity for BNB, its crash could devastate Binance.
YEREVAN (CoinChapter.com) — The Binance token (BNB) appears to face increased potential liquidation risks. These fears primarily stem from concerns related to its market maker, Sigma-Chain. Securities and Exchange Commission documents have raised several alarming issues that warrant a closer look at the stability of the BNB token.
According to Dylan LeClair, Director of Market Intelligence at UTXO Management and Co-Founder of 21st Paradigm, the development is very concerning. As he points out, one of the key concerns is the apparent shortfall associated with market maker Sigma-Chain. The firm is wholly owned by Binance CEO Changpeng Zhao (CZ).
The Sigma-Chain and BNB connection
Earlier this year, the Securities and Exchange Commission (SEC) initiated legal action against Binance, its US affiliate, and its founder, Zhao.
The lawsuit includes various allegations of securities violations, notably the failure to register as a securities exchange, broker-dealer, and clearing agency, along with the issuance of an unregistered security, specifically Binance Coin (BNB).
Reports emerged that the SEC was investigating CZ’s affiliated entities, Merit Peak and Sigma Chain. The SEC filing alleged that Sigma Chain, acting as a market maker, was involved in wash trading practices that artificially inflated trading volumes on Binance.US.
Furthermore, the SEC asserts that undisclosed relationships with Merit Peak and Sigma Chain posed a significant conflict of interest.
Brian Brooks, the former acting Comptroller of the Currency and briefly CEO of Binance.US in 2021, also testified in this regard.
“To the extent that these two liquidity providers were significant sources of liquidity, meaning that our customers couldn’t, you know, clear orders without the presence of those makers on our platform, I thought that was a real problem. It suggested that the company was, in fact, heavily dependent on CZ, not just as a control person but also as an economic counterparty and that is problematic, so I thought we needed to look into deplatforming them,”
Brooks said.
Moreover, the SEC accused Binance.US of sending millions of dollars in customer assets to Merit Peak and Sigma-Chain. Zhao had previously claimed that the US exchange was a separate entity running independently of the main Binance Holdings Ltd.
However, as the regulators insisted, Binance and CZ “exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please..”
Is Sigma-Chain crashing, and what it means for BNB?
As Dylan LeClair points out, CZ had previously acknowledged that one of the market makers in which he is a shareholder and investor is not profitable.
He speculated that this market maker in question could be Sigma-Chain. Hence, if it is not profitable, the scenario raises questions about its ability to manage BNB liquidity effectively.
This shortfall, mentioned in un-redacted SEC documents from Aug. 31, 2023, indicates that Sigma Chain may have encountered financial difficulties as recently as the summer of this year.
The relationship between Sigma Chain’s financial health and BNB’s performance is a cause for concern.
Charts from 2022, as shared by LeClair, reveal that BNB outperformed other assets against the Bitcoin (BTC) price. In one year, BNB gained over 70% against BTC’s price.
However, that tide subsequently turned. Since last November, BNB has lost more than 50% against the market leader.
Investors now speculate if the initial rally in 2022 happened thanks to artificial support from Sigma Chain. If Sigma Chain is indeed experiencing financial challenges or insolvency, the potential repercussions on BNB’s value could be significant.
Conversely, the shift from BNB towards BTC could also be attributed to anticipation of a Bitcoin ETF. Moreover, regulatory clarity provided by SEC Chairman Gary Gensler’s statement that BTC is not a security also makes it a safer bet.
The fact that the legal issues involving Binance and the SEC have mounted does not help the BNB.
What if the BNB price tanks?
Given the uncertainties surrounding Sigma Chain’s financial condition, any negative development could have a cascading effect on BNB’s stability.
At the time of writing, BNB trades at around $212 per token. This is a massive 60% below its all-time high of $690 on May 10, 2021.
The potential risk of a collapse in BNB’s value is a valid concern that investors and the cryptocurrency community should closely monitor, as it could have far-reaching implications for the token and the broader crypto market.
The crypto market could experience another FTX-like collapse, sending tokens tumbling.
