Over the years, cryptocurrencies have been stored and traded on different wallets and Exchanges. There are the centralized exchanges and the decentralized exchanges. Popular among these exchanges are; Binance, Kucoin, coinbase, Huobi, Gemini and Bitstamp.
According to a report by cryptocompare, it has been established that top-tier exchanges have reached an all-time high market share as their market share has increased to 96% from 89%. And in the last six months, these top-tier exchanges have amassed an average trading volume of around 88% of all the trading in the cryptomarket. In February 2022, it was established that these top-tier exchanges traded about $1.5 trillion and lower-tier exchanges traded about $62 million in that same month. This shows the uneven and lopsided patronage among crypto exchanges. And it is a fact that if this trend keeps going, the oligopoly of crypto exchanges will be inevitable.
The important question that would be going on in the minds of traders and investors is the reason for this trend. Some of the reasons will be discussed below.
The fact that bigger exchanges offer lower security risks
Top-tier exchanges such as Gemini, Coinbase, Binance and Bitstamp that have been controlling trading volume have been ranked to have the lowest risk rate with an AA rating on cryptoCompare. At the moment, 78 exchanges are being led by these 4 top-tier exchanges mentioned as against the 87 in August 2021.
The use of a more stern benchmark standard in rating these exchanges in terms of their security standards and more regulatory scrutiny has kept lower-tiered exchanges afloat. Hence, the same report has proved that most people are drawn to these top-tier exchanges because of their security and their high rating.
The adjustment to legislative bill’s
From time to time, top-tier exchanges adjust their policies in line with the always-changing legislative stance. A good example is the know-your-customer (KYC) rule which has been laid down by regulatory bodies to be followed. Another example is the anti-money laundering and counter-terrorism finance laws (AML-CTF) under which these exchanges are registered.
As a result of the constant changes in the legislation on crypto exchanges, lower-tier exchanges lose trading volume. Since the start of April 2022, the volume of trade among crypto exchanges in India fell by 15%. This is as a result of the new crypto taxation policy made in India. These unfavorable legislations have made some other exchanges weak even in their country of inception. Another example is China where exchanges had to shut down just like Bidesk and some left their country of dominance and inception because of legislative changes just like Huobi, BitMart, Biki and a few others. These legislations strengthen these top-tier exchanges at the expense of the lower-tiered ones hence the Oligopoly.
The unending merger and acquisition (M&A)
Since August 2021, top-tier crypto exchanges have been actively involved in the M&A market. Top-tier exchanges such as Binance, Gemini and FTX are not only poaching staff from competing exchanges but they also acquire these competing exchanges.
Earlier this year, Gemini which is being run by the Winklevoss brothers acquired Ominex with the aim to make Ominex serve institutional investors. Also, FTX acquired a fintech Liquid group to increase its presence in Japan.
Recently, as the Financial Conduct Authority FCA in the UK was tightening how the licensing of exchanges should be conducted, Binance hired one of FCA officials as its global regulation head. With this, the interest of Binance will be protected directly and indirectly when it comes to licensing. This is another means employed by top-tier exchanges to dominate the exchange market.
In conclusion,if this consolidation of exchanges continues to happen without check, the move toward an oligopolistic crypto exchange market will be unstoppable. This is further confirmed as it was stated by cryptoCompare that “As the industry matures, we expect there to be an oligopoly of exchanges dominating trading volumes as their traction accelerates and smaller players are left behind.”