Sam Kessler
Wed, December 14, 2022
Monday’s arrest of Sam Bankman-Fried (“SBF”) capped off a historic period in the world of memes, money and mayhem that is the cryptocurrency industry. The arrest of the FTX exchange founder drew mainstream headlines that greatly overshadowed the other big crypto story of the day: questions around the solvency of Binance, the largest cryptocurrency exchange by trading volume.
If the collapse of FTX was catastrophic for the burgeoning crypto industry, a collapse of Binance would be apocalyptic.
This article originally appeared in Valid Points, CoinDesk’s weekly newsletter breaking down Ethereum’s evolution and its impact on crypto markets. Subscribe to get it in your inbox every Wednesday.
FTX – at one point the third-largest crypto exchange by spot volume – processed around $37 billion in spot trades in October, the month before it collapsed, according to CryptoCompare. The second-largest exchange, Coinbase, processed $47 billion that month. Meanwhile, Binance’s spot trading volume in October totaled a whopping $390 billion.
For over a month, Binance CEO Chanpeng Zhao (“CZ”), like other exchange leaders, has been on a quest to convince users that his product is wholly different from FTX – the SBF-led exchange that became insolvent after misusing user funds.
Like FTX, though, Binance is largely unregulated, and not everyone is buying CZ’s repeated assurances of propriety. Over the past week, a shoddy audit of the exchange’s reserves – followed by news of criminal investigations into Binance executives – alarmed users enough to catalyze record withdrawals from the platform.
While Binance appears to be weathering the storm so far (there are no glaring signs that the exchange has misappropriated user funds FTX-style), recent events have drawn attention to the fact that Binance, which exists beyond the scope of regulators and tracks customer holdings on its own servers rather than on public blockchains, asks for a tremendous amount of trust from its users in order to operate. In the “trustless” world of cryptocurrency, this is a bit hard to square.
Trusting Binance
The biggest players in crypto are centralized exchanges – platforms like FTX, Coinbase, Kraken and Binance – that take direct custody of user cryptocurrency (rather than leave tokens in a user’s own blockchain wallet) in order to facilitate trades.
After investors were burned by FTX – the largest crypto exchange to collapse after abusing the trust of its depositors – people have grown wary of trusting other, similarly centralized platforms. But not all cryptocurrency exchanges that custody user funds have earned the same degree of skepticism.
Unlike U.S.-regulated exchanges like Coinbase and Kraken, Binance (like FTX) operates in a sort of regulatory gray area. The firm was originally founded in China but left the country in 2017 just before its government banned cryptocurrency trading. Today, Binance deliberately obfuscates where it is headquartered.
While there are jurisdiction-specific versions of Binance, like Binance.US, which operate independently from the main Binance platform, the main, largely unregulated version of Binance is the biggest by far. (Binance.US doesn’t even rank among the top 10 crypto exchanges by spot trading volume.)
Coinbase, Kraken, Binance.US and other jurisdiction-specific Binance platforms make routine accounting disclosures and face strict oversight from regulators. The main Binance platform, however, isn’t subject to the same regulatory scrutiny as its peers. As such, it can offer relatively low fees along with products that it would be unable to run in the U.S. and many other countries – like sophisticated derivative contracts and margin trading facilities that allow users to borrow money in order to make bigger, riskier bets.
As a consequence of Binance’s regulation dodging, though, the platform’s users need to trust Binance’s word on whether their money is where it purports to be.
Record withdrawals
Fears of a Binance insolvency reached a fever pitch over the weekend after a much-derided “proof-of-reserves” report from the exchange failed to convince onlookers that it was fully collateralizing assets behind the scenes.
Widespread skepticism towards the report – which users criticized for its lack of thoroughness and selective disclosures – sparked record outflows from Binance, with investors pulling nearly a billion dollars from the exchange in a period of just 24 hours over the weekend.
Money continued to pour out of the exchange on Monday after a report from Reuters detailed a U.S. Department of Justice investigation into Binance – one of several ongoing probes into the firm from global law enforcement agencies. According to Reuters, federal prosecutors are weighing whether to charge Binance executives, including CZ, with money-laundering violations.
News of Binance’s legal troubles opened the floodgates even wider; users were soon criticizing Binance for everything from its ability to change the ledger of its “decentralized” BNB blockchain, to the solvency of “bridged” versions of BUSD, Binance’s stablecoin.
“Binance FUD” (meaning fear, uncertainty and doubt) briefly trended on Twitter.
The USDC pause
On Monday, Binance saw another $2 billion in net withdrawals from its platform – the largest withdrawal event for the exchange since this past June, according to crypto analytics firm Nansen.
The outflows were large enough to force Binance to temporarily pause withdrawals of USDC, the second-largest stablecoin – a vital instrument in crypto financial markets that stays “pegged” to the price of one dollar.
Binance said it needed to pause USDC withdrawals in order to facilitate a “token swap” of USDC stablecoins for its own BUSD stablecoins – a sort of practical measure necessary to loosen up liquidity for further withdrawals.
However, the move sparked worrying headlines, including one from CNBC, reflecting that some users saw the pause as yet another signal that Binance might not be fully collateralizing user assets behind the scenes. (Notably, pausing stablecoin withdrawals was one of the last actions FTX took before filing for bankruptcy.)
Despite the uproar, Binance’s explanation for why it paused USDC withdrawals is plausible on its face. Moreover, Nansen’s accounting of Binance-linked blockchain wallets shows that the exchange has at least $60 billion in on-chain reserves – more than enough liquidity to handle customer withdrawal demands and vastly more than FTX had (as a percentage of overall user assets) when it collapsed.
But without a full accounting of Binance’s assets and liabilities, the exchange’s health is impossible to judge definitively.
Why should Binance be trusted?
Despite Binance’s opaqueness, users continue to rely on the platform.
The largest crypto exchange offers users the ability to trade more kinds of tokens, with higher liquidity and lower fees, than virtually any other platform – centralized or decentralized. It also offers strategies that are inaccessible, in many jurisdictions, to anyone other than licensed investors.
But the fact that Binance is the only shop in town for certain trading activities isn’t the only reason why some investors continue to trust CZ with their money.
Wave Financial CEO David Siemer told CoinDesk that while he is wary of all centralized exchange platforms, he is relatively unconcerned that Binance will face FTX-type insolvency.
For one thing, says Siemer, Binance was founded in 2017 and simply has a longer track record than FTX, which was founded in 2019.
Siemer also noted that Binance has been relatively conservative in terms of the features it offers users – at least compared to FTX. “From a functionality standpoint,” said Siemer, “Binance rolls things out that are pretty tried and true.”
FTX, says Siemer, partially failed because it advertised a high-tech – but error-prone – cross-margining system. In essence, the system was supposed to allow a user to take multiple separate positions against a single pool of collateral; if one of a user’s bets went bust, the whole pool was subject to liquidation (meaning the FTX exchange would have automatically claimed the user’s collateral).
In Siemer’s experience, this system didn’t always work as advertised; users were sometimes able to make big bets that weren’t auto-liquidated when they should’ve been – meaning investors might have lost the exchange’s (and, it seems, other users’) money on bets that they should’ve lost.
Unlike FTX, Binance “[doesn’t] allow a lot of crazy, weird margining” features like cross-margining, said Siemer.
And then, says Siemer, there’s the fact that Binance “doesn't have an Alameda.” Alameda Research was the SBF-linked trading firm that collapsed after it apparently invested (and lost) funds belonging to FTX users.
“Because [FTX] had Alameda,” said Siemer, “both sides were able to just kind of prop each other up for a long, long time.”
While it’s technically possible that Binance is using or loaning out user funds behind the scenes (the firm is apparently under investigation for money laundering), there’s no sister firm like Alameda to which Binance would have obviously funneled money.
The importance of PR
While one can find some differences between Binance and FTX, it’s impossible to know what’s really going on at Binance behind the scenes. CZ, for his part, seems acutely aware of the fact that his exchange will live or die based on the trust of its users.
Amid all the “FUD,” the Binance founder – at one point more of a behind-the-scenes operator – has become uncharacteristically active on social media in recent months as the market has soured and the FTX debacle has continued to unfold.
In between tweets defending Binance, CZ has also found time to joke around with his followers, and he recently retweeted a tweet from 2019 in which he explained that he was “a normal guy, nothing fancy” and aimed to “seek and provide positive energy.”
In this way, one finds a striking similarity between CZ and SBF, his one-time nemesis. Both founders realize that in a world of centralization and lax regulations – perception is everything.
Phil Rosen
Wed, December 14, 2022
Changpeng Zhao
Chinese-Canadian businessman
Binance Co-Founder and CEO Changpeng Zhao delivers a speech at the opening event of Europe's largest tech conference, the Web Summit, in Lisbon on November 1, 2022.
Binance has seen heavy withdrawals as the FTX implosion continues to shake confidence in the sector.
The exchange saw roughly $3.66 billion in net outflows over the last week, per Nansen data.
Binance CEO Changpeng "CZ" Zhao tweeted that the flows were "busines as usual."
Binance, the world's largest cryptocurrency exchange, has seen $3.66 billion in net outflows over the last week, according to data compiled by Nansen.
Customers have pulled a total of $8.78 billion out of the crypto exchange, while $5.12 billion have flowed into company, per Nansen's exchange flows dashboard.
Despite the sizable withdrawals, Binance still holds about $58.9 billion in assets, according to Nansen data cited by Decrypt.
Amid the outflows from the exchange, Binance CEO Changpeng "CZ" Zhao, shrugged off any concerns about customers withdrawing funds.
"We saw some withdrawals today," CZ tweeted Tuesday. "We have seen this before. Some days we have net withdrawals; some days we have net deposits. Business as usual for us."
His comments come shortly after the exchange temporarily froze customer withdrawals of the USDC stablecoin. The company announced withdrawals had resumed Wednesday.
Separately, the exec warned employees in an internal memo that he expects the "next several months to be bumpy," Bloomberg reported Wednesday.
A "historic moment" is beginning, he said, as repercussions from FTX's collapse continue to rattle the industry, but Binance is financially secure enough to survive a downturn.
Meanwhile, on Monday, Reuters said that the US Department of Justice has been investigating Binance over money laundering violations, reporting that the exchange had processed over $10 billion worth of illegal payments in 2022.
Binance resumes USDC withdrawals
after temporary halt as FTX fallout
ripples through crypto industry
Binance, the largest crypto exchange by trading volume, resumed customer withdrawals for the stablecoin USDC Tuesday after announcing a brief halt earlier in the day.
That halt came as Binance saw a massive wave of withdrawals as crypto markets continued to be unsteady in the wake of FTX's collapse last month.
According to blockchain data platform Nansen, over the 24 hour period ending at 1 a.m. on Wednesday, Binance saw about $3 billion in total outflows, its largest customer withdrawal event since June.
Assets tracked in known Binance controlled wallets by Nansen amount to $59 billion in assets, $36 billion of which is held in the BNB and BUSD tokens Binance has created.
"I wouldn't be surprised if they are intentionally making it harder for USDC users to withdraw, while other stables and tokens are being withdrawn at ease," Conor Ryder, a researcher with Kaiko told Yahoo Finance.
As Ryder noted, in recent months Binance has worked to phase out the use of USDC on its platform in exchange for its own stablecoin, BUSD. That means it converts USDC deposits on its platform to BUSD, and must convert them back to meet withdrawal requests. The exchange's BNB token, which carries use as a native token for its own blockchain, is used on the platform for fee discounts like to FTX's failed FTT token.
“If there’s any risk that we fail, it all depends on how we fail,” Binance’s founder and CEO Changpeng Zhao said during an Ask Me Anything over Twitter.
“As long as we fail honorably and credibly, we let people withdraw their funds because the company ran out of money, that’s okay,” Zhao added.
As Zhao pointed out, crypto exchanges aren’t banks. That means when faced with a run of heavy customer withdrawals, crypto exchanges should still be able to give customers all their money back, even if the process puts them out of business.
As Reuters reported earlier this week, the Justice Department is now weighing whether to press charges against Binance for violating sanctions and money laundering laws after a multi-year investigation.
Along with other exchanges such as Houbi, Bitmex, and Bybit, Binance has gone to great lengths to publish a proof of reserves report, in addition to a report from auditing firm Mazars a week ago.
The Mazars report was an Agreed Upon Procedure (AUP), not an audit, and showed 97% of Binance's bitcoin holdings ($9 billion) were collateralized, meaning it hadn’t achieved a 1:1 backing of bitcoin deposits to liabilities.
However, the report noted it did not include "out-of-scope assets," meaning margin and loans taken out for BTC in other tokens. With those other tokens, Binance's bitcoin deposits would be “101% collateralized” according to Mazars' findings.
When asked why Binance doesn’t show more transparency surrounding what Mazars called "out-of-scope assets," Zhao said proving asset reserves "is not as simple of an exercise as people think" and that the company will roll out more information “in the next couple of weeks.”
“I don’t know exactly," Zhao said in reference to the timing on additional reserves data. "In Binance, internally, we don’t use a lot of deadlines. People work pretty fast already. We try not to push."
FTX fallout
On Monday night, FTX’s founder and former CEO Sam Bankman-Fried was arrested in The Bahamas. On Tuesday, the U.S. Justice Department, Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) filed charges against the 30-year old, alleging he and his company committed fraud by spending FTX customer deposits.
The shocking collapse has put the money of more than a million customers into the hands of Chapter 11 bankruptcy, and caused major investors from Sequoia, to BlackRock, to Temasek, and the Ontario Teacher’s Pension Plan to write off their equity investments in the exchange to zero.
According to data tracked by blockchain forensics company, Chainalysis, the impact of the FTX collapse has proven to be the third largest sell off in digital coins this year.
In May, the collapse of algorithmic stablecoin Terra (UST) cost crypto holders an estimated realized loss $20.5 billion, while the bankruptcies of Three Arrows Capital, Voyager Digital, and Celsius Network a month later accounted for as much as $33 billion in weekly realized losses.
FTX’s demise has left investors with a largest weekly realized loss of $9 billion. Over the course of this year, the overall value of crypto assets has dropped by about two-thirds.
Recent revelations regarding how FTX handled customer funds has also forced many crypto investors to reassess the viability of the emerging asset class, with hearings on Capitol Hill this week seeing the industry again under pressure amid an onslaught of criticism from lawmakers.
"FTX is just the latest in the series of major crypto industry failures, failures of centralized crypto intermediaries like Celsius, and failures of DeFi offerings like Terra Luna," Hilary Allen, a professor at American University Washington College of Law said during a Wednesday Senate Banking, Housing and Urban Affairs Committee hearing on FTX.
"These failures arose in large part because of a feature that is unique to the crypto industry, crypto assets can be made up out of thin air."
David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers
Nidhi Pandurangi
Wed, December 14, 2022
Binance CEO, Changpeng Zhao.
Shortly after jittery investors withdrew over $1 billion from Binance on Tuesday, its CEO sent a memo to staffers.
Changpeng "CZ" Zhao seemed to try to assuage market fears amid the implosion of crypto peer FTX.
In the memo, CZ wrote Binance expects "the next several months to be bumpy."
On Tuesday, jittery investors withdrew more than $1 billion from Binance, the world's largest crypto exchange. Hours later, the company's CEO, Changpeng "CZ" Zhao, sent a memo to staffers where he seemed to try to assuage market fears in the aftermath of the implosion of crypto peer FTX.
"Binance will survive any crypto winter," CZ wrote in the memo.
Tuesday's withdrawals marked the biggest single-day withdrawal the exchange had seen since June, per blockchain research group Nansen.
Insider's Phil Rosen reported on Wednesday that Binance has seen about $3.66 billion in net outflows in the seven days preceding December 13, also citing data compiled by Nansen.
Publicly, CZ appeared to shrug off concerns about customers withdrawing funds, tweeting on Tuesday: "We saw some withdrawals today (net $1.14b ish). We have seen this before. Some days we have net withdrawals; some days we have net deposits. Business as usual for us."
But in the memo to staff, CZ wrote that Binance expects "the next several months to be bumpy." He added that the company will "get past this challenging period."
Binance declined Insider's request for comment for this story.
Read the full memo Changpeng "CZ" Zhao sent to staff on Tuesday.
You may have seen some of the latest news regarding Binance. The fallout from the FTX implosion has brought with it a lot of extra scrutiny and tough questions. The good news is that, even though the news stories don't always reflect it, we can answer the tough questions thrown at our business.
For example, despite today's news regarding withdrawals, we are in a strong financial position. We often process more than $1b in deposits or withdrawals on a daily basis. So, it's nothing unusual today. User assets at Binance are all backed 1:1 and Binance's capital structure is debt free. We maintain hot wallet balances to ensure that we always have more than enough funds to fulfill withdrawal requests and we top up hot wallet balances accordingly.
With regard to questions on the temporary halt of withdrawals of USDC, because we auto convert USDC to BUSD in order to retain large liquidity pools, we generally retain USDC deposits for future withdrawals. In today's case, many people deposited BUSD or USDT to withdraw USDC. When this happens, we need to convert. Our current conversion channels are clunky. We have to go through a bank in NY in USD, which is slow. We will improve this going forward.
With all that is going on, we know that we are at a historic moment in crypto. Rest assured, this organization was built to last. As long as we continue to offer users the best product, user experience, and frictionless trading environment – Binance will survive any crypto winter.
While we expect the next several months to be bumpy, we will get past this challenging period – and we'll be stronger for having been through it. As always, I'm grateful to each of you for your incredible dedication and hard work and I'm proud of the incredible business we've built together.
CZ"
