Binance recently admitted that it failed to maintain backing for tokens issued on Binance Smart Chain separate from customer funds. Whilst the exchange claims it is addressing these “historical operational oversights”, the dangers of commingling customer funds are still fresh following the implosion of FTX, which left over $1B in investor assets missing.
Binance has also been under fire after it emerged that the firm transferred close to $350 million for Russian exchange Bitzlato, casting doubt on the company’s claims that it is working to tackle money laundering.
So, is Binance on the same path to collapse? And if so, could it be Armageddon for centralized crypto exchanges?
$1.3B Of Client Assets Mixed With B-Tokens
There are 94 tokens on Binance Smart Chain (BSC) that are pegged to other crypto assets. Yet Binance was keeping the collateral for dozens of these ‘B-tokens’ in a cold wallet, commingled with client assets when they should have been stored separately.
The crypto exchange routinely mints B-tokens for various digital assets, including Bitcoin, Tether, and USDC, for use on other blockchains. However, Binance should maintain reserves of the original tokens that correspond to their respective B-tokens in separate client wallets.
The Binance 8 wallet was housing approximately $1.3 billion in client assets. Binance has recognized that it needs to transfer the B-tokens to a collateral asset wallet, however, clients cannot be certain that the exchange can satisfy withdrawal requests 1:1 until the funds have been separated.
‘Transparency In Wallets At Binance’
In November 2022, Binance claimed in its blog that it kept “all of its clients’ crypto-assets in segregated accounts which are identified separately from any accounts used to hold crypto-assets belonging to Binance.”
However, its interpretation of segregated accounts isn’t what you might expect. Binance didn’t mean they are segregated on-chain. Instead, it was referring to an internal accounting system they use to monitor how much in these cold wallets is client funds vs company funds.
The problem is, this relies on Binance having excellent internal accounting procedures and maintaining accurate records. Yet given that the former CFO wasn’t even allowed to view the firm’s books, you have to wonder how good these processes really are.
Proof-Of-Reserves Report Raises Issues
Concerns about commingling client funds add to the challenges that have arisen from Binance’s proof-of-reserves report, issued by auditor, Mazars. The report, released in December, relied on balances from client accounts and Binance cold wallets. But if the exchange held substantial amounts of corporate assets in these wallets, verifying that there were sufficient reserves for customer liabilities is difficult.
Interestingly, the following month, Mazars came out and said that it will no longer provide proof-of-reserves for crypto companies due to “concerns regarding the way these reports are understood by the public”.
More recently, big four auditors, PwC, found that proof-of-reserves reports do not provide sufficient assurance of a crypto firm’s health without audited financial statements and accepted accounting standards.
Is this it then, is Binance doomed to follow in the footsteps of the now disgraced Sam Bankman-Fried and FTX? Well, it’s not quite that bleak… yet.
The latest revelations don’t necessarily mean that everything is unbacked or that Binance is about to go bankrupt. But they do raise serious concerns about the way in which crypto companies appear to be managing customer assets along with the reliability and accuracy of their accounting records.
Concerns are made even more challenging to address when Binance regularly changes entities (over 70 have been set up) to navigate regulatory challenges, making it difficult to keep accurate records, even more so to audit reliably.
It is perhaps unsurprising then that many retail investors are turning to established crypto brokers, which typically operate with more robust oversight and offer alternative investment vehicles. CFD crypto trading, in particular, offers several advantages:
- Ownership – CFDs are derivatives, meaning traders do not own the underlying token, such as BTC. Instead, traders simply speculate on the price. As such, crypto investors don’t have to worry whether their digital assets are securely held on a centralized exchange.
- Leverage – CFDs can be traded with leverage, whereby the broker effectively loans clients funds to increase their position sizes and potential profits. Reputable crypto brokers typically offer 1:2 leverage, so if you deposit $1000, you can trade with $2000.
- Credibility – The best brokers are regulated by trusted financial authorities. As well as undergoing regular audits, they also offer customer safeguarding measures like negative balance protection, so you can’t lose more than your account balance.