3 - 5 minute read
In the wake of the collapse of FTX, a once-$32 billion cryptocurrency empire, some investors are concerned about potential cracks at Binance, one of the largest cryptocurrency exchanges. There are several factors that have contributed to this unease, including concerns about Binance’s holdings of customers’ funds, heavy withdrawals from the exchange, and a Department of Justice investigation into potential money laundering.
First, the bankruptcy of FTX has put pressure on other crypto firms to reassure customers that their funds are safe and that the company has the ability to pay out in the event of a mass withdrawal. To address these concerns, Binance sought to get a “proof of reserves” report from accounting firm Mazars to verify its holdings. However, legal experts have argued that the report, which suggested that Binance’s financial situation was solid but also showed that bitcoin liabilities were $245 million larger than assets, was insufficient in assuaging customer fears. Additionally, nearly half of the company’s $75 billion reserves are in its own stablecoin BUSD and its native token, Binance Coin (BNB). In response to these concerns, Mazars suspended its proof-of-reserves work with Binance and other crypto clients, citing concerns about how the reports are understood by the public.
Second, Binance has experienced heavy withdrawals in recent days, with net outflows of $3 billion over a 24-hour period on Tuesday, according to Nansen data. This marks the highest daily withdrawals for Binance since June. The exchange was forced to temporarily freeze withdrawals of USD Coin while it increased its holdings of the stablecoin. In the past month, Binance’s total of digital assets in publicly disclosed wallets has decreased from $69.5 billion to $54.7 billion due to large withdrawals and price fluctuation. Despite this, Binance CEO Changpeng Zhao, commonly known as “CZ,” has assured customers that they can withdraw “100% of the assets they have on Binance” and that the company holds user assets one-to-one, as required.
Third, the Department of Justice is reportedly investigating Binance for potential compliance issues with financial crime rules, including money laundering conspiracy, unlicensed money transmission, and criminal sanctions violations. Reuters has claimed that Binance processed over $10 billion in illegal payments in 2022 and attempted to evade regulators, a claim that Binance has disputed. If charges are filed against Binance’s founder and other executives, it could further erode trust in the company.
Despite these challenges, CZ has emphasized that it is “business as usual” at Binance and has described the recent heavy withdrawals as a “stress test” that demonstrates the exchange’s resilience. He has also warned employees that there may be a “bumpy” road ahead as the company navigates these challenges.
Overall, the recent events at Binance, including the Mazars report, heavy withdrawals, and DOJ investigation, have raised concerns among some in the cryptocurrency community about the stability and transparency of the exchange. It remains to be seen how Binance will address these concerns and whether it can maintain the trust of its customers moving forward.