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Aggravation. Irony. Apathy. This week’s story about Binance and the mismanagement of its reserves stirred up a lot of emotion.
In case you missed it, Bloomberg reported that Binance “erroneously” collected collateral for some of the crypto assets it issued with customer funds, with the report citing an unnamed Binance spokesperson.
The summary is as follows. Binance issues B-Tokens, with reserves of about half of these assets held in cold wallets. Fine – makes sense. The only problem is, the cold wallet contains more funds than needed to support the B-Token. Considering assets are meant to be backed 1:1, this is not how it should be. This is an issue that means collateral is mixed in with customer tokens, reports Bloomberg.
“The collateral assets were previously moved to this wallet in error and referenced according to the B-Token Proof of Collateral page,” the spokesperson told Bloomberg. Oops.
“Binance is aware of this error and is in the process of transferring these assets to a dedicated collateral wallet,” the spokesperson added.
PTSD for crypto investors
What’s made all of this so sensitive – and upsetting – is what has been happening across the industry over the last few months. FTX famously collapsed in November following revelations that founder Sam Bankman-Fried had merged customer assets with his trading firm Alameda Research, before suffering heavy losses and ultimately leaving an $8 billion hole in its balance sheet where customer funds should have been.
Bankman-Fried was arrested, extradited to the US and currently under house arrest in California.
This sparked an industry-wide push for exchanges to publish proof of reserves and be fully audited. The problem, however, is that the report explains nothing. Mazars, the accounting firm hired to oversee Binance’s reports, suddenly stopped dealing with all crypto firms after the debacle drew heavy criticism.
I appeared on CNBC earlier this month denouncing how this report falls short of the “audit” they claim, lamenting that this exchange remains so opaque. Nothing has changed since then (started at 5:37).
The lack of transparency continues for crypto
This story, revealing that Binance mistakenly pooled reserves with customer assets, is a further reminder of how vulnerable customers are to these large exchanges. To be clear, there is absolutely no evidence that Binance did anything fraudulent, but the kicker is also no way to verify that they didn’t, because the information is just not public.
We don’t know anything about Binance’s liability. We don’t know anything about whether it uses its own token, BNB, as collateral. We know nothing about a lot of what’s going on off-screen. We are forced to believe CEO Changpeng Zhao.
Again, this is not to say that there is anything to suggest that we shouldn’t trust Zhao. I am a huge fan of her and have written about her in the past. He has been an amazing leader for Binance and a great personality for crypto.
My problem is that the crypto industry must not be in a position where they are required to blindly trust individuals or companies. CZ says that to make sure Binance doesn’t owe anyone money, we just have to “ask around.” Well, CZ, I was wondering.
2008 again
What happened to the fact that crypto can’t be trusted? “Don’t trust, verify” has become a kind of calling card. Tell me – how do you verify that Binance is good for that? How to verify that one of these companies? You can’t. It’s just a case”Trust me guys.”
Remember, Bankman-Fried famously tweeted that “FTX has enough to cover all client holdings” and that “we do not invest client assets (even in treasury)”. He also tweeted that “FTX is doing well. Assets are fine.” Two days later, he deleted the tweet, and FTX filed for bankruptcy later that week.
Bankman-Fried is far from the only founder asking the world to ignore the ridiculous “FUD” on the subject of bankruptcy, that Bob Marley was right when he sang. every little thing will be fine.” FUD supposedly means “fear, anxiety and doubt”, but in fact it is often used by crypto defenders to describe perfectly reasonable questions for which answers are not available in the public domain.
Alex Mashinsky, former CEO of crypto lender Celsius, also had an amazing tweet below this past May. His company suspended withdrawals a few weeks later, then filed for bankruptcy with $4.7 billion owed to customers. The case continues to move through the courts.
There are many more, but why go on?
The great irony of all this is that the crypto industry grew enormously because of the dislike for institutions that emerged from the Great Financial Crisis of 2008. Crypto was meant to be the new financial system, a way for society to build beyond the stress point of the established system that all but collapsed in 2008.
Yet here we are, blindly clinging to the CEO’s tweets on Twitter that all is well. The fact that the crypto industry is back on this merry-go-round, as Binance and all the other centralized companies refuse to do the simple thing and just publish their holdings, is exhausting.
Assets held with exchanges “have been and continue to be supported 1:1,” added a Binance spokesperson.
I hope he’s right. But that’s all you can do now: hope. Possible “Don’t believe it, Verify“must be changed to”Do not believe, Just blindly hope for the best”.
Post Open letter to crypto: What’s wrong with the industry? Binance collects customer funds with collateral for first appearing on Invezz.
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