Frustration. Irony. Apathy. This Week’s Story: Binance and its mismanagement of reserves has provoked a range of reactions.
If You didn’t catch it, Bloomberg reported that Binance had “mistakenly” bundled client funds with collateral assets, according to a spokesperson who was unnamed.
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The Summary is as follows. Binance Issued B-Tokens which are backed by half the assets in reserve, which are stored in a cold wallet. Well, that’s smart. The Only problem is that the cold storage contains more funds than is needed to back the B-Tokens. Since Assets are meant to be backed 1:1. This is not the case. The Combination of customer tokens and collateral is the issue. Bloomberg reported.
“Collateral assets were mistakenly transferred to this wallet and were appropriately mentioned on the B-Token proof of collateral page,” the spokesperson told Bloomberg. Whoops.
“Binance is aware of this error and is in the process of transferring these assets to dedicated collateral wallets,” the spokesperson added.
For Those with Crypto PTSD
This is all so sensitive. What has happened in recent months? In November, the notorious FTX collapsed after it was revealed that the founder Sam Bankman-Fried had mixed his trading firms’ funds with customer assets from Alameda Research. This led to a business-wide drive for exchanges to submit proof of reserves and be fully audited. But there was a downside: the reports failed to make anything clear. The audit was overseen by Mazars, after intense criticism, the firm abruptly halted business with all crypto companies.
I was interviewed by CNBC earlier this month to complain about the removal of these audits from their archives. They referred to them as “audits”, while lamenting the fact that these exchanges remain largely opaque. Nothing has changed since (starts at 5:37).
The Lack of Transparency is a Constant in Crypto
This story about Binance revealing the truth is yet another example of how vulnerable customers can be to major exchanges by having incorrectly pooled reserves with client assets. There is no proof that Binance is doing anything wrong, but there is no way for them to prove their innocence. Opaqueness is not allowed.
We don’t even know what Binance’s duties are. We don’t know if they are using their native token BNB as collateral. There are a lot of things that happen behind the scenes that are not well understood. We are forced to take CEO Changpeng Zhao’s word for it.
However, we should not trust just him. Zhao is a great enthusiast. I have seen it first-hand. He is an excellent leader, but he is not a saint. Binance has been known to be secretive and uncooperative with regulators. He has been criticized for his lack of transparency. We should not blindly trust him.
It’s up to us all to make sure the industry is as safe as possible. We must demand transparency from our exchanges and make sure that they are not taking advantage of us. We must demand that they are audited and held to the same standards as other industries. We must require them to be held accountable for their actions.
I have written many good things about him before. He was an incredible leader. Binance is an impressive crypto figure.
However, the downside is that the crypto industry shouldn’t have to rely on taking someone’s word for it. CZ claims that to support that Binance doesn’t owe anyone money, they just have to “ask.” Well, CZ, I’m asking.
Back to 2008
What if cryptocurrencies were untrustworthy? “Don’t trust, verify” has become a business slogan. Please confirm it with me. Binance, it’s great! But how can I prove the authenticity of any signatures? You won’t be able to. Only in the case of “Trust me brother.”
Remember Bankman-Fried famously tweeted “FTX has enough to cover all client holdings” and more “we do not invest client assets (not even Treasuries).” He deleted the tweets a few days later and FTX filed for bankruptcy that week.
Bankman-Fried’s words are impossible to ignore. Bob Marley was right when he sang, “each little thing is gonna be alright.” FUD is supposedly an abbreviation for “fear, uncertainty, and doubt,” but crypto advocates use it to answer very cheap questions that are not often available in the public domain.
Alex Mashinsky, the former CEO of crypto lender Celsius, had a brilliant tweet at the end of the conversation. A few weeks later, the company froze withdrawals and filed for bankruptcy with customers owing $4.7 million. The case is still in court.
There are many more, but why not? It’s ironic that all of this happened due to the hatred of institutions that came out of the Great Financial Crisis of 2008. Crypto was
