Crypto firm Binance endures wild weeks in wake of FTX collapse

Paris – Even by the extreme standards of cryptocurrency trading, the past few weeks have been a wild ride for Binance, the world’s biggest exchange for crypto assets.

After

the collapse of rival exchange FTX

in a hail of allegations of fraud and criminality in November, trust in the entire sector has crumbled.

Customers pulled more than US$3 billion (S$4 billion) from Binance in a single day last week as

part of a three-day frenzy

that saw more than US$6 billion withdrawn.

Last Friday, accountancy firm Mazars, engaged by Binance to provide a “proof of reserves” report, abruptly halted work with all crypto firms because of “public misunderstanding” of what they were providing.

A “proof of reserves” report is not a full audit and gives no information about liabilities.

Media reports suggest that United States prosecutors are weighing up money laundering and sanctions-busting charges against Binance and possibly its co-founder and chief executive Zhao Changpeng. The firm has refused to comment on the inquiry.

The stakes could not be higher.

“It is absolutely vital that Binance survives,” said Mr Dan Ashmore, an analyst at Invezz crypto investment firm. “Any sort of demise would be a devastating blow for crypto, and would likely pull a massive chunk of the industry down with it.”

For Mr Leigh Drogen of Starkiller Capital, it would be “Armageddon” for short-term crypto asset prices if Binance collapsed.

Investors ‘confused and scared’

Mr Zhao’s public appearances have hardly helped to calm the jitters.

In one recent interview with CNBC, he claimed that Binance “kind of forgot” about part of a US$2.1 billion payment that it received from FTX in 2021.

Mr Zhao said a “big chunk” had been paid in FTX’s now worthless in-house token, but sat untouched for 18 months before Binance remembered and transferred the sum, then worth US$580 million.

“Is forgetting about over half a billion dollars supposed to make me feel more confident in Binance’s ability to properly run an exchange?” Ms Genevieve Roch-Decter of Grit Capital wrote in an opinion piece for Coindesk, a crypto news outlet.

Critics point out that Mr Zhao is prone to making confusing and sometimes contradictory public statements.

He claims to want transparency but Binance refuses to divulge even basic company information such as where it is registered, let alone submit to a full audit, like a publicly traded firm would have to undergo.

Mr Zhao cosies up to regulators in some jurisdictions, but reportedly keeps his main business well away from prying eyes in the Cayman Islands.

He stresses his firm’s solidity and competence, but his personal Twitter feed paints a picture of a one-man band backed by interns.

When asked to clarify details of Binance’s structure, a company spokesman said in an e-mail that “the Binance.com global business operates through a number of entities incorporated in a range of jurisdictions”.

On the issue of transparency, he said that the blockchain technology that crypto relies on was “inherently transparent”.

“That said, we embrace additional transparency and we are looking into how best to provide this in the coming months,” the spokesman added.

‘Too big to fail’?

Analysts agree that comparisons with FTX only go so far.

“While there are obvious parallels with FTX, there are important differences, the most notable of which is that Binance does not have a giant in-house hedge fund,” said ByteTree Asset Management CEO Charlie Erith.

Much of the alleged wrongdoing at FTX involved former chief executive Sam Bankman-Fried using FTX customer deposits to

fund risky bets undertaken by its hedge fund Alameda Research.

Mr Drogen said: “I don’t think there is anybody out there, even those people who assume the absolute worst, that think Binance is even half insolvent.”

He pointed out that Binance is about 10 times the size of pre-collapse FTX, in terms of the assets that should be on its platform, giving it a far bigger cushion in case of a sudden upsurge in withdrawals.

The Binance spokesman said the firm handled last week’s withdrawal requests “without breaking stride”, adding that “flows have now normalised”.

Mr Drogen stressed that hedge funds and venture capitalists exposed to crypto assets needed the Binance platform right now to protect their positions.

But the firm’s long-term prospects are less clear – especially if the US authorities push ahead with criminal charges.

“Our feeling is that nothing in crypto is too big to fail for the US government,” said Mr Drogen, adding that the authorities are “probably going to crush something that is illicit at some level”. AFP