Binance, the world’s biggest cryptocurrency exchange, is under the spotlight after temporarily halting withdrawals of the stablecoin USD Coin (USDC).
Concerns about Binance are growing, and customers are withdrawing funds from the exchange at a high rate. In the 24-hour period leading up to Tuesday, £2.4 billion in net withdrawals flowed out of Binance, according to blockchain analytics firm Nansen.
While Binance Markets Limited was stopped from operating in Britain by the Financial Conduct Authority (FCA), UK investors are free to access Binance.com
Binance CEO Changpeng “CZ” Zhao has made valiant attempts to reassure his customers and investors. “Things seem to have stabilized,” Zhao tweeted on 13 December, claiming that the prior day’s withdrawals were not in “the top five” largest single-day withdrawals in the company’s history.
Zhao claimed that only around £1.1 billion in net withdrawals took place on 12 December, and that the temporary halt of USDC withdrawals occurred as part of a “token swap.”
The swap was needed, Zhao said, due to a large increase in withdrawal volume outside of traditional banking hours, and the need to complete a token swap, which required routing through a New York-based bank.
“We expect the situation to be resolved when the bank opens,” he said in a tweet.
Trading resumed normally as promised, with a total downtime of 8 hours after Binance first announced the pausing of withdrawals.
Crypto markets are worried about Binance
The growing concerns reflect diminishing trust in centralised exchanges following a series of industry scandals throughout 2022. Recent headlines have focused the market’s worries squarely on Binance.
On 12 December, there were reports that US prosecutors could move aggressively against Binance and file criminal charges against several individual executives, including Zhao.
This relates to a long-running case on Binance’s compliance with anti-money laundering laws. The investigation was launched in 2018, and is public knowledge.
Then came the suspension of USDC withdrawals on Tuesday.
Looming over Binance is the shockingly rapid collapse of FTX. In a matter of days, FTX went from one of the leading crypto exchanges to bankruptcy after reports emerged that it had been using client funds to prop up its sister trading firm, Alameda Research.
In a move reminiscent of Zhao’s tweets this week, FTX CEO Sam Bankman-Fried had tweeted in November that “FTX is fine. Assets are fine” and “we don’t invest client assets (even in Treasurys).”
FTX filed for bankruptcy on 11 November within days of those tweets, which Bankman-Fried has since deleted. The disgraced former CEO was arrested in the Bahamas on Monday and faces federal criminal charges.
Binance’s proof-of-reserves fails to reassure
In the aftermath of the FTX collapse, Zhao has pushed for more transparency, insisting that crypto exchanges present proof-of-reserves on a blockchain to assure customers that their assets are backed.
Binance has presented assets in an on-chain wallet, but there are plenty of outstanding questions about how much this actually tells investors.
For instance, critics note that Binance’s liabilities are not transparent. Without a clear accounting of the firm’s liabilities, it’s impossible to come to an informed decision about a company’s financial health.
Zhao has commented that it is harder to present liabilities, and asserted that Binance does not owe loans to anyone.
Despite attempts at more transparency, Binance still operates in an opaque manner compared with traditional financial entities. Many clients are choosing to withdraw funds from Binance and other exchanges, opting for safer offline crypto storage.
Incidents such as the USDC withdrawal pause only to back this up. While this was for legitimate reasons and turned out to be nothing ominous, the fact of the matter is that investors are forced to rely on tweets from CEOs on Twitter that are all above board.
Given the painful memories of Bankman-Fried’s deception, it is easy to understand the fear, despite nothing of substance suggesting that funds are not safe with Binance.
