- Investors are concerned that cracks are starting to appear on Binance after the shocking crash of FTX.
- The cryptocurrency exchange giant faces questions about its reserves and is under investigation by the Justice Department.
- As the cryptocurrency market has lost faith in the exchange, its CEO has warned staff of “irregular” times ahead.
Clients drained billions of dollars from Binance’s crypto platform last week, just one reason the spotlight is on the company in the wake of the FTX implosion.
Frightened investors are on the lookout for signs of trouble after the collapse of the now-bankrupt FTX, the $32 billion crypto empire founded by Sam Bankman-Fried. Some are concerned that cracks may start appearing on Binance.
Here are 5 things to know about what’s happening at Binance and why the cryptocurrency community is wondering.
People are concerned about Binance’s holdings in client funds
After FTX’s bankruptcy showed its coffers empty, cryptocurrency firms were under pressure to prove their clients’ holdings were safe and could pay out if there was a surge in withdrawals.
Additionally, a Reuters report claims that FTX’s Bankman-Fried quietly transferred at least $4 billion in user funds to sister trading firm Alameda Research after it suffered losses.
Binance has been trying to boost confidence in its business by obtaining a “proof of reserves” report. He has enlisted accounting firm Mazars to audit his holdings, perhaps to reassure clients that their funds are still in their accounts and not loaned out.
But legal experts and other he said that users of the platform should not be satisfied with the Mazars report, as it did not elaborate on the effectiveness of financial controls. While he suggested Binance’s situation was solid, he also showed that bitcoin liabilities were $245 million larger than assets, the WSJ reported.
According to a Bloomberg report last month, nearly half of the company’s $75 billion reserves are in its stablecoin BUSD and its native token binance coin (BNB).
On Friday, the accounting firm suspended its reserve testing work with Binance and other crypto clients “due to concerns about how these reports are being understood by the public,” the FT reported.
Clients withdrew $3 billion in net funds in one day
Binance has seen heavy pullbacks in recent days due to questions about its reserves and a DOJ investigation. Meanwhile, the arrest of FTX founder Bankman-Fried has further eroded trust in cryptocurrencies.
Binance recorded its highest daily withdrawals since June on Tuesday, with net outflows of $3 billion in just 24 hours, according to Nansen data. The exchange was forced to temporarily freeze USD Coin withdrawals as it increased its holdings in the stablecoin.
Just over a month ago, the cryptocurrency giant held $69.5 billion in digital assets in publicly disclosed wallets, according to Nansen. That total is now $54.7 billion due to large withdrawals and price fluctuations, he said she.
There is a DOJ investigation into Binance centered around money laundering
Adding fuel to the fire were reports that the US Department of Justice has been investigating Binance over the company’s compliance with financial crime rules.
Prosecutors are considering whether to file criminal charges against its founder Changpeng Zhao and other executives, according to Reuters. These would cover conspiracy to commit money laundering, unlicensed money transmission and criminal sanctions violations.
Reuters calculated that Binance processed over $10 billion in illegal payments in 2022 and said it attempted to evade regulators, which the contested crypto giant.
Binance CEO “CZ” is not upset and says business as usual
Zhao, commonly known as “CZ”, has doubled down on his efforts to ease clients’ concerns about Binance’s liquidity. He is rejected against what he sees as “FUD” – the spreading of groundless fears, uncertainties and doubts.
“People can withdraw 100% of the assets they have to Binance. We won’t have any problems on any given day,” he told CNBC on Thursday. “Cryptocurrency companies need to hold user assets one-to-one, and that’s what we do.”
Earlier in the week, Zhao shrugged off heavy outflows from the exchange as “business as usual.” And after Binance lifted the block on USDC withdrawals, it welcomed the events as a credibility booster “endurance test” of the resilience of the exchange.
But he warned Binance staff that there is an “uneven” road ahead
Though Zhao has played down concerns, problems remain. The young billionaire told staff that FTX’s troubles have put “a lot of extra scrutiny and tough questions” on Binance, which is facing a crisis of confidence.
“While we anticipate the next few months to be bumpy, we will get through this difficult period and be stronger for getting through it,” he said in a memo displayed by Bloomberg.