Open letter to crypto: What’s wrong with this industry? Binance Aggregates Client Funds with Collateral | Invezz
Exasperation. Irony. Apathy. This week’s story on Binance and his poor management of the reserves arouses many emotions.
If you missed it, Bloomberg reported that Binance “mistakenly” bundled collateral for some of the crypto assets it issues with customer funds, with the report citing an unidentified Binance spokesperson.
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The summary is as follows. Binance has issued B-Tokens, with reserves for around half of these assets stored in a cold wallet. Well – logical. The only problem is that the cold wallet contains more funds than necessary to back up the B-Tokens. Since the assets are supposed to be backed 1:1, this is not what should happen. It’s a problem that means collateral is mixed with customer tokens, Bloomberg reported.
“Collateral assets have already been moved into this wallet by mistake and referenced accordingly 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.
PTSD for crypto investors
What makes all of this so sensitive – and disappointing – is what’s been happening across the industry over the past few months. FTX sadly collapsed in November following revelations that founder Sam Bankman-Fried mixed client assets with his trading firm Alameda Research, before suffering heavy losses and ultimately leaving an $8 billion hole in the balance sheet where client funds should have been found.
Bankman Fried has been arrestedextradited to the United States 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, was that the reports did not clarify anything. Mazars, the accounting firm hired to oversee Binance’s report, abruptly stopped dealing with all crypto companies after the debacle drew heavy criticism.
I appeared on CNBC earlier this month to denounce how far these reports fell from the “audits” they claimed to be, lamenting that these exchanges remained incredibly opaque. Nothing has changed since (begins at 5:37).
Lack of transparency continues for crypto
This story, revealing that Binance mistakenly pooled reserves with client assets, is yet another reminder of how vulnerable clients are to these large exchanges. To be clear, there is no evidence that Binance is doing anything fishy, but more importantly there is also no way to verify that they are not, as the information is just not public.
We don’t know anything about Binance’s liabilities. We don’t know anything about whether it uses its own token, BNB, warranty. We don’t know much about what happens beyond the scenes. We are forced to trust CEO Changpeng Zhao.
Again, that’s not to say there’s nothing to show that we shouldn’t trust Zhao. I’m a huge fan of his and have written favorably of him in the past. He has been a fantastic leader for Binance and a great personality for crypto.
My issue is that the crypto industry should not be in a position where it is required to blindly trust any individual or company. CZ says that to confirm that Binance doesn’t owe anyone money, we should just “ask around”. Well, CZ, I ask around.
2008 all over again
What happened to crypto being trustless? “Don’t trust, verify” has become something of a calling card. Tell me – how do you verify that Binance is good for this? How to verify that one of these companies are? You can not. It’s just a matter of “Trust me brother”.
Remember, Bankman-Fried notoriously tweeted that “FTX has enough to cover all client holdings” and “we don’t invest client assets (even in treasuries)”. He also tweeted that “FTX is doing well. Assets are doing well.” Two days later, he deleted the tweets and FTX filed for bankruptcy later in the week.
Bankman-Fried is far from the only founder pleading with the world to ignore the stupid “FUD” on insolvency issues, which Bob Marley was right about when he sang. every little thing will be fine”. FUD is supposed to stand for “fear, anxiety and doubt”, but in reality it is often used by crypto advocates to describe extremely reasonable questions for which the answers are not available in the public domain.
Alex Mashinsky, the former CEO of crypto lender Celsius, also had the gem below of a tweet back in May. His company suspended withdrawals a few weeks later, then bankruptcy filing with $4.7 billion owed to customers. The case continues to move forward in court.
There are many more, but why go on?
The great irony of it all is that the crypto industry grew so much because of the distaste for institutions that resulted from the Great Financial Crisis of 2008. Crypto was meant to be a new financial system, the way people are building beyond the stress points of the established system that collapsed in 2008.
Yet here we are, blindly clinging to the CEO’s tweets on Twitter that all is well. It is exhausting to have the crypto industry ride this merry-go-round again, while Binance and all these other centralized companies refuse to do the simplest thing and just publicize their holdings.
Assets held with the exchange “have been and continue to be backed 1:1,” the Binance spokesperson added.
I hope he is right. But that’s all you can do for now: to hope. May be “Don’t trust, verify“must be replaced by”Don’t trust, just blindly hope for the best.”
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