Binance, the World’s Largest Crypto Exchange, Faces a Test as Customers Withdraw Funds
By Jack Denton
After Sam Bankman-Fried’s downfall, Binance CEO Changpeng “CZ” Zhao remains one of crypto’s most high-profile voices./Patricia De Melo Moreira/AFP via Getty ImagesThere’s nothing in crypto like the New York Stock Exchange, but if the industry has anything close, Coinbase COIN +3.88% Global and Binance fill that role.
Coinbase (ticker: COIN) is based in the U.S. and provides audited financial statements to investors.
Binance, based offshore, is more opaque.
And that is causing concern: In the 24 hours through Tuesday, investors withdrew assets from the exchange at the fastest rate in months, and it is facing perhaps one of the biggest stress tests in its five-year history.
“Withdrawals on the platform highlight the uncertainty and shattered confidence in the space, a desperation not to be caught up in another FTX event,” said Craig Erlam, an analyst at broker Oanda, in a note on Tuesday.
“That’s what fear does, especially in a situation where confidence has been so severely damaged, as it has in recent weeks.”
Regardless of the recent withdrawals, the bankruptcy of FTX has shifted attention, and business, to Binance.
According to a report from CryptoCompare, Binance increased its share of global spot crypto trading volume to a record 52.9% in November.
Binance also recorded its highest market share in derivatives trading, with 67.2% of the market last month, as users migrated assets to a platform deemed safer.
The value of crypto held on Binance wallets tracked by data firm Nansen remains above $58 billion, but recent withdrawals have seen deposits shrink.
More than $3 billion worth of Ether and Ethereum network-hosted tokens were withdrawn from Binance over 24 hours by Tuesday, the most in at least six months, according to the blockchain research firm Nansen.
Customers have pulled about 45,000 Bitcoin BTCUSD –1.80% , worth more than $800 million at current prices, over the past 24 hours, though the pace of withdrawals has slowed from Tuesday, according to data firm Coinglass.
There are no signs that Binance is having trouble processing withdrawals, though it did pause withdrawals of USDC-related tokens in the last 24 hours.
“Things seem to have stabilized,” Binance’s CEO, Changpeng Zhao, said via Twitter Wednesday.
“Yesterday was not the highest withdrawals we processed, not even top 5 … Now deposits are coming back in.”
Along with spot trading, Binance offers derivatives services, and launched its own blockchains: Binance Chain and Binance Smart Chain, which have since merged as BNB Chain.
It supports its own token, BNB, which has a market capitalization of $43 billion at recent prices.
That makes it the third most valuable crypto after Bitcoin and Ether, aside from stablecoin tokens pegged to the dollar.
“Our mission is to provide the core infrastructure services for organizing the world’s crypto,” the company says on its site.
Binance seems to be achieving that goal.
The company says it handles an average $76 billion of volume in 24 hours, has 120 million registered users, and offers more than 350 tokens on its platform.
Investors also use the service to earn yield on tokens, advertised at rates approaching 200% on the stablecoin USDT if users lock up other, smaller tokens as liquidity.
Yet its operations remain something of a black box. CZ has said the company doesn’t have a corporate headquarters, running the business out of offices in the Middle East, Caribbean, Asia, and other places.
Binance has never released audited financial statements.
It only recently disclosed some information about its assets and liabilities.
The exchange last week released a “proof of reserves” report from accounting firm Mazars, issued from a South African office.
Addressed to Binance Capital Management in the British Virgin Islands, the report outlined Binance’s “in-scope assets,” including customers’ spot, options, margin, futures, and loan accounts recorded on major blockchains, including Bitcoin, BNB Chain, and Ethereum.
The report is based on “agreed-upon procedures,” Mazars said, but added that it makes no representation regarding its appropriateness.
The report shows that Binance has covered customer liabilities with a 101% collateralization ratio, a seemingly clean bill of health.
Mazars didn’t express a further view regarding Binance, saying that if it had performed additional procedures it may have come across other matters.
The lack of disclosure and standard auditing practices struck John Reed Stark, a former chief of the Securities and Exchange Commission’s Office of Internet Enforcement, as inadequate for a company of Binance’s size and scope.
“You’re a multi-billion company and you don’t hire a Big Four auditor, give them all your account numbers, and review your risk procedures?
It’s a joke,” Stark said.
“The only thing we know for sure is that we know nothing.”
A spokesperson for Binance said that the company contacted Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers.
“However, they remain hesitant to conduct an audit or a ‘proof of custody’ report for any privately held crypto exchange,” she said in a statement.
Mazars has experience working in the crypto space and conducted an “agreed upon procedures” analysis similar to what the crypto exchange Kraken publishes, she added.
It is a specific test “to review a business process, rather than do a full company audit,” she wrote.
CZ, in a public Twitter Spaces forum on Wednesday, said that he expects “the next batch” of accounting reports offering proof of the exchange’s reserves in a couple of weeks.
The crypto industry is under increasing regulatory scrutiny.
“As has been reported widely, regulators are doing a sweeping review of every crypto company against many of the same issues,” a spokeswoman for Binance said in a statement.
Binance, she added, “has shown its commitment to security and compliance through large investments in our team as well as the tools and technology we use to detect and deter illicit activity.”
Ordinary operating procedures for an exchange or broker/dealer, with customers’ assets segregated from those of the company, should allow Binance to continue processing customer withdrawals even if its corporate entity were to come under financial strain, said Stéphane Ouellette, the CEO of crypto advisor and capital markets platform FRNT Financial.
— Daren Fonda contributed to this article.
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