Binance’s ‘fractured administration’ spurs heated debates and FUD

Binance is under fire again as FUDs regarding its proof of reserves and regulatory uncertainties, are gaining traction. The exchange is also experiencing massive withdrawals following a story by Reuters that details it’s on the US DOJ’s radar. Other reports regarding failed audits are in the air as well. But what’s going on?

FTX collapse and Binance’s proof-of-reserves release

Where did Binance’s current woes originate from? It all started with the triggering of FTX’s death spiral. A few days before the FTX’s eventual collapse, Binance CEO Changpeng Zhao took to Twitter explaining that he would dump his FTT holdings regarding risky FTX business. He explained that he would not do that to undermine the solidity of FTX but because he didn’t trust the way Sam Bankman-Fried and his team were driving the exchange.

When FTX’s doomsday came, investors discovered that what Binance CEO CZ had said was true. There wasn’t enough liquidity in the exchange to match customer deposits 1:1. Massive withdrawals were triggered where investors sought to withdraw upwards of $5B. However, the exchange couldn’t process such funds, which resulted in even dumping FTT. 

FTX turned to Binance for help; however, CEO CZ had already explained that he wouldn’t always come to aid crypto empires that mismanaged funds and were on the verge of collapse. He had acted at the mercy of saving the Terra Luna ecosystem following LUNA and UST’s collapse. Binance looked into FTX’s books and realized there were ‘holes’ in its accounting and thus decided to pull out of a potential deal of buying out FTX.

Following the pulling out of Binance, CEO CZ said crypto exchanges and other crypto empires must provide proof of their reserves.

Validating exchanges’ proof-of-reserves

Binance and other CEXs rallied to introduce Merkle tree proof of reserves. Binance first tweeted its reserves showing that it had the customer’s funds in BNB, BUSD, and BTC. However, this did not sit well with investors, who said that people wouldn’t necessarily be using BUSD to keep their assets safe with Binance. Binance explained that it had default settings to allow the funds saved with them to be converted from all other stablecoins into BUSD, raising eyebrows further.

Other CEXs like Coinbase and Kraken followed suit and submitted their proof of reserves online. Coinbase was also under fire Mid November 2022 as FUDs claimed it lacked enough funds to match customers’ 1:1 deposits. However, its CEO, Brian Armstrong, refuted those claims explaining that all funds were safe. He posted proof that they hold 2M BTC worth around $40B.

In a tweet, Armstrong said:

“We all must unite to build this industry responsibly going forward. Be wary of false information.”

On-chain data platforms like coinmarketcap and CoinGecko also provided tools for checking exchanges’ proof of reserves. These developments also pushed other CEXs like Bybot to explain that they would follow suit and provide proof of their reserves. Bybit only did it a few days ago.

Binance criticized for their “flawed” proof-of-reserves

Although Binance did a white knight save of the crypto space by helping failing organizations like Terra ecosystem and compelling other exchanges to provide Prof of Reserves, its own weren’t received gracefully. As discussed earlier, some investors expressed their views on Twitter, explaining that Binance’s reserves were questionable.

Onlookers complained that Binance is not careful with keeping most of its reserves as BUSD and BNB since they are assets affiliated with it. Binance also published an official Merkle tree-based proof of reserves, where its current troubles started to gain weight.

Some Twitter users expressed that Binance’s proof of reserves was pointless as they did not include liabilities. CZ clarified that Binance did not have any liabilities, so there was no need to include that information.

Kraken’s Jesse Powell did like the information and commented regarding Binance’s Merkle Tree proof of reserves. He claimed that such a report does not qualify as acceptable proof of reserves. He even went further to brand it as either ignorance or intentional misinterpretation of what is required of the company’s finance department.

Powell explained that people like him would continue calling out anomalies in the proof of reserves that will be published for public viewing and certification. In an earlier tweet, he explained that reserves should be assets minus liabilities and not just a list of wallets. He even said that CoimMarketCap’s (owned by Binance) reserves also have issues.

Powell also touched on what kind of reports auditors should provide investors with. In his view, he expressed that he felt auditors have an obligation to show the sum of client liabilities excluding negative balances, user-verifiable cryptographic proof that each account provided by the company was included in the total sum, and finally, signatures that prove ownership of the accounts. He also provided Kraken’s proof of reserves via tweets.

Reuters allegations

Powell is not the only one who expressed concerns regarding Binance’s PoR. On Monday, Reuters announced that it had an internal source who reported that the recent Binance audit failed terribly. It expressed that the auditors in charge of the operation were never given the freedom to provide independent reports, alleging that even Binance’s Auditor could not vouch for the final results.

Crypto.news shed more light on the report explaining how Reuters had a source claiming the US government was planning on prosecuting Binance, including its executives, in particular CEO CZ. The audit carried out by Mazars, a third-party auditing firm that also revied Donald Trump’s organizations, seemingly uncovered that Binance’s BTC reserves were over-collateralized.

Reuters explained that the US Department of Justice (US DOJ) began looking into Binance in 2018 after suspicions of financial foul play. Its main argument was that Binance would most likely be prosecuted for criminal sanction violation, unauthorized money transmission, and other major conspiracies like money laundering. 

Reuters also explained that Binance’s defense team was busy meeting with DoJ over the past months to reach a plea deal and avoid mainstream prosecution. This report came as a new FUD amid Biance’s highly criticized proof of reserves. Regarding the ongoing issues, Binance has argued that the crypto industry is already caught up in a long descent, and criminal trials would only worsen matters. However, some sources say that such a case would need hard evidence making it almost impossible to kick start now.

Binance response

Shortly after Reuter’s report went live, Binance clarified via an official statement. It claimed that Reuters had it all wrong again. It explained that its legal team was already working with regulators globally. It revealed that its legal team had responded to over 47K requests in 2022 alone regarding the exchange’s operations.

Binance claimed not to have any links to the internal functioning of the US DOJ, contrary to what Reuters had explained: the DOJ is cut in between taking action against the exchange. It explained that its legal team is working with regulators to ensure illegal actors do not have open access to crypto via Binance’s tools. 

Additionally, Binance’s CZ also hit Reuters, claiming that some media houses were questionable and seemed to be working for SBF though he didn’t say it, frankly. This allegation follows a recent reveal by The Block CEO that he has been financed by Same Bankman-Fried, which begs the question, do he and his kind have a connection to common crypto FUD propagators like Bloomberg, Reuters, WSJ, and WaPo have a network.

Massive withdrawals

The crypto community is not taking the FUD against Binance lightly. The exchange is experiencing massive withdrawals that now top $1B. This data is provided by on-chain data provider Nansen showing that Binance has surpassed all other CEXs withdrawal requests in 24 hours. 

Since the spike in Binance withdrawal requests comes from a string of news circulating regarding regulatory and financial uncertainties, CEO Changpeng Zhao has asked investors to ignore the FUD and continue building.