Just last month, Changpeng Zhao (CZ) seemed like the undisputed king of cryptocurrencies. Emerging exchange FTX exploded spectacularly in early November. Meanwhile, Zhao, the CEO of Binance, took the killing blow, triggering a liquidity crisis. So how stable is Binance really? Fortune writer Jeff John Roberts seeks an answer to this question.
How much trouble is Binance in?
The dramatic collapse of FTX has brought an already stressed crypto industry to the brink. Prosecutors and regulators argue that FTX is not only an endangered company, but also a massive scam. Accordingly, Sam Bankman-Fried was arrested in the Bahamas. The FTX debacle raised the question of which dominoes will fall next. Moreover, it is questionable whether one of them will become the largest crypto exchange Binance. This triggered widespread distrust among crypto survivors.
Binance is the world’s largest crypto exchange by volume. But it has problems with regulators. It also faces possible criminal charges related to money laundering and sanctions violations. Last week, clients pulled billions of dollars worth of assets from the platform. In addition, Binance has temporarily stopped the withdrawal of an important crypto asset. After that, doubts about the company accelerated this week. Other crypto companies held crisis meetings to plan how they would react if Binance’s situation worsened. So how much trouble is Binance in? According to insiders, it’s not as bad as FTX, but still not good.
CZ acknowledged this week that the company, and cryptocurrency more broadly, is going through a tough time. In a note to staff, he wrote that the industry is going through a ‘historic moment’ and that the next few months will be ‘bumpy’. But he reassured them that Binance will ‘endure any crypto winter’. However, the company and its CEO are under scrutiny like never before. Also, the next few months will determine whether Binance has a long-term future.
Binance had a very bad week
This week’s news cycle features Bankman-Fried and crypto-related testimony in Washington DC. In the background, a new drama about Binance has quietly taken place. Analytics firm Nansen has released data showing that customers have cashed out about $3.6 billion in assets from Binance in seven days. That’s when the drama started.
The pullbacks were likely due to a report released Monday that claimed groups at the Department of Justice were aggressively pressuring Binance and its CEO to bring charges related to sanctions violations and money laundering. Nansen data included Ethereum and stablecoins, not Bitcoin. So it’s also possible that the exact size of the outputs is higher than reported.
The alarm on Binance rose amid reports that the company was unable to process USDC, one of the more widely used stablecoins pegged to the US dollar. The competitor’s executive said this is part of what makes it urgent to map out worst-case scenarios involving Binance. Binance itself has responded strongly to all these dire predictions. However, it might be more reassuring if we didn’t see similar behavior from other troubled crypto leaders.
Late on Tuesday, amid widespread mutterings about the situation at Binance, CEO Zhao noted that the company has had bigger exits in the past. In line with this, he suggested that such events amounted to healthy ‘stress tests’.
At the end of the week, exits from the platform began to decrease. Along these lines, fears about his financial health have calmed somewhat.
Is it just a ‘stress test’?
Other crypto industry figures agreed with Zhao’s claim that concerns about exits were exaggerated. Among them was venture capitalist Nic Carter, who dismissed the ‘bankbreak’ claims on Binance as hyperbolic, stating that total assets on their platform had dropped by more than 15%, with most of the money already flowing back.
The background for Binance to temporarily halt the withdrawal of USDC is more complex. The company says this occurred for technical reasons rather than any existential threat to Binance’s financial health. But it includes Binance’s recent decision to convert USDC assets controlled by rivals Circle and Coinbase into its own stablecoin, known as BUSD. Binance made this decision, presumably to prefer its own currency, as other exchanges have done recently. Because stablecoins have become an increasingly important source of income for their issuers as interest rates rise. Meanwhile, Binance appears to have recovered relatively unscathed from the events of the past week. However, their biggest battles lie ahead.
Binance is also fighting a legitimacy challenge
Binance burst onto the scene during the crypto boom in 2017. She rose to popularity by offering numerous digital assets and innovations, including her own Blockchain. But even as Binance became the dominant player in the crypto world, Zhao remained an outsider.
In recent months, Binance has tried to portray concerns about the company as a xenophobic reaction to Zhao’s Chinese heritage. In a blog post in September, Zhao, whose parents moved his family to Vancouver when he was 12, claimed that his rivals were trying to undermine him by citing his ethnicity. “I am a Canadian citizen,” CZ wrote. He has also echoed these sentiments on Twitter in recent weeks.
However, rumors persist despite Binance denying ties to China. For example, a credible report suggests that the company has an office in Shanghai that closed in late 2019. However, Binance denies its existence. The company has shifted its headquarters between several jurisdictions known for its light regulation, including Malta. It does not give clear information about where its headquarters is located today.
And then there’s Binance’s finances. CZ has repeatedly claimed on Twitter that every asset a customer puts on the Binance platform is backed 1:1 by assets held by Binance. cryptocoin.comEarlier this week, the company released an audit, a clear attempt to reassure customers that their funds are safe. But it did little to allay fears. The audit was prepared by the South African branch of global company Mazars, rather than one of the Big Four accounting firms. Critics noted that the document was sadly incomplete. One accounting professor went so far as to call it ‘worthless’.
‘There is no choice but to legalize it’
For now, the views of the crypto world will have less say in shaping the future of Binance than that of any other influential body. This influential body is undoubtedly the US government. Binance, like many other crypto companies, has been under scrutiny by various governments for years. However, today the company appears to be facing an unprecedented level of legal peril. Recent Reuters reports highlighted a series of actions that federal prosecutors targeted Binance and Zhao for.
All of this coincides with the strong move Binance has made over the past 18 months to repair its old illegal reputation. This push included hiring senior executives such as Interpol and the IRS, and establishing a US entity led by experienced American executives.
Whether Binance is successful in this gamble is another matter. For all of this to work, the company must not only avoid the full wrath of the Justice Department. It also needs to reassure investors and the rest of the crypto industry that everything in its books will be transparent about the true nature of it. Because, to date, it remains unclear what exactly is on Binance’s balance sheet.
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