In a botched CNBC interview, CZ said Binance is financially fine. They can meet any customer withdrawals and all the clients assets are backed one to one. This sounds awfully familiar to what SBF said right before FTX collapsed. I will be quite shocked if Binance turns out to do the same horrendous things FTX did. But less bad doesn’t mean good. There are so many red flags from Binance. I won’t be too surprised if it ends up collapsing. Hopefully they made enough money in 2020 and 2021 to cover their losses in 2022. But these offshore exchanges need to be regulated in the long term to avoid more fiascos down the road.
Over the weekend, Dirty Bubble Media who first published the analysis about Alameda solvency issues published a scathing post titled: “Is Binance.US a Fake Exchange?” as shown below. The tl;dr version of the post is that Binance.US commingles its crypto assets with Binance.com according to the blockchain data. Billions of cryptos were being sent back and forth between Binace.US and Binance.com’s exchange wallets. Binance’s claim that Binance.com and Binance.US are completely separate entities and only share technologies seems bogus. After the publication, instead of responding to the post, CZ blocked Dirty Bubble Media. WOW! Can someone report to the FBI/SEC to trigger a proper investigation so we know what’s really going on? It’s possible that the crypto transfers between these two exchanges were initiated by customers but CZ’s response really made this possibility unlikely.
This morning Reuters published a post about Binance’s lack of transparency and regulatory oversight and its intention to remain opaque and unregulated. Binance declines to say where Binance.com is based!!!??? They have a lot of local entities but it’s not clear what the relationships are between the main Binance.com entity and the local entities. It’s also alleged that Binance's former chief financial officer, Wei Zhou, did not have access to the company's full accounts during his three-year tenure!!!??? The Reuter’s post didn’t raise any issue about Binance’s solvency and estimated their revenue to be in billions based on their trading volume of $34.5 trillions last year.
Binance’s finances remain a mystery. This lack of transparency and regulatory oversight is concerning. Binance operates a super risky derivative exchange through perpetual contracts where customers can lever up to 10X. They claim they have a great risk management program. But there have been so many crypto blackswan events in the past year. Some of their customers were probably wiped out and had negative balances. Nobody knows how much loss Binance incurred during those volatile periods and Binance doesn’t intend to tell anybody. If their losses are manageable, then Binance customers are probably okay for now. But if their losses are catastrophic and make Binance insolvent, what do you think they will do? There are really only three options:
Raise money from investors through debt or equity
File for bankruptcy
Dip into customer funds
Raising more money is unlikely under the current macro environment. Filing for bankruptcy is the last resort option. When under a desperate situation, most unregulated exchanges will probably opt for dipping into customer funds . They probably didn’t intend to steal customer funds when they started the exchange but when they lost so much money during volatile periods and became insolvent, most likely they would dip into the customer funds before filing for bankruptcy if there’s no regulatory oversight. In other words, regulatory oversight is necessary to make sure these exchanges don’t misappropriate customer funds because the temptations are simply too hard to resist. They all think they can make the money back to repay the customers.
Did I also mention Biance’s auditing partner Mazars quit last week? The extra revenue was simply not worth the risk for the accounting firm. The accounting firm couldn’t actually do the proper audit to assure the customers because there are many things Binance wouldn’t allow the auditor to do. I believe what Binance customers could do right now is to withdraw their funds and wait for most funds to be withdrawn without hiccups. If that is the case, customers can probably use Binance as an exchange to buy and sell cryptos. I will advise people to move their cryptos out of Binance right after though. Binance might be solvent today after the stress test but due to the lack of transparency, you don’t know if they will still be solvent tomorrow.
Ultimately, I don’t think I could trust any offshore unregulated exchanges and let’s not forget the main point of blockchains: trustless and decentralized. After all the crypto fiascos in 2022, customers only have themselves to blame if they choose to store their cryptos inside unregulated offshore centralized exchanges.