Big moves for Binance to prove solvency
Big moves for Binance to prove solvency
Crypto

Big moves for Binance to prove solvency

By Marco Cavicchioli - 1 Dec 2022

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A few days ago Binance made a transaction of over 127,000 BTC (over $2 billion)

At first, such a transaction had created some concern within the crypto industry, but later it turned out that it was just an internal technical transfer. 

The fact is that the destination wallet was unknown to the public, and so it was not immediately apparent that it was simply another wallet on the exchange. 

The importance of Binance within the ecosystem

Binance is the largest crypto exchange in the world. 

At a time when some exchanges have gone bankrupt, such as FTX, and others seem to be struggling, there is a lot of concern circulating about the fate of Binance as well, because its eventual collapse could throw the entire industry into a panic. 

Yet so far there seems to be no concrete evidence or clue that Binance may be insolvent. 

For example, a few days before FTX’s bankruptcy, some information had begun to circulate regarding the financial statements of its group companies, and in particular Alameda Research, that cast shadows on how they were managed. 

As for Binance, to date there is none of this, so it is possible that the fears circulating about its future are unwarranted. 

Moreover, it is also one of the few large exchanges that seem to be going out of its way to try to prove that it has sufficient reserves to cover all customer deposits. 

So far they have disclosed data regarding crypto assets on their balance sheet, but questions have been raised about this initiative regarding the fact that they have not disclosed their liabilities. 

Binance’s Proof-of-Reserves

The 127,000 BTC transaction a few days ago was intended to prove the real ownership of those funds to those who are auditing the exchange’s reserves. 

This is because, as mentioned earlier, it is not enough to publicly disclose how many funds are held in cryptocurrencies, because if liabilities are not disclosed as well, there is no way of knowing whether those funds really cover customer deposits, or other debts. 

The fact is that, in the event of liquidity problems, available funds are used at first to try to keep the company’s operations afloat, and only later to allow customers to make withdrawals. 

This has been noted several times now, when exchanges or centralized crypto platforms have had to suspend withdrawals due to a lack of liquidity. In such cases, for example, salaries to employees were paid, thus revealing that customer withdrawals are not the priority in the event of a liquidity shortage. 

Therefore, a proper Proof-of-Reserve cannot be limited to disclosing how much cryptocurrency one has on hand, and how much customer deposits amount to because it is also necessary to show that those funds are really only and exclusively used to cover deposits, and not other expenses or other corporate debts. 

It is possible that Binance is trying to do just that, which is to say that after proving that they have funds in cash of equal or greater value than customer deposits, an audit may be underway to certify that indeed all deposits are covered by adequate reserves. 

Tether

The affair of seemingly unwarranted doubts about Binance’s solvency is in some ways reminiscent of the one related to doubts about Tether. 

For years, Tether has been accused by several parties of not having sufficient cover for all its USDT, but this assumption has never really been proven. On the contrary, through several audits, the company has shown recently that it has sufficient reserves, yet some doubts remain. 

The CTO of Bitfinex, Paolo Ardoino, commented on the Binance affair saying: 

“While we welcome any initiative to support the digital token ecosystem, we would urge all industry participants to remain true to the tenets of decentralization. At its very inception, Bitcoin has provided an alternative financial system that specifically avoids centralization, and yet is secure and trustworthy. 

It is therefore imperative that industry participants also do not revert to overarching forms of centralized power and control. At Bitfinex, we believe the industry is at its strongest when a diversity of platforms can flourish. Peer-to-peer platforms and decentralized ledger technologies have great potential to further financial freedom, and freedom more generally.”

Centralized exchanges, such as Binance or Bitfinex, have no way to publicly and trustlessly display all their reserves and liabilities, but this can be achieved onchain, as decentralized exchanges demonstrate. 

Much more work will be needed before we get to the point where even centralized crypto exchanges are truly transparent. 

CZ’s comment

Binance co-founder and CEO Changpeng CZ Zhao, on the other hand, was much less diplomatic. 

After revealing that that fateful multibillion-dollar transaction was merely a request from the auditor, who had asked the exchange to send the funds to another wallet owned by him to prove real control of those funds, he removed a few pebbles from his shoes. 

Indeed, he then also added: 

“If you believe FUD all the time, you will also likely to be poor. Life is not easy.”

On the one hand, this outburst does not seem very reassuring, but on the other hand, it probably reveals a deep and accumulated frustration over time, as Binance continues to be attacked despite the fact that over time it has never shown any real weaknesses. 

Then again, following the collapse of FTX, CZ himself had written that if an exchange has to move large amounts of cryptocurrency before or after showing its wallet addresses, it is a clear sign of trouble.

This earlier tweet was actually probably just a public negative propaganda message against other exchanges that a few weeks ago looked like they might end up like FTX. CZ is no stranger to such negative propaganda messages aimed at competitors. 

The war of the exchanges

In November 2018, when Bitcoin’s price collapsed from around $6,000 to $3,000, the cause was the so-called hashwar between Bitcoin Cash and Bitcoin SV. 

Instead, the drop this November 2022 from about $20,000 to $15,500 was caused by the collapse of the FTX exchange, somehow triggered by Binance. 

It seems that during the current bear market, and particularly in November of the year following the last big speculative bubble, another war is taking place, this time between crypto exchanges. 

Truth be told, with the collapse of FTX, as well as other small exchanges, and the resilience of Binance and Crypto.com, this war may even have already ended. 

Several exchanges, including Kraken, are attacking each other, probably because tempers are tense in the industry due to the implosion of revenues from last year’s boom. 

At this time, however, there do not appear to be any other major exchanges on the verge of collapse, so in fact the war they are waging may have claimed only one major victim, FTX. 

Then again, it is more than logical that there should be competition between competing companies, although should this competition instead result in open warfare of “all against all” the entire crypto market would suffer. 

Marco Cavicchioli

Born in 1975, Marco has been the first to talk about Bitcoin on YouTube in Italy. He founded ilBitcoin.news and the Facebook group" Bitcoin Italia (open and without scam) ".

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