Binance, insurance funds and the events of 19 May

Over the past few days, an academic article has taken an in-depth look at what happened on 19 May on the Binance platform. The exchange went offline, causing losses to users who could not interact with the platform while a cryptocurrency market crash was underway. 

University of Sussex economics professor Carol Alexander went in depth with a lengthy article analysing what would have happened if the platform had remained operational. 

Specifically, the analysis focuses on trading futures and leveraged tokens. Had the platform not gone offline, professional traders would have been able to make large gains by taking advantage of the bear market. With the platform offline for several hours, traders could not capitalize on the momentum and their positions were liquidated. 

Carol Alexander’s basic argument is that the whole situation was “convenient” for Binance. 

Indeed, the text reads:

“the outage of the futures platform was very convenient for Binance”.

If Binance had in fact been operational, it would have had to cover the positions with the insurance fund and, according to her analysis, that fund would not have been sufficient. 

Two points should be made: 19 May is the day China announced a new ban on bitcoin. On that day, bitcoin fell from 42,000 to 34,000 dollars and then partially recovered. It should be added that it was not only Binance that went offline, but other platforms also experienced problems due to the high number of users. 

The fact that investors have been harmed is out of the question, so much so that, for example, a class action lawsuit against Binance is underway in Italy. 

It remains to be seen what happened that day and whether Carol Alexander’s thesis is true.

19 May as told by Binance

The Cryptonomist wanted to discuss the matter directly with Binance. In response to the article, a representative of the exchange pointed out that the entire analysis is probably based on incorrect data, which inevitably leads to incorrect conclusions. From Binance they explain: 

“Academic research of cryptocurrency is a positive sign that our industry is gaining greater mainstream adoption so we are happy to see growing academic interest. As the cryptocurrency market is still young, many benchmark standards are yet to be formalized. In the case of this author’s blog post, it seems they mixed up aggregated data with our snapshot data. Our insurance fund also differs greatly in purpose and function than what was indicated in the blog post. As a result, the author’s conclusion drawn therein is likely inaccurate. We would be very happy to work with the wider public to set industry standards”.

As far as the operation of the system, liquidations, and the insurance fund are concerned, the platform is keen to be as transparent as possible.

Indeed, the following guides are available on the site:

• Settlement Protocol;
• How to avoid being liquidated;
• Introduction to insurance funds.

But what happened on 19 May? From Binance they explain: 

“The exponential growth of cryptocurrency can occasionally pose technical bottlenecks for exchange platforms due to real-time market fluctuations associated with periods of high trading volume. On 19 May, nearly all cryptocurrency exchanges suffered temporary outages due to extreme market volatility. At Binance, we took immediate steps to engage with users affected by the outage, and we worked quickly to restore trading. There are risks associated with any trading environment, and our Terms of Service discloses those risks, including the possibility of systems-related downtime, to our users. We strive to limit any disruptions, and we are continually working to enhance our platform capabilities to provide a best-in-class experience”.

In short, as mentioned on 19 May, all platforms experienced technical problems, so the Binance problem was not an isolated incident. 

Finally. Carol Alexander’s analysis concludes by focusing on the relationship between Binance and Tether. 

Tether in recent days has disclosed its reserves, updating an earlier report from March. The documents show that the USDT tokens are backed not only by cash, but half of them are bonds.

Professor Carol Alexander wonders whether Binance is not the issuer of the $30 billion in debt securities on which half of Tether’s collateralization is based. (whose market cap is over $60 billion).  After all, reasons the academic, Binance is one of the top brokers of Tether. 

When questioned on the subject, Binance did not reply:

“We do not publicly discuss any of our commercial agreements with any of our partners. Hence as with regards to questions about Tether we would refer you to them”.

What is certain is that after these incidents, the authorities’ attention on Binance has increased. But the exchange is not worried and is ready to cooperate with the authorities, in a context, that of cryptocurrencies, which is young and constantly evolving. 

After all, as CEO Changpeng Zhao said recently, the platform is young and in some cases has made mistakes, but it is working to improve every day. It will do this by collaborating with the authorities and implementing what is necessary to protect users.