Disclaimer: Opinions expressed below belong solely to the author.
Following the collapse of FTX, Binance published a preliminary proof of reserves (or rather assets, as the full proof of reserves is reportedly expected only after a few weeks) stipulating that the world’s largest crypto exchange held approximately US$69 billion worth of coins as of November 10, including:
- 475,000 BTC
- 4.8 million Ether
- 58 million BNB
- 17.6 billion USDT
- 601 million USDC
- 21.7 billion BUSD
Asked whether these figures include Binance’s own assets, founder Changpeng Zhao, better known as CZ, replied on Twitter that they reflect customer deposits:
In this tweet he also rubbished Bloomberg’s reporting on the holdings, which highlighted that around half of all tokens are, in fact, in Binance-issued coins (when, technically speaking, it is not so, but let’s not dwell on this at the moment).
What I find more interesting is that Binance’s great reveal raises more questions than it provides answers to — and also paints an unexpected picture of the crypto market as a whole.
What are the liabilities, CZ?
Binance’s CEO was quick to reveal the assets held by his company, which is fairly easy to do and verifiable, since all he had to do was really just point to the wallet addresses for the public to check the veracity of his claims.
However, assets are just one side of the picture. After all, FTX also claimed to have had more than enough to cover for all of its customers, until it turned out it didn’t.
CZ’s claim (in the Tweet above) that Binance Holdings represent customer deposits would suggest that these figures do reflect the liabilities it has towards its users — but we don’t know for sure, and there’s no evidence to support that claim.
Rather worryingly, he dodged this question by conflating liabilities and debt:
While it’s easy to check how much the company has (although even that can be subject to some manipulation), it is much harder to independently verify how much it should have — and CZ has so far, done little to allay those fears (particularly given the post-FTX frenzy).
He promised to release the figures within a few weeks, after a complete audit, but it does strike me as a bit concerning that these numbers are not available on hand. After all, shouldn’t a company as big as this be able to produce them quite quickly (even if it’s not a publicly traded one, like Coinbase)?
And the next observation doesn’t make things better.
Where is all of the crypto?
Given that Binance is the largest exchange in the world by trading volume, it’s a little surprising to see that all of its customer holdings amount to only 8.5 per cent of the total market capitalisation of the entire cryptocurrency market, which stood at US$806 billion on November 10.
Interestingly, this is less than Coinbase, which held US$95 billion in customer crypto assets as of September 30 — what at the time represented 10 per cent of the global market cap.
In addition, 475,000 Bitcoin at Binance represent just 2.5 per cent of total BTC supply in circulation and it is only slightly higher for 4.8 million Ether, which makes up four per cent of its total.
The only other major non-fiat holding is Binance’s “own” BNB — 58 million coins (about one-third of all in circulation) worth around US$16 billion as of November 10.
Meanwhile, a massive 57 per cent of all assets listed are actually in USD-pegged stablecoins — including more than 25 per cent of global supply of the still-controversial Tether (which was ordered in September to produce documentation proving it is backed by sufficient USD assets).
It’s quite the opposite of Coinbase, which holds over two million BTC and close to 18 million Ether for its customers — around 3.5 to 4 times more than Binance does in either (and has a negligible amount of stablecoins).
The structure of balance sheets of both exchanges could not be more different.
Margin call
This raises a fundamental question about the role Binance plays in the industry as it is effectively loaded with US dollars chasing a rather small pool of actual crypto tokens.
Is it just a day trader heaven, thanks to its low fees? Or a digital quasi-casino for margin traders in derivatives, placing over-leveraged USD bets on the future prices of tokens? Both, perhaps?
Margin trading has always been a dangerous game, because just as it can amplify your gains, it can also amplify your losses. But it is even more so in the crypto space, where volatility can be quite extreme, sending token values very high or low in a short time span.
This is not only a threat to users (nobody cares about them, since they assume the risk), but to entire exchanges and the industry as a whole.
It’s nothing short of gambling, only in this case, the bets aren’t placed on equities or commodities (or even fiat currencies), all of which generally have some fundamental value and use, but on coins whose price is mainly driven by prevailing market perceptions.
While Binance does have its own Margin Insurance Fund, the US$50 million in BUSD it holds there looks rather small given the risks inherent not only to the practice of margin trading, but the volatile nature of crypto itself.
Let’s consider its Tether holdings, currently valued at US$17.6 billion (representing customer balances).
If Tether is serving as collateral for margin trading and its value tumbles should many of the allegations about its peg prove true (i.e. that it’s not really backed by sufficient USD assets), this could rip a massive hole in Binance itself, as margin insurance will not be able to cover the losses of the losing bets which would suddenly be backed by little else than thin air.
This would have cascading effects across the entire industry, making the FTX debacle look like child’s play.
And, mind you, we’re not even talking about fraud (which is what, fundamentally, brought FTX down), but structural risks of unregulated crypto at its current state.
Actions speak louder than words
It’s very good to see CZ reiterating his commitment to transparency, but it would have been better if actions came much earlier than words. What was stopping Binance from releasing its figures earlier?
Let’s not forget that Sam Bankman-Fried was the loudest proponent of regulation, and look where he is today.
Gate.io, for instance, has published the ratios of its crypto holdings versus customer deposits, independently audited using an open source, on-chain solution since 2020, showing that it holds in excess of 100 per cent of customer deposits in BTC and ETH.
Even though their methodology could, perhaps, be improved to be more transparent (and reveal the actual amounts), it’s at least something to lean on. Meanwhile, Binance is only now planning to do an audit of its own figures.
Does this inspire confidence?
I think it’s quite ironic that the biggest — and still one of the most trusted exchanges today — is also the very same which has a number of investigations around the world open into its practices.
And while regulators don’t have many fans in the crypto world (and I’m not a supporter of excessive red tape either), some fundamental transparency has to be required by law before more people lose their money (often life savings) — regardless of whether due to crime or simply chaotic nature of this yet untamed technology.
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