With great power comes great responsibility. In the immediate aftermath of the FTX fallout, Changpeng “CZ” Zhao, chief executive of Binance, became the Winston Churchill of the crypto world.
Despite the constant assurance of their charismatic leader, Binance has been met with increasing scrutiny.
As a testament to the shaky grounds it stands on, growing uncertainty about its reserves and ripples of ill tidings led to a record US$1.9 billion in withdrawals within 24 hours last week.
Will this spell the beginning of the end for Binance, or is this the stress test the industry needs to prove its mettle?
An uncanny resemblance
In the months leading up to FTX’s collapse, there was little to suggest anything was amiss.
Without question, Sam Bankman-Fried (SBF) was the face of ethical business. He spoke effusively about effective altruism and provided millions to bail out distressed crypto firms — except, it all came crashing down.
And right now, one cannot help but feel as though Binance is taking advice from the same playbook SBF had been using.
As the new face of crypto, CZ went on a charm offensive, issuing one rallying cry after another to rebuild trust for the embattled industry.
Over the last few turbulent weeks, CZ suggested that crypto exchanges provide proof of reserves to promote transparency, stating that Binance would voluntarily do the same.
He had also pledged billions to recuse struggling crypto firms and joined a crypto lobbying group, hoping to “educate, advocate, and bring forth solutions”.
However, these actions resembling PR stunts deflect from the real issue; that is — regulations, not half-hearted audits or bailouts — are the key to instilling trust and protecting investors’ funds.
Questions are mounting
Following CZ’s call for transparency, Binance hired Mazars, an accounting firm, to verify its token reserves.
By proving their solvency, Binance and other crypto exchanges have hoped that such a move would inject confidence back into shaken investors.
Unfortunately, like a plot twist in a soap opera, Mazars decided to suspend their work with crypto clients due to concerns regarding how these (proof-of-reserves) reports are understood by the public.
Since then, eager to prove that it has nothing to hide, Binance has reached out to the Big Four accounting firms, all of whom have turned down the chance to provide Binance with the validation it seeks.
While the U-turn by Mazars or the refusal of the Big Four to audit Binance does not imply financial problems at the crypto companies, the decision still has a chilling effect.
Already, the preliminary proof of reserves released by Binance has raised more questions than answers, since assets are worth nothing without disclosure of liabilities.
In addition, a Reuters analysis of corporate filings at Binance paints a shady picture of a business shrouded in secrecy.
A full audit into the financial health of crypto exchanges is what the industry needs, especially one that has repeated ad nauseam about trust.
But when we are left with auditing firms unwilling or unable to take on the challenge, our desire to trust and move forward is now in a state of limbo.
The last man standing
Outflows from Binance have since hit US$6 billion. However, it is still business as usual and a triumph for the crypto giant. After all, what better way is there to put US$60 billion worth of assets to the test than frantic withdrawals?
In an industry suffering from a severe crisis of confidence, hearsay can easily be blown out of proportion and trigger a bank run, which is why 2023 will be a crucial year for Binance and cryptocurrencies.
For a start, talk about trust and transparency is white noise unless crypto exchanges are legally required to be upfront about their finances and subject them to microscopic scrutiny.
In the case of Binance, we are looking at a company whose former chief financial officer did not have access to the company’s full accounts during his tenure.
The enigma continues, where apart from CZ himself, it seems like nobody knows much about the finances, profits, cash reserves or even where the headquarters of Binance is.
Such an information black hole will not do Binance or the industry any favours in the bumpy months ahead. In fact, there is a chance that Binance might sink if US prosecutors decide to file criminal charges against it over money laundering violations.
Of course, it could also swim, and be the saviour to lift cryptocurrencies out of the dark ages it now inhabits.
Featured Image Credit: Cryptoslate