Cryptocurrency trading platform FTX filed for bankruptcy protection on November 11, 2022. Its founder, Sam Bankman-Fried (SBF for short), has been arrested by the U.S. police for misappropriating client assets. FTX collapsed, and Binance was firmly seated as the world’s largest crypto exchange, with a market share reaching a record high of 52.9%, but it also triggered a “too big to fail” panic for Binance.
Customers Withdraw Over $6 Billion from Binance as Confidence Collapses
After the bankruptcy of FTX, the market’s confidence in cryptocurrencies dropped sharply, and many customers began to withdraw a large amount of cash from Binance. In this regard, the founder of Binance, Changpeng Zhao (CZ), insisted that Binance will not abuse customer funds. The trading platform can not only handle any amount of withdrawals but also has a longer transaction record than FTX, which has proved that it can survive the previous “cryptocurrency winter”, including the tragedy of Bitcoin’s price plummeting by more than 80% from the end of 2017 to the end of 2018.
However, Binance’s BNB (the exchange’s native token) has fallen by about 20% in the past week due to a lack of confidence in Binance due to “runs” by customers.
In connection with the same problem, the stock price of Coinbase, the largest cryptocurrency exchange in the United States, has also plummeted. It has fallen by about 86% since 2022, and its market value is only about 8 billion US dollars, while its peak market value is about 76.9 billion US dollars. Coinbase CEO Brian Armstrong admitted that revenue in 2022 may be cut in half, or even more.
Faced with a large number of cash withdrawals as if customers were fleeing, a spokesperson for Binance stated that the net withdrawal amount for the three days from December 12 to 14, 2022 was 6 billion US dollars, but he said, “We can These withdrawals can be completed without interrupting business”, he said, Binance does not misappropriate customer funds to invest but holds customers’ cryptocurrencies in segregated accounts, and all assets are held one-to-one. He added that Binance also maintains a $1 billion contingency fund to protect users in extreme situations, and that “Binance’s capital structure is debt-free.”
Binance’s Lack of Accounting Transparency Adds to Concerns About Its Financials
However, according to Bloomberg, on December 17, 2022, the accounting firm Mazars Group stopped preparing reports for Binance and other cryptocurrency companies to prove that these companies hold sufficient and necessary reserves. gold to cover any potential surge in withdrawals by clients.
The withdrawal of the accounting firm from the audit will undoubtedly exacerbate market concerns because it means that there is no third-party unit that can prove that Binance’s financial capacity is sufficient to cope with market panic. “If you have one player in the market controlling a lot of volumes, there’s a lot of systemic risks,” said Mark Lurie, chief executive of decentralized exchange developer Shipyard Software.
A Binance spokesperson said the exchange is exploring ways to provide additional transparency to show users that their assets exist on the blockchain, and is seeking another accounting firm to work with it on proof of its reserves.
Government agencies are also eyeing Binance to investigate its money laundering and tax avoidance
But Binance’s crisis is not limited to this. It has long been reported that the U.S. Department of Justice and the Internal Revenue Service are investigating Binance’s money laundering and tax avoidance practices. Changpeng Zhao may face legal risks and government scrutiny. In 2020, blockchain analysis firm Chainalysis found that more funds related to criminal activities circulated through Binance than through other cryptocurrency exchanges.
At the same time, the currency circle is also concerned about whether Binance will return the $2.1 billion it received from FTX when it withdrew from FTX investment in 2019. According to the FTX bankruptcy coordination case, FTX may claim to recover $2.1 billion from Binance. Zhao Changpeng accepted CNBC on the 15th. When asked if he could pay this amount during the report, he only played Tai Chi and said, “Our financial situation is not bad.”
And when Changpeng Zhao was asked why he didn’t ask the Big Four accountants to audit and endorse Binance, Changpeng Zhao said: “Most of them don’t know how to audit cryptocurrency exchanges.” The host reminded: “Coinbase is audited by the Big Four accountants.” Zhao Changpeng responded that he was not paying attention to Coinbase. This series of interviews made the outside world think it was a public relations disaster for Binance.
After the bankruptcy of FTX, the crisis of Binance has not yet come to an end, and the cold winter of the Canadian currency may continue.