Binance’s asset management story is under doubt. As a result, fear, uncertainty, and doubt (FUD) is rising for the popular crypto exchange.
Last week, Forbes reported that on Aug. 17, 2022, $1.78 billion worth of collateral was moved out of Binance customer wallets with the intention to back stablecoins – with b-USDC in particular, a wrapped version of Circle’s USDC.
After the detailed investigation, significant questions regarding Binance’s asset management and custodial services for its customers’ assets and stablecoin collateral have surfaced.
Forbes’ on-chain analysis (but not yet disputed with Binance) shows that $1.2 billion of the moved collateral was sent to trading firm Cumberland DRW, with the rest going to now-insolvent Alameda Research, Tron founder Justin Sun, and crypto infrastructure and services firm Amber Group.
According to Forbes, the outflow was not followed up after by a corresponding reduction in the circulating supply of b-USDC tokens.
While there may be a number of explanatations for Binance’s decision to make the hefty transfer, Binance has been giving out confused and sometimes contradictory responses – adding to the FUD – fear, uncertainty, and doubt – rampant in the industry post-FTX.
Piling on the blame for Binance’s asset management woes
It should be noted that Forbes’ investigation is built on the coattails of Binance’s ongoing woes, and investigations into its management practices.
In response to Forbes’ investigation this time, Binance on March 1st published a more detailed account of what really happened, but still maintains their signature defensive tone, arguing that media publications have taken to making massive leaps to conclusions “made based on incorrect interpretations of the blockchain data,” calling such accusations conspiracy theories.
“One significant source of interest has been in the movement of funds across blockchain wallets, which is the subject of some recent “analyses” that appeared in the media. We’ve seen external sources making huge leaps to conclusions based on flawed observations about assets’ movement on the blockchain. These conclusions are then used to fuel false narratives that confuse investors and attempt to put Binance on par with some of the most unscrupulous actors in the space – all the while collecting a lot of views and clicks,” wrote the account.
Meanwhile, Binance CEO Changpeng Zhao had accused Forbes of spreading FUD – but Binance has yet to address or follow up on the answers that have caused such confusion and anxiety.
I am reluctantly spending time on FUD again (4). Forbes wrote another FUD article with lots of accusatory questions, with negative spins, intentionally misconstruing facts. They referred to some old blockchain transactions that our clients have done. 1/9
— CZ 🔶 Binance (@cz_binance) February 28, 2023
So, what went down?
There are currently many theories to what happened with the $1.78 billion that Binance had misplaced.
In the recent investigation, Forbes suggested that the intended effect for the moving of collateral was to swap USDC for BUSD issued by Paxos (it should be noted that these events predate Paxos’ recent warning by the New York Department of Financial Services (NYDFS) to stop issuing BUSD). The motivation? Forbes guessed that Binance instead of Circle would have been allowed to collect rising interest on various instruments – including US treasury bonds that back certain stablecoins. This would imply that b-USDC was at points effectively backed by BUSD instead of USDC, but there’s other guesses out there.
Another ongoing theory – and perhaps the harshest one yet – Ram Ahluwalia, Lumida CEO and co-founder hypothesised that Binance was involved with rehypothecation.
Rehypothecation is the process where banks and brokers use their rights to the collateral to make their own personal transactions, often with hopes of financial gain. In this case, the funds backing b-USDC were loaned to counterparties, or put at risk. Under this assumption, Forbes was quick to compare what’s happening with Binance to what happened to FTX’s collapse.
Meanwhile, Binance has firmly denied that any rehypothecation happened, despite providing uncoordinated explanations of what happened.
Binance’s Asset Management Contradictions
In Forbes’ investigation, Patrick Hillmann, Binance’s chief strategy officer, explained that events regarding on-chain wallets containing backings for Binance’s stablecoin are meaningless.
There was no commingling” of customer funds, Hillman told Forbes, because “there’s wallets and then there is a ledger.” The off-chain, internal ledger, is the mechanism that actually tracks assets owned and/or in custody by Binance, whereas the on-chain wallets are just acting as, in Hillman’s words, mere “containers.”
Forbes decided Hillman’s explanation showed a contradiction which undermines Binance’s claims of transparency, where it’s assumed that customers can view their ledger at all times, on-chain instead of just trusting the exchange to responsibly handle their money.
While Binance has repeatedly cited its proof-of-reserves system to combat suspicions, and has maintained its status as a trustworthy custodian, paranoia is still rising regarding the role of crypto custodians, like with FTX.
To add to the confusion, a Binance spokesperson Tuesday wrote statements explaining the matter in contradiction to Hillman’s claims.
“Binance does not, and has never, invested or otherwise deployed user assets without consent under the terms of specific products. Binance holds all of its clients’ assets in segregated accounts which are identified separately from any accounts used to hold assets belonging to Binance,” adding that the on-chain wallet management processes that were identified by Forbes “relate to internal wallet management.”
The contradiction here is that the spokesperson says Binance “holds” client assets in “segregated accounts” located on-chain, rather than the “off-chain internal ledger” that Hillman speaks about.
In the past, Binance has admitted that its wallet management processes for Binance-pegged token collateral have not been smooth sailing at all times, record shows that the collateralisation of user assets have never been affected.
“Processes for managing our collateral wallets have been fixed on a longer-term basis and this is verifiable on-chain,” says the Binance spokesperson.
To add to the confusion, Binance CEO Zhao offered another explanation that’s different from his CSO and communications team.
Hillman says that the on-chain wallet management processes in question by Forbes meant nothing. The Binance spokesperson claimed that they were part of “internal rebalancing.” However, according to Zhao, it’s “some old blockchain transactions that our clients have done.”
“Our users are free to withdraw their assets any time they want,” he continued. “Their withdrawals are turned into ‘received hundreds of millions of shifted collateral.’”
This flippancy by Zhao, describing the upheaval of funds as mere “blockchain transactions” can suggest that they weren’t mediated by Binance at any moment. If this were to be true, it would debunk the “internal rebalancing” that these on-chain transactions in question may be.
Furthermore, if we were to follow Zhao’s trail of thought, it can be implied that Cumberland DSW alone owned or managed $1.2 billion worth of USDC, mirrored as b-USD on Binance – and then decided to cash it all out on the same day, which is quite strange.
Another explanation can be that the big transaction to Cumberland is a cumulation of a large number of on-chain customer moves over time, which can make it look like both “balancing” and “customer withdrawal”, but Binance has yet to produce such a response that explicitly makes this claim.
The elephant in the room
As of writing, Binance’s asset management team has not yet disputed Forbes’ findings. Instead, they’ve provided three separate explanations to what has happened behind the on-chain moving of $1.78 billion in b-USD collateral as aforementioned, and a blog post titled “How and Why Assets Move Between Binance Wallets” published March 1.
Although it may be simple enough to just declare the huge transfer as “simply a case of institutional clients withdrawing their own assets from our platform,” Binance’s post does not address Forbes’ core finding: that the “peg wallet” meant to back various wrapped assets has been repeatedly off its proper collateralization level.
The blog post doesn’t also make clear that backings for b-USD collateral were simply held elsewhere, instead of Binance’s on-chain custody system – rather saying quite vaguely “at no time was the collateralization of user assets affected” by peg wallet mismanagement.
If this is the case, then there is truth to Hillman’s statement where on-chain records don’t necessarily reflect real customer balances. While not having parallel on-chain and off-chain transaction records is commonplace amongst crypto exchanges, Binance decides to treat the matter with flippance, essentially gatekeeping the process.
Referring to their processes as “a vast network of hot, cold and deposit wallets” and to “the fact that the movement of funds between wallets could serve a variety of purposes,” despite attempted efforts for explaining what really happened, Binance’s asset management team hasn’t yet offered a clear-cut explanation to the mass movement of funds from customer wallets to other places as detailed Forbes’ findings.
While Binance prefers to maintain unclear and vague information about how they conduct business, it’s only becoming more unsettling as anxieties for the platform rise. Amongst extra attention from US regulators, there’s been a hefty amount of outflows from Binance custody and assets over the past few weeks.
It’s only up to Binance and Binance’s asset management division to coordinate their explanation and responsibly handle offering the transparency that they pride themselves on, instead of leaving it up to the media to concoct theories that can potentially damage the reputation of the crypto industry even further.