Why Binance is the Next Crypto Domino

Binance, the now largest centralized offshore crypto exchange run by Changpeng Zhao, better known as CZ, has just completed a self-reported audit of its reserves in an attempt to quell fears that it too could go the way of FTX, Celsius, and an increasing pile of failed crypto enterprises.

The problem is, the whole exercise, and what happened after, raises more red flags than it mitigates.

There are several reasons for that.

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♬ Paradise – Ikson

1. The report is not conducted according to any GAAP or IFRS standard, nor was any accredited third party audit firm involved in the report. Furthermore, the “report” is not publicly available anywhere, and according to a tweet from CZ, is not complete. Adding to the skepticism surrounding this report is his statement “This is while we are waiting for the proof-of-reserves to finish. Waiting on a vendor that everyone uses. But it seems like may take weeks, we might try to find someone else.”

2. The “reserves” as disclosed by Binance consist of “475,000 BTC, 4.8 million Ether, 17.6 billion USDT, 601 million USDC, 58 million BNB. and approximately 21.7 billion of its own stablecoin, BUSD. The total reserves held by Binance, as of Thursday, stand at an approximate worth of $69 billion.”

BUSD is Binance’s own stablecoin ostensibly pegged to the US dollar. That implies that besides the proff of crypto reserves, Binance should theoretically have $21.7 billion in non-crypto Tier 1 assets as defined by the Bank for International Settlements, if it was to be compliant to a global standard. But such is not the case.  No proof of assets has been provided.

So that means over 30% of the reported “reserve” is not proven, nor is it even probable. Binance can create BUSD out thin air, just like FTX could and did. In fact, it was by publishing his intent to unload 200 million of FTX’s FTT token that the whole FTX debacle began.

3. Immediately following the publication of the report, Binance shifted $2.1 billion from the cold wallet used for the report to an undisclosed wallet, claiming this was all part of their cash management routine. Huh?

All in all, there is diminishing confidence in Binance’s reported proof of reserves, and so this could theoretically lead to collapse in confidence in Binance’s token, and the exchange would likely not be in a position to survive a broad based run on the bank if too many users tried to withdraw funds simultaneously.

Anyone who has holdings on Binance should probably consider removing them to a cold wallet in their own possession. As is the now ubiquitous mantra of the crypto universe, not you wallet, not your crypto.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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