17th December 2022 > > Binance (again).

tl;dr

Binance remains in the spotlight, damaging investors’ confidence and abruptly halting the recent mini rally in crypto prices.

Market Snap

Market Wrap

Price action is all about Binance, though techies selling snake oil would like to tell you differently.

Curious Cryptos’ Commentary — Trump’s NFT collection

Nah, you are right, we won’t go there.

Curious Cryptos’ Commentary — Binance (again)

The CCC did a quick run-down of the Binance situation on 14th December 2022.

The only material change I am aware of is that Mazars, the accounting firm that produced an audit of Binance’s PoR (Proof-of-Reserves), has halted all its services to crypto clients.

The CCC has been critical in the past of such reports (see CCC 13th, 14th, and 17th November) whilst recognising that they could be reconfigured to be extremely useful in restoring investors’ confidence. Mazars had this to say:

"Mazars has paused its activity relating to the provision of Proof of Reserves Reports for entities in the cryptocurrency sector due to concerns regarding the way these reports are understood by the public."

There is something not quite right about that explanation. I am not sure how anyone at Mazars could possibly misunderstand the purpose of a PoR report. Mazars has yet to respond to a request for clarification at time of publication.

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The knee-jerk response from vocal crypto naysayers is the obvious one – that Mazars now no longer trusts its own report, and that Binance’s claim to have 100% backing for customers deposits is baloney.

In that situation, the equivalent of a bank run on Binance would leave it insolvent, an event that would probably see BTC heading towards $10k in short order.

Binance is a private company with several operating entities. Its entire corporate structure and public presence is dominated by CEO and founder Changpeng Zhao. He told CNBC this week that:

"… the well-run crypto exchanges should hold users' assets one-to-one."

And the evidence we have so far is that Binance does indeed follow this good practice. A statement from Binance addressed this issue:

“… over the past week, Binance passed a stress test that should give the community extraordinary comfort that their funds are secure. Despite the large number of withdrawals 12-14 December, $6B of net withdrawals over three days, we were able to fulfill them without breaking stride."

And this is a fair point, as far as it goes.

Keen to reinforce this safety net, Binance has approached other firms to audit its PoR but with little success. There is no doubt that the potential for Binance to collapse as dramatically as FTX offers up reputational risk that no-one wishes to entertain. The Big Four - Deloitte, Ernst & Young, KPMG and Pricewaterhouse Coopers — are all "currently unwilling to conduct a PoR for a private crypto company" according to a spokesman for Binance.

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The other issue to address is one of leverage. Even in the scenario that customer deposits are segregated and backed 100%, other liabilities that Binance might have could also result in insolvency in the event of a bank run.

Binance is a private company. Its accounts are opaque and incomplete. A statement says:

"Ultimately, our users want to know that their funds are secure and that our business is financially strong. To that end, Binance’s capital structure is debt free …”.

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If customer deposits are backed 100% with reserves, and the company has zero debt, given the strength of their daily cashflows with low operating costs, it would take extraordinary management incompetence to result in the situation that Binance goes bust.