After the dreadful crypto winter of 2022, this current year may prove just as cold for the waning crypto industry. More investigations into the most-popular crypto exchange Binance’s financial backbone reveal there are some concerning potholes that the exchange is struggling to fill.
On Tuesday, Bloomberg reported that the Binance-issued stablecoin BUSD had lost much of its financial backing at various points. Based on data from blockchain analysis company ChainArgos, Bloomberg said that at several points between 2020 and 2021, Binance-Peg BUSD was undercollateralized by more than $1 billion.
Stablecoins are meant to be backed with real assets, whether that’s the U.S. dollar or gold. They act as a kind of collateral for crypto transactions since they don’t have the same kind of volatility that practically every other kind of crypto coin has. When a stablecoin becomes “depegged,” as in the coin loses its 1-to-1 value between itself and the U.S. dollar, it can cause a chain effect across the entire crypto ecosystem. The industry witnessed such a calamity in May last year when the Terra/Luna crypto ecosystem utterly collapsed.
Binance finally admitted late Tuesday in a blog post that the Binace-Peg BUSD has indeed lost some of its backing on multiple occasions, though the company tried to claim there was a “timing mismatch” between itself and the regular issuer of BUSD, Paxos.
Binance derives its Binance-Peg BUSD from Paxos’ own BUSD token. In effect, the exchange’s version of the stablecoin is backed by BUSD, which is then allegedly backed by real assets. In the past, Binance has explained this weird situation as a means for the exchange to operate on blockchains other than BUSD’s native Ethereum blockchain.
A Binance spokesperson told Bloomberg that their process for backing their stablecoin “has not always been flawless,” though that only resulted in “operational delays.” Binance linked to both their own site and to a series of monthly reports from Paxos Trust, which runs the Paxos blockchain, to show that their BUSD is backed by cash assets, in this case, U.S. Treasury bills. The latest report was from December last year.
“Binance has always rebalanced or updated the assets in the pegged addresses periodically, not in real time,” the company wrote. “We now rebalance much more frequently to ensure it’s always 1:1 backed.”
Binance also claimed that none of this failure to maintain the peg impacted users. At the same time, it does cast even further doubts about Binance’s own ability to self-regulate. Binance CEO Changpeng Zhao had previously touted his so-called “proof-of-reserve” audit that was supposed to show its collateralization. Last month, the firm that was conducting this extremely limited audit, Mazars, dumped all its crypto clients including Binance after it caught flak for not really revealing the true extent of each company’s financial situation.
Binance still remains the largest crypto exchange by market cap, but the company has experienced a 40% drop in the number of BUSD it holds in just the past two months, according to an analysis by Forbes.
The situation for the exchange is becoming especially concerning. On Tuesday, Forbes reported that Binance customers are raking back their crypto from the exchange at an alarming rate. The report used data from crypto firm Defillama showing customers withdrew $360 million worth of crypto on Jan. 6 alone. Nearly a quarter of the exchange’s net assets have left the building in just a few months’ time, according to the report.
In an email, Binance spokesperson Ismael Garcia said “outflows are not accelerating,” and suggested that the company prefers to judge the “health of an exchange” based on “daily transaction volume,“—a statistic that’s easy to manipulate. They added that the Forbes numbers “are off by billions,” but did not provide an exact number for the alleged discrepancy.
Zhao, who often goes by CZ online, has previously tried to calm investors, customers, and his own staff’s concerns about the nearly $3.7 billion in withdrawals up to that point in mid-December. Now Forbes reported that since Dec. 15, Binance has lost 15% of its total assets even after Zhao tried to claim they were fine and that his exchange has processed way more withdrawals in the past.
Update 1/11/2023 at 2:17 p.m. ET: This article was updated to include a response from a Binance spokesperson.