Unless you’ve been living under a rock, you should have known about the FTX crash by now. After all, it’s all the finance world has been talking about.
Like déjà vu, Binance is slowly suffering the same fate as Sam Bankman-Fried’s fallen crypto empire.
Here’s what happened.
Binance Seeing Withdrawals of USD$1.9 Billion in 24 Hours
Binance, the world’s largest cryptocurrency exchange, has been seeing massive withdrawals of the stablecoin USDC.
How much exactly?
US$1.9 billion (~S$2.6 billion). Yea, billion with a b.
What this means is that people are getting worried about their holdings and are, in turn pulling out of participation, forcing Binance to return their money to them.
This follows after the crypto giant tweeted a so-called proof-of-reserves report by audit firm Mazars. In the report, Binance has a reserve ratio of 101%, meaning it has enough assets to cover customer deposits.
So why is this worrisome?
Firstly, the report indicates that the company “does not express an opinion or an assurance conclusion.”
Additionally, people are suspicious of why Binance engaged Mazars instead of the big-four audit firms, and hence they suspect falsification of data.
As such, uncertainty about Binance’s stability started to bubble and eventually spilled over on Tuesday (13 December).
Binance Halts Withdrawals of USDC
In order to cut their losses (or rather, pause them), Binance halted the withdrawals.
What does this all mean?
For context, USDC has the same value as the US dollar, hence the term “USD” in the name.
It is a stablecoin, meaning that the coin’s value is pegged to something, in this case, the US dollar.
USDC is used for trading cryptocurrencies without needing to exchange them for US dollars and vice versa, facilitating transactions.
Since USDC is being pulled out of Binance, it means that users are taking their dollars out of the company.
Here’s why it’s worrying.
Remember Sam Bankman-Fried? Remember FTX? Remember that whole commotion?
Yea, this was how they fell as well.
Futures Exchange, better known as FTX, is a cryptocurrency exchange system promoting digital currency transactions.
Started by Sam Bankman-Fried in 2019, this platform initially saw hypergrowth. However, as it increased in popularity, it needed more to supply customer demand.
It was revealed to the public that Bankman-Fried had taken US$10 billion of FTX funds and pumped it into Alameda, and reports alleged that Alameda had loans amounting to US$7.4 billion.
For those who don’t know, Alameda is another company founded by Bankman-Fried.
Many were sceptical about the solvency of the company (the ability to meet long-term debts and financial obligations) and worried that they stood to lose all their money. As such, they withdrew from the market.
The mass market pullout meant that FTX had to return the users’ money to them. Unfortunately, they lacked assets in their reserve to meet the demand and were forced into filing for bankruptcy.
If Binance continues down the same path as its fallen competitor, it might also end up bankrupt.
@goodyfeed Why FTX collapsed simplified for babies #sgtiktok #tiktoksg #fyp #singapore #ftx ♬ original sound – Goody Feed
How is Binance Coping
When halting the withdrawals, Binance claimed it was undergoing a “token swap.” A token swap involves swapping one cryptocurrency for another without the need for fiat currency (i.e. paper money).
Providing users with other pathways, they said, “USDT and BUSD withdrawals are available and unaffected,” while the “USDC withdrawals will reopen once the token swap is completed.”
Basically, it suggests that people convert other currencies into USDC to withdraw their funds from Binance.
On their part, the token swap was delayed because the channel to swap the coins (PAX and BUSD) to USDC required going through a bank in New York, but the banks weren’t open then.
On Twitter, Binance CEO Changpeng Zhao tweeted that the withdrawals were “business as usual” and that they “have seen this before.”
We saw some withdrawals today (net $1.14b ish). We have seen this before. Some days we have net withdrawals; some days we have net deposits. Business as usual for us.
I actually think it is a good idea to “stress test withdrawals” on each CEX on a rotating basis. 💪
— CZ 🔶 Binance (@cz_binance) December 13, 2022
Additionally, a Binance spokesperson assured the public that it had “more than enough funds” to meet withdrawal requests.
At the time of writing, Binance has announced a stabilisation of the condition.
“Yesterday was not the highest withdrawals we processed, not even top 5. We processed more during LUNA or FTX crashes,” CEO Zhao tweeted.
“Now deposits are coming back in,” he further assured.
Things seem to have stabilized. Yesterday was not the highest withdrawals we processed, not even top 5. We processed more during LUNA or FTX crashes. Now deposits are coming back in. 🤷♂️💪 https://t.co/WLK2KyCym0
— CZ 🔶 Binance (@cz_binance) December 14, 2022
In response to why they chose Mazars, they said the more established audit firms were hesitant to conduct a “proof of custody” report for a private exchange.
As such, the contacted Mazars, who has “experience working in the cryto space”.
Luckily they managed to bounce back quickly. The world’s had enough of the crypto cripple.
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Featured Image: Binance + @cz_binance / Twitter
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