In response to the FTX bankruptcy, several centralized cryptocurrency exchanges, including Binance, are rushing to publish data on their holdings and ease investor concerns. However, the change has already produced a cautionary tale that shows that publishing reservation data can reveal problematic practices. On November 11, Kris Marszalek, CEO of Crypto.com, said that the exchange was conducting an audit of its reserves. He shared Crypto.com’s Bitcoin and Ethereum offline wallet addresses. At the same time, it released a data dashboard tracking wallet balances. According to Marszalek, the audit report will be complete in a few weeks.
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Suspicious Transfers
But Marszalek’s attempt to score points with the crypto community may be backfiring. After all, blockchain “detectives” question a bevy of suspicious transfers between Crypto.com and other exchanges. On the 21st of October, Crypto.com sent 320,000 ETH to Gate.io, another centralized exchange. This was a week before Gate.io published its latest Proof of Booking audit. Gate.io sent ETH back to Crypto.com between the 26th and 28th of October, raising suspicions that the two exchanges were passing ETH between them to inflate their reserves for audits. Marszalek said that Crypto.com accidentally sent over 80% of its ETH to a whitelisted Gate.io address when trying to move the coins to a new cold storage address. “We worked with the Gate team and the funds were later returned to our cold storage,” tweeted Marszalek on November 13th. “New processes and resources have been put in place to prevent this from happening again.” Gate.io also addressed the transactions, noting that the snapshot used to inform its proof of reservations audit was taken on Oct. The explanation was criticized on social media. “Accidentally sending $400M in user funds to the wrong address and having to request them back is a little more than just ‘fuck,’” he responded ChainLinkGod, a cryptocurrency influencer. “It was a clear operational failure, especially concerning. After all, this is not the first time that user funds have been mismanaged.”
Bad Diligence
Another influencer, SteveWoody, He asked: “Why didn’t you announce it instead of letting us find out? Poor due diligence in the current climate when we need absolute confidence.” Crypto.com’s CRO token has lost a quarter of its value in the last 24 hours, according to CoinGecko. Crypto.com did not respond to an emailed request for comment. This confusion could make headlines as several exchanges seek to reassure investors and their customers that they properly manage reserves. KuCoin, Poloniex, Bitget and Huobi are among the exchanges that pledged to increase their transparency after the FTX failure. On Nov. 12, Huobi released an asset transparency report showing that its hot and cold portfolios hold $3.5 billion in assets. The exchange said it will provide a reserve asset disclosure “routinely” in the future. According informed Colin Wu, a cryptocurrency journalist, Huobi transferred more than two-thirds of his nearly 15,000 Ether from one of his wallets on Nov. 13, sparking concerns that Huobi may not be fully capitalized. So Huobi said the transfers were routine hot wallet transactions. “Huobi guarantees the security of users’ assets”, tweeted🇧🇷
security of funds
If the experience of Crypto.com and Gate.io is any guide, things can get a little confusing. In March 2021, Crypto.com mistakenly transferred $10.5 million to an Australian woman and didn’t realize it had made the mistake until December, according to The Guardian. The recipient used the US$ 1.35 million to buy real estate. On November 13, Lookonchain, an on-chain analytics team, told the followers who hold assets on Crypto.com who should pay attention to the safety of their funds. Lookonchain examined Crypto.com wallets and found that 40% of its holdings comprise “illiquidity assets”. Furthermore, it signaled that SHIB, a highly volatile memecoin, is the second largest holding on Crypto.com’s balance sheet, accounting for a fifth of its reserves. Meanwhile, the exchange’s own CRO token represents 3% of its assets. Another practice that could come under scrutiny is how exchanges can ensure the safety of their customers’ assets that are temporarily held on other platforms. For example, Crypto.com transferred $210 million USDT and 1,500 BTC from Binance shortly before Marszalek made the exchange’s cold wallet addresses public. This suggests that nearly a quarter of a billion dollars worth of assets were being held on another exchange. Crypto.com would be “on a tightrope” for anything that happened to these assets while they were on the Binance platform.
put at risk
Had Binance been hacked while funds were on the platform, the data suggests that funds belonging to Crypto.com customers could have been put at risk. “Why would most cold funds come directly from exchanges?”, He asked Adam Cochran, a Synthetix contributor. “To make matters worse, why is this cold wallet sending to Gate, Binance, Huobi and Deribit?… This is certainly unorthodox and should be explained given the strange transactions people have pointed out.” On-chain data suggests that Crypto.com is putting customer funds at risk by using assets to place arbitrage trades on third-party exchanges, according to Chuchuprotocolresearcher at GMB Ventures.
Facing the scrutiny
Chuchuprotocol flagged several trades that Crypto.com executed on Oct. 10 that appear to be arbitraging the POLY token between Binance and Gate.io. Crypto.com suspiciously suspended POLY deposit and withdrawal services at the time of executing trades. The Crypto.com episode unfolded when Changpeng Zhao, the CEO of Binance, called on centralized exchanges to prove they are solvent by publishing proof of reserves data. On Nov. 11, Binance revealed that it holds nearly $75 billion in assets. Of this amount, 40% of which are BUSD or BNB – tokens that Binance itself issues. Reserves on centralized exchanges are facing scrutiny after the rapid collapse of FTX, the Bahamas-based leveraged exchange founded by Sam Bankman-Fried. The platform has suffered a crisis of confidence after reports surfaced that it may be “self-trading” with Alameda Research, a hedge fund controlled by Bankman-Fried, using its own local token, FTT. FTX filed for bankruptcy on November 11. Disclosing Reserves May Backfire for Centralized Exchanges with permission from The Defiant
Warning: The text presented in this column does not necessarily reflect the opinion of CriptoFácil. Read also: CEO of Crypto.com denies financial problems and says exposure to FTX is minimal Read also: Visa ends global debit card deal with FTX Read also: FTX releases BRL 2 billion in FTT without explanation; Huobi and Binance paralyze deposits
