main conclusions
Binance saw $3 billion in funds leave the platform in the last week USDC withdrawals were halted, but now they are back The flood of outflows highlights how low confidence in the space is Binance is in the middle of it yet again turn. The world’s largest cryptocurrency exchange is facing an unprecedented increase in withdrawals from its platform. More than $3 billion in funds fled the platform in the last week, according to network data. This follows several stories that scared off investors. The first was the report that criminal charges could be brought against CEO Chengpeng Zhao, in relation to a years-old investigation into money laundering. Then there was the interruption of USDC stablecoin withdrawals, due to an unexpectedly high outflow that occurred outside banking hours (swaps had to be routed through New York-based banks). USDC withdrawals resumed as normal, with a total downtime of around 8 hours.
On USDC, we have seen an increase in withdrawals. However, the channel to swap from PAX/BUSD to USDC requires going through a bank in NY in USD. The banks are not open for another few hours. We expect the situation will be restored when the banks open. 1/2 — CZ 🔶 Binance (@cz_binance) December 13, 2022
Customers in Panic After FTX Collapse
But the real reason for the flood of withdrawals is that the spectacular collapse of FTX, for which former CEO Sam Bankman-Fried was arrested on Monday, has cut confidence in the crypto industry. This isn’t necessarily fair to honest companies, but it makes sense. Customers need to take care of themselves first, and it stands to reason to withdraw now until the dust settles, as there really is no downside to doing so. Binance’s official proof of reservation address shows that Bitcoin outflows were also significantly elevated in the last 48 hours: Binance is also not helping itself with its shoddy attempt at proof of reservations, which has done nothing to calm the sector concerns. The disclosures do not show liabilities, which means they are redundant when it comes to making a fair assessment of whether all assets are secured. Worry over halted USDC withdrawals and lack of transparency with proof of reserves was the last straw in terms of confidence, and investors flooded into outflows.
Zhao warns of ‘bumpy’ road ahead
Of course, the flow of funds is perfectly acceptable. That is, assuming that everything is correct, for which there is no reason to believe, is not the case. However, the fact that customers can’t verify themselves and must trust a CEO’s word isn’t exactly comforting.
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. 💪 1/2 https://t.co/uF9lLPDSyS — CZ 🔶 Binance (@cz_binance) December 13, 2022
Especially when, you know, a certain other CEO burned the entire industry down last month. But this is not the same situation as FTX. “You are definitely seeing larger than normal withdrawals from Binance. It’s definitely worth keeping an eye on, but as far as I can tell at this point, this is very different from the FTX situation,” said Alex Svanevik, CEO of blockchain analytics firm Nansen, in an interview with CNBC. Binance CEO Zhao stated that while there are challenges ahead, Binance will be fine. “While we expect the coming months to be turbulent, we will weather this challenging period — and we will be stronger for having been through it,” Zhao wrote in an internal memo seen by Bloomberg.
The industry must change
The bottom line is that despite what you might believe about Binance, the reality is that there is a lack of transparency here and investors are paranoid due to the series of scandals that have rocked the industry this year. Any semblance of trust that remained after the LUNA fiasco, which brought down several companies such as cryptocurrency lender Celsius, is now shattered following the staggering scale of the FTX debacle. Binance has an obligation to hold itself to a higher standard now that it has such a dominant market share. So far, their efforts regarding proof of reservations have fallen short, with the crypto world again relying on a CEO’s tweets to ensure all is well.
