Binance: Waiting For The Other Shoe To Drop

Summary Binance exchange under pressure over its reserves. Auditor halts work and critics talk of a 'black box' A DOJ investigation adds further negative sentiment. As the dust settles on the collapse of the FTX (FTT-USD) cryptocurrency exchange, attention has now turned to the financial soundness of the Binance exchange. In this article, I will dig deeper into the finances and criticism of Binance and the outlook for the BNB token ( BNB-USD ). Binance is under pressure over its finances It has been a year of hero-turned-villain in the cryptocurrency market. In the summer of 2022, Sam Bankman-Fried was likened by Fortune to John Pierpont Morgan for bailing out crypto firms in the bear market. Six months later and he is under arrest after being extradited to the U.S. with his $32 billion empire now in messy bankruptcy proceedings. The rival Binance exchange, and its CEO Changpeng Zhao, or CZ, is now facing a similar predicament. It was CZ who triggered the initial run on the FTX exchange and its ultimate collapse when he announced that his firm was selling all of its FTT tokens- the native coin of the FTX exchange. As FTX collapsed, Binance was left standing at the top of the mountain with its CEO preaching about how to handle customer funds. Only a month later, it is Zhao who is having to deflect concerns over the soundness of his exchange. Binance would be a big scalp and could lead to an even bigger fallout than FTX. The company has a daily trading volume of $7.8 billion, which is huge compared to its nearest big-name rival Coinbase ( COIN ), which has $1.1 billion. Last week, Binance saw its highest daily withdrawals since June, with net outflows of $3 billion in a 24-hour period, according to Nansen. Investors are spooked over reserves and audits The problems started for Binance last week when the audit company Mazars removed a web page related to its work with Binance and said that it had halted its work on “proof of reserves” reporting, with Binance, Crypto.com, and KuCoin. Mazars said it had “paused its activity relating to the provision of proof of reserves reports for entities in the cryptocurrency sector due to concerns regarding how these reports are understood by the public”. The reports were said to be limited in scope compared to a traditional audit of company accounts and the company was distancing itself from the media attention, according to the Financial Times. Michael Burry, the famed investor of the “Big Short” film, tweeted : In 2005 when I started using a new kind of credit default swap, our auditors were learning on the job. That's not a good thing. Same goes for FTX, Binance, etc. The audit is essentially meaningless. A month ago, Nansen reported that Binance held $69.5 billion in digital assets in publicly disclosed wallets. That total was now said to be around $54.7 billion due to large withdrawals and price fluctuations. Nansen analyst Andrew Thurman told Coindesk that Binance’s finances were still, “ very much a black box .” After Reuters released an article with a similar accusation, Binance hit back in a blog post but did not seem to want to increase transparency over the firm’s finances. Binance said that it “does not need” to disclose detailed information on its financial status as it is not publicly traded. The company stated it was self-sufficient and “financially healthy,” with “no external financing needs and external investors, and no intention to go public at this stage.” A DOJ money laundering investigation adds extra weight Another headwind over the last two weeks was news that the Department of Justice (DOJ) was considering whether to file criminal charges against Binance over money laundering accusations. The investigation began in 2018 and Reuters said , “Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two of the sources. Others have argued taking time to review more evidence.” “The stakes are high for the deeply troubled crypto sector. If the investigation goes against Binance and Zhao, it could loosen Binance's grip on the industry,” they added. Zhao seeks to reassure investors and staff Changpeng Zhao tried to reassure Binance’s army of retail investors in an email, saying : We only spend our own funds. We do not use client funds to deal on our own account. Zhao added: Binance holds all of its clients’ crypto-assets in segregated accounts which are identified separately from any accounts used to hold crypto-assets belonging to Binance and it also uses Binance’s own wallet infrastructure to safeguard user assets and Binance’s own assets. This is where the story gets interesting as CZ seems to believe that all will be well at Binance because they do not trade or spend users’ funds. That is true, but the company still holds the majority of its assets in its native token, just like FTX did. Client funds may be protected, but the fate of the exchange’s operations is a different story. The price of Binance Coin has been under pressure since the late-November crypto peak but is still in a bearish tone despite the reassurances of the exchange’s management team. BNB-USD ((M)) (TradingView) On the monthly chart, support is at $200-210 and if that gives way, all hell could break out in the cryptocurrency sector once more. Conclusion Just as Binance appeared to be left standing alone at the top of the mountain as king of the crypto exchanges, the company is coming under fire from all angles. A DOJ investigation into money laundering, dropped by its auditor and now fielding regular questions over its reserves. The market is looking for assurances that the company is in sound financial health. The company's response that they are not publicly listed and not required to disclose such details is not what investors are looking for. Binance may not trade client funds, but a large number of its reserves are held in its native BNB token and that could ultimately threaten its operations.