The collapse of FTX revealed that the crypto exchange had knowingly defrauded billions of customer deposits to pay expenses and debts owed by sister trading firm, Alameda Research. As contagion effects continue to play out in the weeks to come, many other centralized lenders are beginning to follow suit. BlockFi was amongst the subsequent victims to file for bankruptcy, citing “significant exposure” to FTX. But others, including Gemini and Genesis Trading, have also halted withdrawals indefinitely until their liquidity situation improves.
With all of these systemic risks arising from centralized exchanges, fear and paranoia has gripped the minds of crypto participants. “Not your keys, not your crypto,” as the old adage goes – expressing the belief that investors cannot be certain of their crypto holdings unless they are stored in a wallet for which they personally hold the private keys to.
Thus, users have begun withdrawing their assets off of centralized platforms en-masse, instead opting to prioritize self-custody through hardware wallets in this time of massive uncertainty.
Binance has had the highest daily withdrawals since June, with over $2B* in net outflows since Dec 12— Nansen 🧭 (@nansen_ai) December 13, 2022
*ETH & ERC20 tokens only pic.twitter.com/xZNdZxRCVy
For Binance – the world’s largest cryptocurrency exchange – this has culminated in over US$3.6 billion in net withdrawals in just the past week. If this keeps up, withdrawals can beget withdrawals, with fears over insolvency compounding to become self-fulfilling.
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.— CZ 🔶 Binance (@cz_binance) December 13, 2022
I actually think it is a good idea to “stress test withdrawals” on each CEX on a rotating basis. 💪
In an appearance on CNBC’s “Squawk Box”, co-host Becky Quick pressed Binance CEO Changpeng “CZ” Zhao on whether Binance would be able to fulfill a $2.1 billion payment from FTX, which the company earned when it exited its 2019 Series A investment with FTX, to potential bankruptcy trustees.
“We are financially OK”, said CZ. “I think we’ll leave that to the lawyers. Our legal team is perfectly capable of handling it.”
In a now removed Proof-of-Reserves (PoR) report, Binance said it had more than $60bn in assets, sufficient funds to honor withdrawals. However, the report has been criticized by netizens as the company’s disclosures do not include its liabilities, making it difficult to ascertain its financial health. The report was deleted after its auditor, Mazars Group, chose to suspend all work with crypto clients, including Binance and Crypto.com, citing indications that markets haven’t been reassured by PoR reports it had published so far, according to an email from the firm seen by Bloomberg News.
Concerns about Binance also intensified this week after a report by Reuters on Monday that Binance faced a criminal investigation in the US over its handling of US money laundering and sanctions laws. Binance has declined to comment on the investigation.
Optimistically however, the analytics group CryptoQuant published their own analysis on the Binance PoR report and found that “on-chain data suggests Binance’s ETH and Stablecoin reserves are not showing ‘FTX-like’ behavior at this point.” Additionally, the firm had found that Binance has an acceptable "Clean Reserve,” meaning that its own token, BNB, is still a low proportion of its total assets – a stark difference to FTX and how its token, FTT, was the majority of its liquidity reserves.
Time will tell as to whether Binance is in the clear, but on-chain data shows that Binance is still safe from the threat of insolvency for now. For users who are still worried, it may be worth considering getting a hardware wallet for peace of mind. It’s a trade-off in terms of convenience, but self-custody can ultimately provide greater security, control, and privacy for cryptocurrency holders.