Other Crypto Exchanges Are Showing Their Coins, As FTX Sinks
As FTX, the world's third-largest cryptocurrency exchange by volume declares bankruptcy and suspends withdrawals, other exchanges work hard to assure customers that they will not suffer the same fate. Binance, Crypto.com, and others have begun to release excerpts from their books, while Coinbase executives are on a media tour informing investors that it is safe to store money with them.
The moves are intended to reassure people that their money is not being used for other purposes and is instead being held one-to-one. In other words, the exchanges want you to know that if you deposit Bitcoin with them, they will hold a Bitcoin in reserve for you. In contrast, FTX allegedly loaned billions of dollars in customer funds to Alameda Research, a trading firm controlled by the exchange's former CEO, Sam Bankman-Fried. A report that Alameda's most significant asset was FTX's token, FTT, triggered FTX's spiral, creating a situation in which the company appeared to use something akin to its own stock as collateral.
Coinbase CEO Brian Armstrong responded by tweeting that his company does not lend customer funds and linking to a blog post from June that explains, "Coinbase always holds customer assets 1:1." This means that our customers have access to funds 24 hours a day, seven days a week, 365 days a year."
Other exchanges have gone even further, promising to show proof of reserves or proof that they have all of the coins that customers have deposited. Binance, the world's largest exchange and a key figure in FTX's demise, shared the addresses of its hot (read: actively accessible) and cold (read: offline) wallets for the Bitcoin, Ethereum, Tron, and Binance networks in a news post titled "Our Commitment To Transparency" on Thursday. The post does state that the list is "not a complete set of data," but it promises a full audited report within the next few weeks.
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According to the CEO of Nansen, a crypto analysis firm, the company collaborated with Binance to create a dashboard that visualizes the exchange's holdings. According to Bloomberg, Nansen's data shows that roughly 40% of Binance's revealed holdings are made up of Binance USD (BUSD), a stablecoin associated with the exchange, and BNB, the exchange's native token.
Binance CEO Changpeng "CZ" Zhao called it "[poop emoji] journalism" after tweeting a screenshot of what appears to be a paywalled version of Bloomberg's article. He was upset that the outlet referred to BUSD as Binance's "own stablecoin" when it was issued by a third party, and he claims that the numbers are incorrect. According to the exchange's website, BUSD is given "in partnership" with Paxos, which also holds the reserves that keep its value pegged to USD 1.
Based on Nansen's data, Bloomberg's reports on how much BUSD and BNB Binance hold appear to be accurate.
Changpeng's main issue, however, appears to be one that Crypto.com is also dealing with right now. According to Changpeng, these assets belong to users and are "in the form that users choose to store with us." "We don't convert for them," implying that the situation is not comparable to the FTX situation. His point is that users select which assets Binance holds based on their transactions with the company.
Crypto.com also released a Nansen dashboard with a partial proof of reserve on Friday, promising a full audited report in the coming weeks. Almost immediately, members of the cryptocurrency community pointed out that the company has more SHIB (a meme coin worth about a thousandth of a cent) than Ethereum, with reserves of around $559 million for the former and $481 million for the latter. Bitcoin is the exchange's largest reserve by far, at $878 million, but one crypto commentator went so far as to advise people to withdraw their money from the deal immediately after seeing the SHIB reserves.
Crypto.com's CEO, Kris Marszalek, claims the company has a one-to-one reserve of its customers' assets. If this is correct, it has more SHIB in its reserves because its customers have simply purchased more SHIB than Ethereum. (And who am I to pass judgment on them?)
However, these announcements should be taken with a grain of salt. For starters, as Binance and Crypto.com have both stated, they are currently unaudited and incomplete. Both say the complete set of data will be available in a few weeks. Still, as we've seen, in crypto land, that's a lifetime — on Monday, Bankman-Fried was estimated to be worth $15.6 billion, and by Thursday, Bloomberg said he had "no material assets tracked by the Bloomberg wealth index."
Another major flaw with proof of reserves is that, while they show what a company has on its books, they do not prove that those figures are a one-to-one match for what customers have traded. As some commentators have pointed out, data on a company's holdings won't tell you much about its liquidity unless you know how much it owes. "Proof of reserves is meaningless at best without reliable information on liabilities," said Molly White, a crypto researcher, and skeptic, in an email to The Verge.
Because Coinbase is a publicly traded company, it is possible to gain some understanding of its assets and liabilities. Crypto.com and Binance, on the other hand, are privately held and are not required to publish financial reports. Binance's CEO has stated that the company will go public in 2024.
