​Binance is under attack. What caused billions of dollars in outflows

Binance users have withdrawn assets worth several billion dollars from their accounts in two days. The exchange’s leadership confirms its solvency and denies the allegations against it.

The outflow of funds from Binance exceeded $3,6 billion in seven days, according to analysts at Nansen, but its resources only monitor Ethereum and blockchain tokens on the ETH network. The actual amount of what users withdrew from their accounts during the short panic is obviously higher.

Over the past weeks, there have been record-breaking withdrawals from decentralized exchanges overall. Traders still reeling from the collapse of the FTX exchange in November, at the slightest suspicion of any player’s insolvency, try to keep cryptocurrencies safe in local or hardware wallets. On December 13, FTX founder Sam Bankman-Fried was charged with fraud in the United States.

“Business as usual”

According to Nansen, the volume of funds withdrawn from Binance accounts became the largest since June when the market experienced an unprecedented collapse that followed the collapse of the Terra/Luna ecosystem and catalyzed a prolonged bearish period for crypto traders.

On his Twitter account, Binance CEO Changpeng Zhao talks about a smaller amount of funds withdrawn between December 12 and 13, insisting that this is “business as usual” for the exchange. Zhao often uses the term “FUD” (Fear, Uncertainty and Doubt) in his posts, referring to rumors of insolvency, mass calls to leave the exchange on social media, and articles in leading US media that he considers provocative or paid-for.

One of the factors that increased users’ concerns about Binance was a Reuters article about the exchange facing a criminal investigation in the United States for suspected money laundering and sanctions violations. Binance through official channels denied the information and clarified the details, and Zhao once again asked his audience not to pay attention to another batch of FUD.

Binance denies information from Reuters about accusations of violating US sanctions and money laundering

“As has been reported widely, regulators are doing a sweeping review of every crypto company against many of the same issues. This nascent industry has grown quickly and Binance has shown its commitment to security and compliance,” the exchange said in an official statement. A few days before the article’s release, Binance shared that the exchange has responded to more than 47 000 law enforcement requests over the current year.

Another reason for the growing panic around Binance was the temporary suspension of withdrawals in USD Coin (USDC), caused, according to Zhao, by out-of-hours hours of the bank that conducts transfers in the stablecoin. Funds in other assets were being withdrawn without any problems, and USDC could be converted into any of them in a wallet on the exchange. Notably, prior to FTX’s bankruptcy, its official Twitter account had similarly stated that “banks are closed for the weekend” as an excuse to users who made mass withdrawal requests, not yet knowing what they would face in just a few days.

🚨 Withdraw your #bitcoin from exchanges 🚨

— Bitcoin Magazine (@BitcoinMagazine) December 13, 2022

The official Bitcoin Magazine account (2,7 million followers) posted a call to withdraw bitcoins from exchanges on December 13.

Source: Twitter.com

Zhao also confidently fended off those stirring up panic. The next day, Binance published on official channels that USDC withdrawals had been restored, while other stablecoins remained unaffected.

Nevertheless, according to Chaineye, the supply of the exchange’s own stablecoin Binance USD (BUSD) decreased by $3 billion in 24 hours, which is almost 18%. It is possible that during the panic, users converted its native stablecoins withdrawn from the exchange into the same USDC or other cryptocurrencies.

Reserves and audit

Perhaps the only valid complaint against Binance is the incomplete and somewhat distorted information about the exchange’s recently published reserves. Last month Binance published proof of reserves, stating that user funds in the wallets of the exchange are collateralized by 101%

The wallets, whose addresses Binance published, hold $60 billion in crypto assets at the time of publication, which can be checked at any time through Nansen or any other service that tracks exchanges’ reserves. Critics argue that proving reserves does not guarantee Binance's collateral. Mazars, the auditing firm that the exchange used to prove reserves, said in a five-page November report that the company does “not express an opinion or an assurance conclusion,” and that the verification process is actually an “Agreed Upon Procedure” rather than a full-fledged audit, as the document explicitly states.

Binance CEO calls the outflow of $1 billion from the platform for a day a “stress test”

Binance does not disclose information about its liabilities, which makes it difficult to determine its financial status. According to market representatives, including, for example, Kraken CEO Jess Powell, such an audit cannot be considered full-fledged. Zhao, responding to the claims, also attributes them to FUD and says that customer deposits are backed by appropriate assets and that Binance is debt-free.

During a December 14 Twitter Spaces broadcast, Zhao said that an updated report on the exchange’s reserves would be released “in the coming weeks.” He then said that there was no FUD so powerful in terms of volumes that would put serious pressure on Binance.

“Time to shine”

Binance’s CEO had to appeal not only to the exchange’s users and numerous followers on Twitter but also to his own employees. On December 13, in an internal newsletter, he warned his colleagues that the proverbial “crypto winter” is not over yet, and the coming months would not be easy.

“While we expect the next several months to be bumpy, we will get past this challenging period – and we’ll be stronger for having been through it,” the memo, published by Bloomberg, said. In a similar letter, the text of which was made available to The Block, Coinbase CEO Brian Armstrong wrote that fear and volatility in the market is a “moment to shine.”

Zhao still blames the collapse of a high-profile competitor, FTX, for subjecting Binance to “a lot of extra scrutinies and tough questions” because of it. On Tuesday, a US jury indicted FTX founder Sam Bankman-Fried for conspiracy to commit fraud against the exchange’s customers and creditors, as well as money laundering. He was denied bail and taken into custody at a Bahamian correctional facility.