Binance in Hot Water as Transparency Concerns Surge

Binance is a household name in the cryptocurrency world, but its reputation is not backed up by its business practices. The crypto exchange’s history of secrecy, avoidance of government regulation, and proximity to more than one criminal investigation raise serious concerns.

3D illustration of Binance exchange in the middle of the city, cryptocurrency exchange, faster and secure. © increation87 /

June 11, 2023 23:05 EDT

In the world of cryptocurrency exchanges, Binance has established itself as the dominant player. However, recent developments have raised serious questions about the platform’s stability and safety. Binance’s involvement with the collapse of FTX Trading Ltd. (FTX), a prominent cryptocurrency exchange, has put the company under intense regulatory scrutiny.

The saga began with Binance’s CEO, Chanpeng Zhao, contributing to panic surrounding FTX’s financial position through a tweet announcing Binance’s plan to liquidate its position in FTX’s FTT crypto token. This announcement fueled concerns and contributed to the depositor selloff that ultimately worsened FTX’s collapse. Binance then expressed interest in acquiring FTX to bail out the struggling exchange but abruptly reversed its decision, citing mishandled customer funds and alleged US agency investigations.

“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of,” the company said in a statement. “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”

Binance’s entanglement in FTX’s collapse has drawn significant attention from government regulators. Allegations have even surfaced suggesting that Binance deliberately attempted to cause a depositor selloff to eliminate its competitor. Moreover, the US Department of Justice (DOJ) has been conducting a criminal investigation into Binance since 2018, examining potential money laundering and criminal sanctions violations.

A long history of secrecy

The origins of Binance itself raise concerns. Chanpeng Zhao, better known as CZ, founded the company in China in 2017. In the early days, the company operated without the necessary licenses in China and Japan. CZ enforced a culture of secrecy among employees, prohibiting them from mentioning the company or divulging its location. Even when prompted for an address by a cybersecurity company, CZ instructed employees to provide an address in the Cayman Islands, where a holding company had been set up.

This secretiveness ought to raise red flags, especially considering that the company continues to avoid producing paper trails with an established policy to keep internal communications on encrypted channels such as the self-erasing message app Keybase. The veil of secrecy further extends to Binance’s financial operations. Astonishingly, even the company’s former CFO did not have full access to the company’s financial accounts, leaving one to ponder what CZ is so desperate to hide from other company executives. As a private company, Binance does not disclose important figures such as revenue, profit, cash reserves, or the extent of its holdings of its own crypto token, BNB, on its balance sheet. Almost hilariously, the company’s base of operations still remains undisclosed.

Given the lack of transparency, it is no surprise that concerns have emerged regarding the safety of customer assets. A proof of reserves report, commissioned by Binance to assure customers of the safety of their funds, was briefly posted to, and then subsequently deleted from, the accounting firm’s website. The firm stated concerns about public understanding and explained that the report merely provided limited findings based on agreed-upon procedures. Consequently, doubts persist about the actual security of customer funds, especially since the report only covered Binance’s Bitcoin holdings and not other cryptocurrencies.

Transparency in Binance’s accounting practices would be desperately needed for investors to be able to trust the company’s statements. An analysis from Jonathan Reiter, co-founder of blockchain analytics firm ChainArgos, showed that the stablecoin Binance created was not fully backed during large parts of 2020 and 2021. A collateralized stablecoin is a cryptocurrency asset meant to be kept interchangeable with the US dollar by being backed by assets of equivalent value held in reserve at all times. Investors looking to Binance’s stablecoin product as a safe haven are essentially trusting nothing more than the company’s word.

Regulators and banks on the alert

The extensive secrecy appears to be a highly motivated attempt to avoid regulatory oversight. The ongoing DOJ investigation and recent criminal charges against Bitzlato, a Hong Kong-based cryptocurrency exchange, are clear indicators of the regulatory pressure faced by Binance. The DOJ charged the relatively unknown exchange with passing more than $700 million in tainted cryptocurrency. Compromisingly, blockchain data revealed significant transactional ties between Bitzlato and Binance, which acted as a major counterparty for its crypto transactions. Binance was the only major crypto exchange that acted as a counterparty to Bitzlato. This raises uncomfortable questions about Binance’s involvement with potentially illicit activities.

On June 5th of this year, the Securities and Exchange Commission (SEC) filed 13 charges against Binance and its CEO for securities law violations. The bombshell SEC lawsuit alleges, among other things, that Binance commingled customer assets, illegally operated in the US as an unregistered exchange, and artificially inflated trading volume on its platforms. Alarmingly, documents collected by the SEC show text messages sent by Binance’s former chief compliance officer to a college where he wrote “we are operating as a fking unlicensed securities exchange in the USA bro [sic].” In the same text conversation, the former chief compliance officer also wrote “there is no fking way we are clean.”

The regulatory crackdown on the cryptocurrency industry has gotten many crypto companies into trouble with their banking partners. US banks are reevaluating their engagement with crypto due to concerns about legal repercussions. Cases like that of crypto-friendly Custodia Bank, which has had its application to join the Federal Reserve system rejected, have not escaped their notice. The Federal Reserve also issued a statement making clear that banks need to ask for permission before engaging in any crypto activity. Consequently, Binance and other exchanges are losing their US banking partners, making it difficult to process transactions involving US dollars. The turmoil has forced Binance’s international company to suspend US dollar deposits and withdrawals.

The erosion of banking partnerships poses a significant risk, as it eliminates the crucial onboarding and offboarding channels for users to convert cryptocurrency into cash. US regulators and banks simply no longer trust the cryptocurrency space. This development has created uncertainty and may deter users from participating in the cryptocurrency market.

In light of these developments, placing trust in Binance seems increasingly difficult. With all of the secrecy, questionable accounting practices, and regulatory attention that surround Binance, investors no longer trust Binance, and neither should the public at large.

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.


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