In the aftermath of the collapse of FTX, many are justifiably concerned about the solvency of crypto exchanges. Sam Bankman-Fried's fraudulent bucket shop may have been an outlier – court documents filed earlier this week by U.S. authorities allege that some $8 billion in FTX customer deposits were transferred to and lost by SBF's "hedge fund" Alameda Research.
But, following a decline in crypto prices, a drawdown of debt between highly-interconnected firms and several bankruptcy filings that have locked up billions worth of assets in legal proceedings – it's reasonable to wonder if there is as much money held on centralized, largely-unaudited crypto exchanges as there should be.
This is part of the reason why users are taking possession of their own coins in recent weeks. Binance, the industry leading crypto exchange, in particular has seen a significant drawdown. Large clients like Jump Trading have taken coins out, and the exchange moved to temporarily halt USDC withdrawals (potentially to execute a token swap to its own stablecoin).
Earlier this week, Binance CEO Changpeng Zhao referred to this trend as "business as usual." But also told employees to brace for a few "bumpy" months ahead. The exchange had published a so-called "proof-of-reserves" report done by auditing firm Mazars showing, depending on which figures you include, it was either over or undercollateralized in its bitcoin holdings. Centralized crypto exchanges reintroduce an element of trust that trustless protocols like Bitcoin and Ethereum remove from finance. Users take on the risks, even if rare, of hacks, frozen withdrawals and other business failures, Casa's Nick Neuman said recently. And so, amid a period of uncertainty, Zhao's primary responsibility is to reestablish confidence in his exchange.
Yesterday, Zhao took to Twitter Spaces to criticize self-custodying crypto, alleging that "99% of people…will end up losing" their funds if they have to be responsible for their own keys. These fears are entirely unjustified and seem to contradict Zhao's comments just last month calling self-custody a "fundamental human right."
This is no doubt a challenging time for Zhao. On Monday, Reuters reported the U.S. Department of Justice was nearly the end of a multi-year investigation into Binance – one of several ongoing probes into the firm from global law enforcement agencies. Federal prosecutors are reportedly weighing whether to charge Binance executives, including CZ, with money-laundering violations, no doubt accelerating withdrawals.
Rebuilding trust in Binance, stymying outflows, should not come at the expense of crypto's principle innovation – enabling people to "be their own bank." To take an old line from Zhao, "some things are better left unsaid. Recommend no more news like these, for the sake of the people, our industry (and your business)."
– D.K.
