Fear and Doubt Cloud Cryptocurrency Exchanges After FTX Collapse

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The surprising collapse of FTX Trading has cast a veil over the entire cryptocurrency industry, sowing fears that even the world’s largest digital asset exchange may not be safe.

Binance customers withdrew nearly $2 billion in crypto assets from the exchange in a single day this week, according to blockchain analytics firm Nansen, noting that users withdrew $8.7 billion over a seven day period. The capital outflow forced Binance CEO Changpeng Zhao to react, and he sought to temper fears that the company was in jeopardy.

In a statement to CBS MoneyWatch, a Binance spokesperson withdrew $1.14 billion from the platform in 12 hours, but said transactions were “handled with ease.”

In a tweet on Tuesday. Zhao called the withdrawals “business as usual for us”.

“We’ve seen this before,” said Zhao, who calls himself CZ. “Some days we have net withdrawals; some days we have net deposits.”

Things seem to have stabilized. Yesterday was not the most withdrawals we have processed, not even the top 5. We have processed more in LUNA or FTX crashes. Now the deposits are coming back. 🤷‍♂️💪 https://t.co/WLK2KyCym0

— CZ 🔶 Binance (@cz_binance) December 14, 2022

But even though Zhao has expressed confidence in Binance, he also expects a prolonged slump in the crypto market. In an email to Binance staff this week, he warned that the next few months would be “bumpy” for the company, CNBC reported.

“General mistrust”

Experts have said that for investors, the crypto industry has entered an era of FUD – fear, uncertainty and doubt. Clients who use crypto exchanges have watched what happened at FTX and are now wondering if their assets are safe, they said.

To ease customer concerns about their financial stability, Binance, Crypto.com, Kraken, and other services have released so-called proof of reserve documents, or PoRs. This is a financial snapshot of an exchange, made public to show customers that the company has enough funding to make a large number of withdrawals at once.

Binance released its PoR last month, and since then there has been debate among crypto enthusiasts about how the company made its calculations, Omid Malekan, crypto expert and professor of commerce at the University of Columbia.

This debate has prompted investors to make large withdrawals just in case, experts said.

“There’s just a general distrust of [cryptocurrrency] exchanges right now,” said crypto risk expert Joshua Peck. “These exchanges are tested to see if they can withstand withdrawals.”

stay liquid

Investors have good reason to worry. Along with FTX, other crypto companies have declared bankruptcy this year as the price of digital assets has plummeted, including BlockFi, Celsius Network and Voyager Digital, and it’s unclear whether users of these platforms will ever see refunds.

Still, Malekan said Binance has become mature enough to weather the storm, noting that the exchange has enough capital to cover customer withdrawals if conditions continue to erode. Binance has the equivalent of over $60 billion in reserves, according to data from Nansen.

“Binance seems to hold its reserves in bitcoin and it’s quite a liquid asset,” Peck said. “If everyone wanted to withdraw all their bitcoin at once, on the face of it, that seems possible.”

FTX founder Sam Bankman-Fried denied bail after arrest 06:19

Malekan also said that Binance appears to have avoided critical mistakes that doomed FTX, such as allegedly funneling client funds to Alameda Research, the hedge fund formerly operated by FTX founder Sam Bankman-Fried, which is now in business. a Bahamas prison facing eight counts. fraud, conspiracy and other financial crimes.

In its statement, Binance confirmed with CBS MoneyWatch that it ensures that client accounts are not used to fund company investments.

“Unlike FTX, Binance does not invest user funds,” the Binance spokesperson said. “Binance holds all of its customers’ crypto-assets in segregated accounts that are identified separately from any accounts used to hold Binance-owned crypto-assets.”

More from Kristopher J. Brooks

Khristopher J. Brooks is a reporter for CBS MoneyWatch and covers business, consumer and financial stories ranging from economic inequality and housing issues to bankruptcies and sports affairs.

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