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Binance faces weeks of challenges after the collapse of rival Crypto Exchange FTX: all the details

Even by the extreme standards of cryptocurrency trading, the past few weeks have been a wild ride for Binance, the world’s largest crypto asset exchange.

After the collapse of its rival FTX in a hail of fraud and crime allegations last month, confidence has collapsed across the industry.

Customers took out more than $3 billion (approximately Rs. 24,000 crore) from Binance in a single day last week as part of a three-day frenzy that saw more than $6 billion (approximately Rs. 48,000 crore) withdrawn.

On Friday, accounting firm Mazars, engaged by Binance to provide a “proof of reserves” report, abruptly stopped work with all crypto firms due to “public misunderstandings” about what they were providing.

A “proof of reserves” report is not a full audit and does not provide information about liabilities.

Media reports suggested US prosecutors were still weighing money laundering and sanctions charges against the company and possibly its co-founder and CEO Changpeng Zhao. The company declined to comment on the investigation.

The stakes couldn’t be higher.

“It is absolutely essential for Binance to survive,” said Dan Ashmore, an analyst at crypto investment firm Invezz.

“Any kind of downfall would be a devastating blow to crypto and would likely drag much of the industry down with it.”

For Starkiller Capital’s Leigh Drogen, it would be “armageddon” for short-term crypto asset prices if Binance collapsed.

Investors ‘confused and scared’

Zhao’s public appearances hardly helped calm the jitters.

In a recent interview with CNBC, he claimed that the company “kind of forgot” part of a $2.1 billion (approximately Rs. 17,000 crore) payment Binance received from FTX last year.

Zhao said a “large portion” was paid in FTX’s now worthless in-house token, but remained untouched for 18 months before Binance remembered and transferred the amount, then worth $580 million (approximately Rs. 4,700 crore).

“Forgetting over half a billion dollars should give me more confidence in Binance’s ability to run an exchange well,” Grit Capital’s Genevieve Roch-Decter wrote in an op-ed for Coindesk, a crypto news outlet.

Critics point out that Zhao is prone to confusing and sometimes contradictory public statements.

He claims to want transparency, but Binance refuses to disclose even basic company information, such as where it is registered, let alone submit to a full audit, as a publicly traded company should undergo.

Zhao is on friendly terms with regulators in some jurisdictions, but he reportedly keeps his main business far from prying eyes in the Cayman Islands.

He emphasizes the solidity and competence of his company, but his personal Twitter feed paints a picture of a one-man band supported by interns.

“Who runs the show there? Is it the same as FTX,” Droogen asked.

He said Zhao’s behavior was “uncannily similar” to Sam Bankman-Fried, the FTX boss who is now in custody awaiting extradition to the United States on charges of financial crimes.

“Everyone is very confused and scared about that,” Droogen said.

When asked to clarify the details of Binance’s structure, a company spokesperson said in an email “Binance.com’s global business operates through a number of entities that are included in a range of jurisdictions”.

On the issue of transparency, he said the blockchain technology crypto relies on was “inherently transparent”.

“That said, we are embracing additional transparency and exploring how best to provide it in the coming months,” he said.

‘Too big to fail’?

Analysts agree that comparisons to FTX only go so far.

“While there are obvious parallels to FTX, there are important differences, the most notable of which is that Binance does not have a massive in-house hedge fund,” said Charlie Erith of ByteTree Asset Management.

Much of the alleged misconduct at FTX involved Bankman-Fried using deposits from FTX clients to fund high-risk bets undertaken by his Alameda Research hedge fund.

“I don’t think there is anyone, not even those people who assume the worst, who think Binance is even semi-insolvent,” Droogen said.

He pointed out that Binance is about 10 times the size of pre-collapse FTX, in terms of the assets that should be on its platform, giving it a much larger buffer in the event of a sudden increase in withdrawals.

Binance’s spokesperson said the company handled last week’s withdrawal requests “without delay,” adding that “flows have now normalized.”

Droogen stressed that hedge funds and venture capitalists exposed to crypto assets now need the Binance platform to protect their holdings.

But the company’s long-term prospects are less clear, especially if US authorities continue to pursue criminal charges.

“Our feeling is that nothing in crypto is too big to fail for the US government,” said Drogen, “and they are likely to crush something that is illicit on some level.”

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