It seems Crypto giants keep running into major issues. First FTX files for bankruptcy and Sam Bankman-Fried faces fraud charges, now it turns out Binance´s system of fund storage has “errors.” Binance has mixed collateral and customer funds in a common account. Reserves of almost half of the 94 different coins that Binance issues known as …
Binance´s Collateral Damage
It seems Crypto giants keep running into major issues. First FTX files for bankruptcy and Sam Bankman-Fried faces fraud charges, now it turns out Binance´s system of fund storage has “errors.”
Binance has mixed collateral and customer funds in a common account. Reserves of almost half of the 94 different coins that Binance issues known as Binance-peg tokens or B-Tokens are all stored in a single wallet called Binance 8. The wallet is listed as a reserve for Binance-peg versions of several cryptocurrencies like Polygon’s MATIC, MakerDAO’s DAI and MKR coins, Aave, and Uniswap’s UNI.
However, according to the process posted on the Binance website:
- B-Tokens should be backed one-to-one by locked reserves of the coins they’re based on.
- Its reserves should be stored in dedicated wallets to keep them separate from customers and exchange funds.
The issue was first called out by Jonathan Reiter, a ChainArgos co-founder: “excessive over-collateralization of some B-Tokens and Binance’s use of the Binance 8 wallet showed “obvious mixing of client and peg-backing funds,” he said back on January 17th, 2023.
What does this mean?
“When collateral is pooled together and used for trading, it’s locked up and clients or holders of assets may not be able to withdraw if the pool is reduced. In essence, this means that there is no segregation of assets between clients’ funds and any collateral used. This could lead to the owner(s) not being able to withdraw due to lack of funds or liquidity by the exchange… This could resonate with what FTX and Alameda did on a daily basis. An audit would generally highlight such shortcomings and ask to remedy it immediately,”
Laurent Kssis, a crypto trading adviser at CEC Capital
Currently, $539 million in Binance Tokens are affected by this. The main issue with the lack of segregation is that it’s almost impossible to verify the amount in coins that Binance holds as a reserve to meet current and future request redemption and how many B-Tokens have been minted already.
Even as the crypto platform states that it holds enough assets to back requests, we don´t know for sure as it’s all mixed up in the same wallet.
Binance response
Apparently, Binance is taking action. The platform has stated that it is in the process of transferring the collateral out of the Binance 8 shared wallet.
“‘Binance 8’ is an exchange cold wallet. Collateral assets have previously been moved into this wallet in error and referenced accordingly on the B-Token Proof of Collateral page. Binance is aware of this mistake and is in the process of transferring these assets to dedicated collateral wallets.”
As of writing, there is no estimate as to how long this would take and which measures will Binance take to prevent this from happening again.
The fund segregation issues have resulted in an increase in uncertainty and a lack of confidence from the customers which has been reflected in the market. Some Binance customers have started to withdraw their funds from the platform.
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