Jan 25, 2023 - Economy

Binance's 8 Wallet "error" was there for all to see

Illustration of a magic 8-ball that reads, "Check yourself."

Illustration: Aïda Amer/Axios

Binance, the world's largest crypto exchange, kept coins in a wallet with others that didn't belong there, raising the specter of company and customer assets commingling.

The big picture: In the wake of FTX's collapse, in which the commingling of assets appears to have played a role, Binance and its founder Changpeng "CZ" Zhao emphasized the importance of transparency and trust.

What's happening: Binance's "8 Wallet" was marked for reserves, to hold the collateral for derivative tokens used on Binance's native blockchain.

  • Because the wallet held more than was necessary for that collateral, as an analyst and Bloomberg first reported, commingling was suggested.

What they're saying: A Binance spokesperson likened the incident to a "clerical error" and denied "commingling" in emailed statements to Axios.

  • "Binance is aware of this mistake and is in the process of transferring these assets to dedicated collateral wallets. This will be visible on chain and reflected on the Proof of Collateral page in the near future."
  • "To be clear, all user assets held with Binance have been and continue to be backed 1:1, notwithstanding these historical operational oversights," the spokesperson said.

Meanwhile: Binance told Decrypt that the discrepancy happened due to funds "not moved quickly enough to the appropriate hot wallets” or that “collateral assets had been stored in cold wallets that were not known to the public.”

  • The company's stated policy does not allow for commingling.

Between the lines: While Binance lists B-token collateral in the wallet totaling $3.8 billion, the wallet in question actually holds roughly $16.5 billion in funds, crypto intelligence platform Arkham tells Axios.

  • Our thought bubble: That's one whopper—$12.7 billion discrepancy—of a mistake.

Details: There are 94 B-tokens the exchange mints, derivatives of bitcoin to zcash, and Binance holds the assets backing them, per their 1-for-1 pledge.

  • They're wrapped tokens. Not to be confused with BNB coins, which were initially minted as gas tokens to pay for transaction fees.
  • Roughly 40 of those tokens' collateral are listed using the Binance 8 wallet.
  • Binance's Proof of Collateral page also shows outsize collateralization by several-fold in some instances.

Flashback: Binance attempted a proof-of-reserves report (POR) in November, only for its auditor, Mazars, to delete its website and stop crypto auditing services.

Of note: Mazars did not suggest there was an issue with Binance's books, but that it was stepping away from work on POR reports for all crypto clients.

  • It cited concerns about the way the public understood them, a nod to the growing criticism about what such reports do not tell you.
  • One of those criticisms is an auditor's general inability to attest to the validity of the clients' financials.

The bottom line: Recent examples show that it's the misappropriation of funds, not necessarily commingling, that would bring a crypto platform to its knees. And in Binance's case, thus far, there is no proof of that.

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