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Binance outflows hit $3b amid reports of criminal charges, audit concerns

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Jittery crypto investors have rushed to withdraw billions of dollars from Binance as fears mount over the platform’s financial health and reports of possible criminal charges.

The world’s largest cryptocurrency exchange said on Tuesday it had “temporarily paused” withdrawals of the USDC stablecoin while it completed a token swap involving the asset, but insisted it was “business as usual”.

Blockchain analytics firm Nansen said Binance had experienced the highest daily withdrawals since June, with net outflows of more than $US3 billion ($4.4 billion) in the space of 24 hours.

“Binance’s withdrawals are increasing due to the growing uncertainty about its reserves report,” a spokesperson for Nansen told Reuters.

The collapse of FTX last month and arrest of its founder Sam Bankman-Fried this week has thrown a spotlight on how exchanges handle customer deposits.

Binance sought to distance itself from the FTX scandal and calm the market by publishing a proof-of-reserves report showing it held enough assets to cover client balances.

“It’s important for us to show users that the coffers are not bare, like at FTX,” Binance chief strategy officer Patrick Hillmann said in an interview with The Wall Street Journal over the weekend.

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On its website, Binance says the report shows “evidence and proof that Binance has funds that cover all of our users assets 1:1, as well as some reserves”.

But the five-page report, released last Wednesday, has only raised more concerns.

John Reed Stark, a former US Securities and Exchange Commission regulator, said the report “doesn’t address effectiveness of internal financial controls, doesn’t express an opinion or assurance conclusion and doesn’t vouch for the numbers”.

“I worked at SEC Enforcement for 18+ yrs,” he wrote on Twitter. “This is how I define ‘red flag’.”

Speaking to Decrypt, Mr Stark questioned why a company as “sophisticated and well capitalised” as Binance opted to go with accounting firm Mazars for the report instead of one of the big four auditors.

Mazars said in the letter it performed the work using “agreed-upon procedures” requested by Binance and that “we make no representation regarding the appropriateness” of the procedures.

Mr Stark said Binance “shoots themselves in the foot when calling these documents audits”.

Speaking to The Wall Street Journal, Mr Hillman was questioned on the appropriateness of referring to the Mazars report as an “audit”.

“We’re talking about a review of our assets in custody,” he said. “I would just say we’re parroting others’ descriptions of this as an independent audit.”

Another red flag is the lack of basic information about Binance’s corporate structure. Mr Hillman told The Wall Street Journal he couldn’t provide the name of Binance’s ultimate parent company because the organisation was undergoing a broad restructure.

He confirmed Mr Zhao was the majority owner of Binance.

On Tuesday, Mr Zhao insisted the massive outflows were no cause for concern.

“We saw some withdrawals today (net $1.14b ish),” he wrote.

“We have seen this before. Some days we have net withdrawals; some days we have net deposits. Business as usual for us. I actually think it is a good idea to ‘stress test withdrawals’ on each CEX on a rotating basis.

“It costs some network fees to run these ‘tests’. But keeps the industry healthy. Exchange business is simple.”

He earlier explained withdrawals of the USDC token had been paused in order to complete a swap with other tokens tied to the value of the dollar, tether and BUSD, a coin developed by Binance and blockchain firm Paxos.

“On USDC, we have seen an increase in withdrawals,” he said.

“However, the channel to swap from PAX/BUSD to USDC requires going through a bank in New York in USD. The banks are not open for another few hours. We expect the situation will be restored when the banks open.

“These are 1:1 conversions, no margin or leverage involved. We will also try to establish more fluid swap channels in the future. In the meantime, feel free to withdraw any other stable coin, BUSD, USDT, etc.”

Meanwhile, Reuters reported earlier this week that prosecutors at the US Department of Justice were split on whether evidence justified filing criminal charges against Binance executives including Mr Zhao.

The long-running criminal investigation is focused on Binance’s compliance with anti-money laundering laws, according to the report, which said DOJ officials had discussed possible plea deals with Binance lawyers in recent months.

Binance has reportedly been on a recruitment blitz of ex-US government officials since last year, including at least five former cybercrime investigators from the Internal Revenue Service.

Sharing its statement to Twitter on Tuesday, Binance said Reuters “has it wrong again”.

“Now they’re attacking our incredible law enforcement team,” the company wrote. “A team that we’re incredibly proud of — they’ve made crypto more secure for all of us.”

In its statement, Binance said, “We don’t have any insight into the workings of the US Justice Department, nor would it be appropriate for us to comment if we did. We are proud to have in our ranks some of the most celebrated cyber investigators representing virtually every single major international law enforcement agency across the globe.”

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