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Binance’s Proof-of-Reserve Transparency Still Not Enough After 12 Tries

Last Updated November 22, 2023 4:17 PM
James Morales
Last Updated November 22, 2023 4:17 PM

Key Takeaways

  • After Binance and its founder CZ pleaded guilty to criminal charges, users have been scrambling to pull their crypto from the platform.
  • The exchange has seen net outflows of more than $1.2B in 24 hours.
  • Binance and CZ have sought to reassure customers by pointing to the exchange’s proof-of-reserve statements.

On Tuesday, November 22, Binance pleaded guilty to multiple criminal charges as part of a  $4.3B settlement deal with the Department of Justice. Alongside founder Changpeng Zhao’s (CZ) departure as CEO, the hefty fine has triggered a crisis of confidence in the platform, which had seen net outflows  of over $1.2B in 24 hours at press time. 

Scrambling to respond, Binance and CZ have pointed to the exchange’s latest attestation report as evidence that it has sufficient crypto reserves to honor customer deposits in full. But their reassurances have done little to curb the pace of withdrawals, with man y users still concerned that their funds may not be safe.

Binance Celebrates a Full Year of Reserves Disclosure

After last year’s FTX crisis, Binance moved to increase transparency by publishing monthly “proof-of-reserve” (PoR) snapshots intended to prove it has the crypto to match user deposits.

The company’s latest snapshot , released on November 7, marks the twelfth such proof-of-reserves report since Binance started publishing them. 

At the time of the most recent attestation, Binance reported reserves of 584,000 Bitcoin, representing 104.2% of customers’ total BTC deposits. The exchange also reported overcollateralized ETH and BNB reserves, equivalent to 105.2% and 111.4% of customer deposits respectively.

Although Binance claims its PoR statements demonstrate that it holds enough crypto to withstand an FTX-style run, that hasn’t stopped users from pulling over a billion dollars worth of assets from the platform since Tuesday.

Proof-Of-Reserves Fail to Assuage Panicking Binance Users

Despite assurances from Binance and CZ, critics have argued that its PoR reports lack the rigor of a full independent audit. What’s more, although Binance lists over 350 different digital assets, it publishes proof-of-reserves for just 31 of them.

Even the company initially contracted to produce the reports, Mazars, pulled out  due to concerns about “the way these reports are understood by the public.” Since Mazars backed out of its arrangement with Binance, the exchange has created its own proof-of-reserve reports.

Now, with trust in Binance taking a battering in light of its recent guilty plea, skepticism surrounding the credibility of its reserve claims have once again risen to the surface.

Binance Has Survived Worse in the Past

Aside from its self-published PoW snapshots, platforms like Arkham and Nansen also track the assets in Binance’s crypto wallets. The good news for worried Binance users is that calculations from independent analysts tend to closely approximate the company’s own numbers.

In the aftermath of Tuesday’s settlement announcement, Nansen observed that although outflows were high, “we’re not seeing a mass exodus of funds.” 

It also pointed out that Binance has seen worse. On three occasions, net outflows have outpaced those witnessed in the past 24 hours: earlier this year when the Securities and Exchange Commission (SEC) sued Binance in June; in December 2022 when the exchange was beset by insolvency rumors; and in the immediate aftermath of FTX.

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