Based on a detailed investigation conducted recently, Forbes raised significant questions about Binance's management and custody of customer assets and Stablecoin collateral. In the investigation Forbes mentioned the nature and intent of some of the on-chain transactions and offered a number of possible explanations. But so far Binance has not provided a clear response to these on-chain transactions. Binance's approach will not restore confidence in the crypto industry. Particularly after the collapse of FTX, centralised platforms with off-chain balance sheets are no longer easily trusted.

Forbes reported this week that on August 17, 2022, $1.78 billion worth of money was transferred from Binance wallets to support Binance Stabocins, specifically b-USDC, a packaged version of Circle's USDC. According to Forbes' on-chain analysis, $1.2 billion of that was sent to trading firm Cumberland DRW, while other payments went to now-defunct hedge fund Alameda Research, Tron founder Yuchen Sun, and encryption infrastructure and services firm Amber Group. Binance does not dispute these facts. Most importantly, according to the survey, these outflows have not been accompanied by a corresponding reduction in the supply of b-USDC tokens in circulation.

Binance offered a number of different, even conflicting, explanations before publishing a more targeted and detailed story Wednesday morning. It is also clear that Binance's response to this incident continues to maintain its previous defensive attitude in the face of close investigation.

Worst case scenario

As evidence mounts that Binance's asset management practices have been problematic in the past. Binance has also admitted that it failed to provide 1:1 funding for b-USDC in a segregated and transparent manner for some periods of time.

Binance CEO Zhao Changpeng went so far as to claim that the Forbes report was nothing more than "FUD" in order to cause panic. Yet such reflexive denial ignores a simple fact: it is the inability to give people a clear response that is more likely to cause panic.

Lumida CEO and co-founder Ram Ahluwalia offered one of the most damning explanations for the Forbes findings in CoinDesk's "First Moder" program on Tuesday, that Binance had some form of remortgage. That is, the money backing b-USDC was lent to counterparties or otherwise put at risk. With that possibility in mind, Forbes compared its findings to the bad practices that led to the FTX debacle.

Research firm ChainArgos published a report on January 2nd claiming that "someone received around $1 billion in loans in about 100 days", though it is unclear exactly what happened. But the sums are large enough to raise concerns about unusual activity.

Another theory, hinted at in the Forbes report, is that the net effect of the deal is not a risky remortgage, but a swap of USdcs for Paxos-issued BusDs. This will allow Binance to collect the rising interest rates it generates, including on US Treasury bonds. This would mean that B-USdcs are actually supported by BusDs rather than USdcs at some point.

Contradictory debate

Binance vehemently denied that the repledge had taken place, but the explanation it initially provided was grossly inconsistent with the facts. According to Patrick Hillmann, Binance's chief strategy officer, whom Forbes interviewed as part of its investigation, the on-chain wallet is simply a "container" and the internal ledger is where the real track of assets owned or managed by Binance is.

In a statement to CoinDesk on Tuesday, another Binance spokesperson wrote, "Binance does not invest in or otherwise deploy user assets without consent in accordance with the terms of a particular product." This contradicts what Hillmann said in an interview with Forbes. The spokesman was referring to "holding" client assets "in segregated accounts" rather than tracking them in internal ledgers.

Meanwhile, Changpeng Zhao, Binance's chief executive, took to Twitter to dispute the Forbes findings, offering a different explanation than his team had previously offered. A Binance spokesperson told CoinDesk that the transactions were part of an "internal rebalancing," but Zhao described them as "some old blockchain transactions that our customers have completed, and our users are free to withdraw assets whenever they want." He continued, "their withdrawals become 'collateral to receive hundreds of millions of transfers.'" This explanation is not entirely convincing, because describing these as "blockchain transactions" sounds like suggesting that their transactions are not transacted through Binance, which also contradicts the description of transactions as "internal rebalancing." Moreover, Zhao's description suggests that Cumberland DSW alone owns or manages $1.2 billion worth of USdcs.

A more plausible corollary to the above explanation is that Cumberland's large transactions appear to represent reconciliation on a blockchain operated by a large number of customers over a period of time, which is both "rebalancing" and "customer cash withdrawals." However, in Binance's response, this claim is not explicitly made.

In the Forbes article, Zhao wrote: "My Chinese identity was brought up again, as if it mattered." Zhao has been the target of discrimination in the past because he is of Chinese origin, especially when trying to establish ties between him and the Chinese government. The Forbes article appropriately referred to him as a "Chinese Canadian" and introduced him only once without the words "China" or "Chinese" appearing in the work. It seems that Zhao is using the Forbes complaint to distract attention from the actual findings of the investigation.

Whimsy and recriminations

After three different descriptions, Binance finally published a blog post titled "How and Why Assets Move between Binance Wallets" on March 1, offering a single explanation for Forbes' findings: These asset movements are simply institutional customers withdrawing their assets from the platform. While this still doesn't explain exactly why the money is moving, it doesn't refute the core finding of Forbes and others. The article does not provide many details, so it needs further review.

The blog post reiterates Hillmann's original point that what Binance-managed blockchain accounts show does not necessarily correspond to real customer balances. For example, the assets used to support b-USDC may simply be held elsewhere in Binance's blockchain hosting system, rather than an anchored wallet. The article mentions the "vast network of hot wallets, cold wallets and deposit wallets" and the fact that "the movement of money between wallets can serve multiple purposes," meaning that moving money between Binance's various accounts does not mean its owners have withdrawn those assets.

The article also analyzes Binance's response to the Forbes investigation and points to unclear explanations for Binance's account management and asset verification, as well as inconsistent attitudes toward media and regulation. The lack of clarity in Binance's response has resulted ina substantial loss of Binance's assets and customers, and more transparent and clear explanations are needed to restore confidence in the market.