Books on finance are needed for trust, not knowledge
2022.12.19 10:23
Books on finance are needed for trust, not knowledge
Budrigannews.com – After a significant decline in the value of its digital token and an increase in customer withdrawals, Binance, the largest cryptocurrency exchange in the world, is having trouble regaining customers’ trust.
Because its finances are solid and “we take our responsibility as a custodian seriously,” the exchange claimed that it dealt with net outflows of approximately $6 billion over the course of 72 hours last week “without breaking stride.” Changpeng Zhao, the founder of Binance, promised that his company would “lead by example” in embracing transparency after the collapse of FTX, a rival exchange, last month.
However, an examination of Binance’s corporate filings by Reuters reveals that the company’s core, the enormous Binance.com exchange, which has processed trades worth more than $22 trillion this year, is largely hidden from view.
Binance does not disclose the location of Binance.com. It conceals fundamental financial data like revenue, profit, and cash reserves. The company owns its own cryptocurrency, but it doesn’t say what its role is on the balance sheet. It lets customers trade on margin with borrowed funds and lends money against their crypto assets. But it doesn’t say how big those bets are, how vulnerable Binance is to that risk, or how much money Binance has left over to pay for withdrawals.
Unlike its American rival Coinbase, which is listed on the Nasdaq, Binance is not required to publish comprehensive financial statements because it is not a public company. Nor has Binance raised external capital starting around 2018, industry information show, and that implies it hasn’t needed to impart monetary data to outside financial backers from that point forward.
Furthermore, Binance has actively avoided oversight, as Reuters reported in October. According to company messages and interviews with former employees, advisors, and business associates, Zhao gave his approval to a plan by lieutenants to “insulate” Binance’s main operation from U.S. regulatory scrutiny by setting up a new American exchange. Zhao claimed that the unit was established with guidance from leading law firms and denied signing off on the plan.
U.S. regulators are keenly interested in Binance’s operations due to its significant role in the cryptocurrency market—it handles more than half of all trading volume. The U.S. Justice Department is looking into the company for possible money laundering and sanctions violations. This month, Reuters reported that some prosecutors believe they have enough evidence to charge Binance and some of its top executives.
Reuters looked at Binance unit filings in 14 jurisdictions where the exchange says it has “regulatory licenses, registrations, authorisations, and approvals” in an effort to get inside the company’s books. Dubai, Canada, and a few other countries in the European Union are among these locations. Binance’s “journey to being fully licensed and regulated around the world,” as Zhao has referred to the authorizations, has reached a significant point.
The filings show that these units seem to have submitted sparse data about Binance’s business to specialists. For instance, the amount of money that moves between the units and the main Binance.com exchange is not shown in the public filings. Additionally, the Reuters analysis revealed that some of the units appear to be idle.
According to ex-Binance executives and former regulators, these local businesses disguise the main unregulated exchange.
John Reed Stark, a former director of the Office of Internet Enforcement of the United States Securities and Exchange Commission, stated, “They are co-opting the nomenclature of regulation to create a veneer of legitimacy.” Stark said that even FTX’s operations were more opaque than Binance’s. Regarding its financial situation, there is absolutely no transparency, light, or confirmation of any kind.”
The Reuters analysis of the units’ filings in the 14 jurisdictions, according to Binance Chief Strategy Officer Patrick Hillmann, was “categorically false.” He stated, “The amount of corporate and financial information that must be disclosed to regulators in those markets is enormous, necessitating frequently a disclosure process that lasts for six months.” “We are not required to disclose our corporate finances because we are a private company,” he continued, comparing the exchange to privately held businesses like Mars, a candy manufacturer in the United States. Mars said in a statement that it was “absurd” to compare its requirements for financial reporting and corporate governance to those of Binance. It also said that the goods and services it provides are “highly regulated.”
Hillmann likewise noticed that FTX’s organizer stands charged by U.S. specialists of extortion. He stated, “it would have been fraud regardless of what regulations were in place” if those allegations are true.
Analysts attributed the Reuters report on the DOJ investigation and concerns about how crypto exchanges hold user funds to Binance’s recent surge in outflows. Additionally, some crypto token withdrawals were halted by the exchange. On Friday, an accounting firm hired by Binance to verify its reserves suspended all crypto firms’ work, dampening the company’s efforts to reassure investors.
There are looks at Binance’s funds in broad daylight remarks by Zhao, past organization explanations, blockchain information and funding bargains.
Binance claims to have more than 120 million users. Its exchanging volumes totalled $34 trillion 2021, Zhao said in June. “90-something percent” of Binance’s revenues are dependent on crypto trading, he stated to an interviewer last month. He added that the business is profitable and has “fairly large cash reserves.” According to PitchBook data, Binance has invested $1.9 billion in over 150 ventures since 2018. After FTX’s demise, Zhao also set up a $1 billion fund to invest in crypto companies in trouble.
Solid assessments of Binance’s exchanging subordinate incomes are scant, be that as it may, notwithstanding the public accessibility of exchanging volume information.
On spot trades, Binance charges fees of up to 1%, with a more complicated fee structure for derivatives. Based on information gathered by the researcher CryptoCompare, Reuters estimated that Binance could have made up to $4.6 billion from spot trading volume of $4.6 trillion in the year to October. Binance may have generated revenues of up to $6.4 billion by charging fees of up to 0.04% on the $16 trillion in derivatives volumes it handles.
The Reuters calculations appeared to be within the appropriate range, according to John Todaro, a senior analyst at Needham & Company, a U.S. asset manager and investment bank, and Joseph Edwards, an independent investment consultant. According to Edwards, promotions like zero-fee trading and other discounts may have reduced revenues. The figures were also agreed upon by a third crypto analyst who declined to be identified.
Hillmann of Binance did not discuss the Reuters estimates. “The exchange has been able to “accumulate large corporate reserves” by keeping expenses low, and the vast majority of our revenue is made from transaction fees,” he stated. Binance’s “capital design is without obligation” and the organization keeps its cash produced using expenses separate from the resources it purchases and holds for clients, Hillmann said.
Users of Binance can leverage the value of their derivatives trades by as much as 125 times by depositing crypto as collateral and borrowing funds. This can result in significant gains or losses for the user. According to Hillmann, all user deposits for derivatives and spot trading are backed by Binance’s own reserves in a one-to-one ratio, ensuring that deposits are safe and simple to withdraw. He said that Binance has strict liquidation procedures that force users to sell their positions if their losses exceed the value of their collateral. According to him, if users’ positions turn negative “due to extreme market volatility,” Binance has insurance funds that are “very-well capitalized” to cover the deficit. Reuters was unable to independently verify Hillmann’s statements because he did not provide any specifics.
Hillmann responded, “When asked about the size of any losses that have occurred this year at the exchange, One of the most risk-averse programs in the industry is managed by Binance’s risk department. Our platform and our users are protected by this.
According to a Reuters report from October, Zhao, a Canadian citizen who was born and raised in China, echoes the strict culture of secrecy he has enforced throughout the rise of his company. This year, the news agency published a number of articles about Binance’s relationship with global regulators and financial compliance.
According to two people who worked with Wei Zhou, the former chief financial officer of Binance did not have full access to the company’s accounts during his three-year tenure. Zhou, who left the previous year, did not respond to inquiries for clarification.
Zhao and different chiefs have reliably declined to openly recognize which element controls the principal trade. However, Chief Compliance Officer Samuel Lim stated that it is owned and operated by Binance Holdings Limited, a Cayman Islands company, in a private court submission that was submitted in 2020 to an arbitration case in the Cayman Islands.
This year, Binance has won licenses or endorsements from experts in areas including France, Spain, Italy and Dubai. In May, Zhao praised these advancements, stating that Binance would be able to operate “in full transparency” if it was registered as a crypto service provider in Italy. However, the Reuters analysis revealed that none of the units registered with local regulators provide a clear window into the main Binance exchange.
Reuters inquired about the oversight of Binance’s local units by authorities in all 14 jurisdictions. Six of the eight that responded to Reuters stated that their duties did not include supervising the main exchange and that the units were only required to comply with local regulations regarding the reporting of suspicious transactions. These countries were Lithuania, Spain, New Zealand, Australia, Canada, and France.
Reuters additionally requested delegates from the neighborhood Binance units and offshoots about their relationship with the fundamental Binance trade. FiveWest, a company based in South Africa, was the only one to respond. Pierre van Helden, the company’s managing director, stated that FiveWest, based in Cape Town, receives a “minimal yearly license fee” from Binance to facilitate crypto derivatives trading for South African users of Binance.
Van Helden stated, “How Binance operates globally is unclear to us.” In addition, he stated that FiveWest holds regular meetings to ensure compliance and that Zhao’s company was “cooperative” with compliance.
Only the unit’s capital base and ownership by a separate Binance company in Ireland are mentioned in the public corporate filings that Binance makes in Italy. The listed address of the Italian company Binance Italy S.R.L. is in a block of apartments and shops in the southern city of Lecce. It and the Organismo Agenti e Mediatori authority with which it is registered did not respond to a request for comment.
In their filings, only two of the Binance units analyzed by Reuters provide more substantial information.
Bifinity UAB, a Lithuanian company, provides the most comprehensive picture. In one regulatory filing, Bifinity said that it was the “official fiat-to-crypto payments provider for Binance.” Dollars, euros, and other common currencies are referred to as “fiat.”
Additionally, Bifinity stated that Binance and its businesses are the company’s “main strategic business partners.” Bifinity reported a net profit of 137 million euros (or 145 million dollars) and assets of 816 million euros in its 2021 annual report. Bifinity stated that it had paid a single related party 421 million euros, including 185 million euros in “related expenses,” but it did not specify whether this party was Binance.
Despite having 147 employees, Bifinity does not have a website or publicly available contact information. Saulius Galatiltis, the company’s chief executive, did not respond to inquiries for comment. Bifinity is not listed on the tenants’ board at its registered address, which is in a business center in Vilnius, the capital of Lithuania.
Spain is the location of the other Binance unit that provides more than just basic financial information. It was registered with the Spanish central bank in July and reported a meager profit of just 9,000 euros and revenue of approximately 1.5 million euros for the previous year. For comment, Reuters was unable to reach anyone from the unit, Binance Spain SL. A journalist visited its enrolled address, at a cooperating space in Madrid. The receptionist stated that a small team from Binance Spain had relocated a month ago but did not provide contact information.
This year, Binance was awarded licenses or permissions in Abu Dhabi, Bahrain, and Dubai, all in the Gulf. In March, Zhao told Bloomberg that Dubai would be his home for the “foreseeable future.” Filings by Binance’s Dubai elements give no subtleties of its monetary movement or its connections to the principal Binance stage.
These details were murky, even for some company employees.
According to a person with direct knowledge of the application, Binance did not disclose global profit figures when it applied for a license in Dubai. According to the person, the licensed Dubai firm did not generate significant trading revenues until at least the end of the summer, despite the fact that nearly all customers in the United Arab Emirates registered with the main Binance exchange.
The unit, Binance FZE, which was registered to a WeWork office near the Dubai World Trade Center, could not be reached by Reuters. A request for clarification from Binance was not met with a response. Virtual Assets Regulatory Authority of Dubai also did not.
Many cryptocurrency exchanges, including Binance rivals Huobi and OKX and the Bahamas-based FTX, operate from offshore locations like the Seychelles. These jurisdictions typically have looser standards for financial reporting and corporate transparency than the United States.
In 2021, Coinbase (COIN.O), the largest U.S. exchange, went public on Wall Street. It is required to submit audited quarterly earnings statements and annual financial reports, just like other public companies. In its most recent income proclamation, Coinbase announced information including income, benefit, cash property and exchanging volumes.
Mark Palmer, head of digital assets research at the U.S. financial services firm BTIG, described the distinction between disclosures made by a listed company and those made by other offshore exchanges as “really night and day.”
“We are a private company and do not have public investors to whom we are beholden,” Binance’s Hillmann stated. “Coinbase is a publicly traded company and is required to share that information with investors.” The primary objective of going public is to raise capital; however, since Binance does not require capital, it is not necessary to do so at this time.”
Elliott Suthers, a Coinbase spokesperson, stated that Deloitte, one of the “Big Four” accounting firms, reviewed the company’s financials quarterly “so customers don’t have to rely on our word.” Suthers stated, “We believe exchanges have a responsibility to share their financial information with their customers.” We urge other exchanges to adopt this strategy.”
More Binance announces return customers to crypto exchange
During fundraising, some privately held exchanges disclose financial information, as FTX did prior to its demise. Binance, nonetheless, has not fund-raised from outside financial backers starting around 2018, as per information from business data supplier Crunchbase. ” On December 15, Zhao stated to CNBC, “We don’t owe anyone any money because we don’t have VC investments.”
Last week, FTX founder Sam Bankman-Fried was indicted by US prosecutors for defrauding equity investors and customers of billions of dollars. It has come to light that money was secretly moving from FTX to Alameda Research, a hedge fund run by Bankman-Fried. Alameda Research was a market maker, or dealer, which buys and sells the same assets to increase liquidity.
Reuters was unable to determine whether Zhao or Binance also own any market-making businesses that use its platform. Binance was served with a subpoena by the SEC in December 2020. US, the distinct American exchange, requested information regarding all of its market makers, their owners, and trading activity.
A “snapshot” of its holdings of six major tokens was made public on Binance’s website last month as part of a “commitment to transparency,” and the company promised to provide a complete set of data at an unspecified future date.
Information firm Nansen said the property, worth around $70 billion at the hour of the Nov. 10 depiction, had tumbled to $54.7 billion by Dec. 17 after withdrawals and cost vacillations. Nearly half of its holdings were in two “stablecoins” that are tied to the dollar: Binance’s BUSD and market leader Tether. According to Nansen data, around 9% of the assets were in BNB, the company’s own token that Binance has issued.
According to industry statistics, BNB has a market value of approximately $40 billion, making it the fifth most popular cryptocurrency. The token’s owners save money on Binance’s trading fees. Binance, according to Zhao, does not use BNB as collateral. When Alameda borrowed money from FTX and other lenders, the company’s own FTT token served as collateral.
Zhao stated, “Audits of crypto exchanges are not guaranteed to prevent bankruptcies” following the collapse of FTX. He stated to a TechCrunch interviewer, “More audits are really good, but I’m not sure if they would prevent this particular case.”
In April, Zhao stated at a conference that Binance has been “fully audited.” When the Financial Times inquired as to who was auditing Binance’s balance sheet and financial results, Zhao responded, “Multiple auditors in multiple places… I don’t have all of the list in my head.”
He currently advocates purported “confirmation of-saves” minds the crypto possessions of trades. Users should be able to verify that the exchange’s reserves match clients’ assets and that their holdings are included in checks of blockchain data using the system.
Mazars, an accounting firm, was hired by Binance to check its bitcoin holdings. The company looked at the holdings as they were at the end of one November day. Mazars discovered in a report on December 7 that Binance’s bitcoin assets were greater than its customer bitcoin liabilities. According to the document, the check, which is referred to as an “agreed-upon procedures engagement,” was “not an assurance engagement,” in which the auditors personally sign off on their attestations of accounts. “Audited proof of reserves,” Zhao tweeted nonetheless. Transparency.”
The report-containing webpage was eventually removed by Mazars. Josh Voulters, its communications director, stated on Friday that the company had “paused” its proof-of-reserves checks for crypto firms “due to concerns regarding the public’s understanding of these reports.” Requests for additional information were unanswered by Voulters.
Seven analysts, lawyers, and accountants told Reuters that this checking system provides some insight into an exchange’s reserves, but it is not a substitute for a complete audit.
Two lawyers stated that the system lacks safeguards because it only provides a limited snapshot of an exchange’s cryptocurrency. Others claimed that it would not provide the same level of financial information as a conventional audit.
According to Needham & Company analyst Todaro, “there really is no color” on Binance’s balance sheet.
