Media entities have recently tried to equate the movement of cryptocurrency between wallets with illicit misuse of customer funds. Binance, the world’s largest cryptocurrency exchange by volume, explained in a blog post that moving assets between hot and cold wallets is a regular function of crypto exchanges that serves to protect user funds while ensuring liquidity, which is different from the criminal misuse of funds perpetrated by the now-bankrupt exchange FTX.
Forbes recently published an article accusing Binance of secretly moving customer funds and using them for “undisclosed” purposes, calling the actions “reminiscent” of FTX’s misuse of customer funds leading up to its bankruptcy. The article claimed that Binance has a “lack of collateral” to back up the coins that it issues. Forbes also asserted that Binance maintains “two sets of books” and makes it difficult for regulators and customers to verify the exchange’s solvency, but Binance’s Chief Strategy Officer Patrick Hillman explained in an interview with Forbes that what it perceives as two sets of books are really wallets, which hold customer funds, and a ledger, which tracks the movement of funds. Hillman said the movement of assets Forbes is scrutinizing is part of the exchange’s regular operations.
Binance explained in a blog post titled “How and Why Assets Move Between Binance Wallets” that the movement of funds between hot and cold wallets is part of a crypto exchange’s regular operations, and it is not the same as what FTX did with its customers’ funds. Binance emphasized that when it moves customer deposits between wallets, it is doing so to provide as much security for those funds as possible while also ensuring that customers retain the ability to withdraw their funds at any time. The post highlighted Binance’s proof-of-reserves technology, which enables verification that user funds are backed 1:1, plus reserves.
“Since the implosion of FTX, our industry has been subject to a lot of scrutiny. We get it. No company, particularly one that’s trusted with people’s money, should ever be allowed to operate with impunity. And, as the industry’s leading exchange, Binance has gotten its fair share of tough questions,” according to the Blog post.
“One significant source of interest has been in the movement of funds across blockchain wallets, which is the subject of some recent ‘analyses' that appeared in the media. We’ve seen external sources making huge leaps to conclusions based on flawed observations about assets’ movement on the blockchain. These conclusions are then used to fuel false narratives that confuse investors and attempt to put Binance on par with some of the most unscrupulous actors in the space – all the while collecting a lot of views and clicks.”
“These misinformed accusations damage not only Binance, but the industry at large, undermining responsible players’ attempts to build user and regulator trust. Since such 'investigations' have become a recurring theme, we see it as an opportunity to engage the public on the logic and to share some technical aspects of how funds move on our exchange, dispelling these unfounded claims...We welcome the scrutiny – we believe it will make the entire industry stronger and rebuild trust in the financial system. That said, efforts to try and paint Binance as behaving like FTX have failed – and they will continue to fail. Why? It’s because we hold user assets 1:1 and have demonstrated, time and time again, that users may withdraw their funds at any time they’d like.”
A “hot” wallet is connected to the internet and a “cold” wallet is not. A Binance Academy post explains that when users deposit funds through their Binance account, those funds go into a hot wallet, where they are easily accessible, which is convenient for traders and people who are frequently using their crypto funds. Cold wallets store funds for long-term investors. Since cold wallets exist offline, they are not vulnerable to hacking attempts and serve as safe storage for those who do not frequently need immediate access to their funds. Binance explained that in order to provide as much security as possible for its users, most funds are kept in cold storage.
Sam Bankman-Fried (SBF), the co-founder and former CEO of crypto exchange FTX, is facing multiple criminal fraud charges for allegedly commingling funds between FTX and its associated hedge fund Alameda Research, according to Investopedia. After a high-profile bankruptcy filing in November, it came to light that approximately $1 billion of investor and customer funds was missing. SBF was extradited from the Bahamas to the U.S. in December and subsequently indicted for his role in what some are calling the biggest financial fraud in American history.
In February, SBF was hit with four new criminal charges in addition to the eight charges he already faced, CNBC reported. The charges against him include making illegal political donations, money laundering, wire fraud, bank fraud, commodities fraud and multiple conspiracy charges. SBF allegedly took billions of dollars of FTX customer funds and used them for FTX and Alameda Research investments, to fund speculative bets, to enrich himself and for political donations through straw donors. Two of SBF’s former close associates, Caroline Ellison and Gary Wang, are cooperating with attorneys against SBF after having pled guilty in December to multiple fraud charges.
CZ, the Canadian CEO and founder of Binance, said in a Feb. 28 Twitter post that the Forbes article intentionally misconstrues facts and demonstrates a basic failure to understand how crypto exchanges operate. He emphasized that a key difference between FTX and Binance is that Binance users have always been able to withdraw their funds at any time.
“The article tries hard to categorize Binance and FTX together, including the choice of the article title,” CZ said. “We are different. Binance has stood the test of time, with users safely withdrawing billions of dollars in December.” He also highlighted Binance’s new proof-of-reserves technology, which protects “users’ security and privacy.”
