Binance CEO Changpeng Zhao (CZ) admitted in November during a Twitter Space “Ask Me Anything” (AMA) session that venture capital investors made a mistake by not probing how FTX made all of its money. However, CZ deflected the blame on himself by claiming that FTX CEO Sam Bankman-Fried (SBF) actively deceived employees, shareholders, users and authorities worldwide.
In a congressional hearing held on December 14, FTX investor Kevin O’Leary, who is also the chairman of O’Leary Ventures and star of the reality TV series “Shark Tank,” blamed Binance for “intentionally” causing FTX’s collapse. Before being arrested, SBF even said in an interview with Forbes that “[CZ] played me, he played it well.”
‘Proof of Reserves’ Cloaked Binance’s Agenda
CZ suggested a “proof of reserves” method to limit the effects of future occurrences of this all-too-familiar crypto collapse. This came after SBF reported that the exchange and some 130 affiliated entities, including the US-licensed FTX US exchange, had filed for Chapter 11 bankruptcy protection.
However, if CZ was as worried about the industry’s health and confidence as he said in internal staff emails, Binance might have chosen many alternative routes to unload its FTT, FTX’s token. He could have discreetly begun talks for a parachute plan instead of publicly stating that Binance would save FTX only to withdraw the offer hours later and to announce that it will sell all of its FTT.
CZ has relentlessly built himself up to be crypto’s public face for years. Yet, he faces significant obstacles, particularly on the credibility front. In fact, Reuters reported on December 13 that officials at the United States Department of Justice (DOJ) are drafting charges against Binance for unauthorized money transmission and money laundering conspiracy.
Binance’s public claim that almost one-third of its clients were from the U.S. prompted investigators to look into the cryptocurrency exchange, which had failed to register with the Department of the Treasury or execute comprehensive anti-money laundering (AML) measures, as required by U.S. law.
By 2018, Reuters had revealed CZ’s strategy to construct Binance.US as a regulatory lightning rod to divert attention away from American clients who were still using Binance.com, contrary to CZ’s public announcements.
This is an example of CZ misleading the people by declaring Binance’s steadfast commitment to compliance while running away from regulatory oversight. By this standard, CZ should bear the lion’s share of the blame should his luck run out after the French auditing company Mazars’ questionable attestation of its proof of reserves of its clients’ BTC holdings.
CZ’s Tricks Spooked Investors
While CZ has advertised the attestation as a formal audit, Mazars describes its report as based on ‘Agreed-Upon Processes (AUP),’ which comprised “performing the procedures that have been agreed with Binance.” It further noted that an AUP engagement “is not an audit, review, or other assurance engagement.”
In other words, Mazars simply reviewed and reported on figures provided by Binance, with no guarantee that the numbers were proof of anything. As a privately held company, Binance is not obligated to issue audited financial statements, and it has disclosed nothing that would provide a clear picture of its financial liquidity or condition.
The Mazars report is worthless without information on the quality of Binance’s internal controls, including its protocols for keeping accurate books and records. The report’s restricted data raised more concerns about Binance’s capacity to meet its financial obligations to clients. Mazars just recently suspended all work related to crypto exchanges “due to concerns regarding the way these reports are understood by the public.”
With all these controversies, Binance went to great lengths to convince venture capital firm GreatPoint and other investors like Japan-based multinational conglomerate SoftBank that it was on the right side of the law. It even hired Manuel Alvarez, California’s former top financial regulator, as its Chief Administrative Officer.
But it was too late as investors were already driven away. According to CNN, Binance withdrawals reached $3 billion in a span of 24 hours as the DOJ investigation was reported on news media. CZ, however, continued to downplay this by tweeting, “We’re seeing the money flowing back already.”
The reason why governments must regulate cryptocurrency exchanges is to protect global investors from unfair harm. In addition to how investors suffered from the FTX collapse and how they will incur damage if Binance is formally charged in violating AML regulations, crypto users and traders are also affected when unregulated exchanges unilaterally decide to delist a digital currency.
This is what happened when Binance, along with three other exchanges, delisted Bitcoin SV (BSV) in April 2019. As a result, Binance is now involved in a class action lawsuit worth up to £9.9 billion. This landmark case claim represents an estimated 240,000 BSV investors who were allegedly harmed during the sudden delisting of BSV by the four exchanges, which were initiated by CZ.
“Hundreds of thousands of people have potentially lost significant amounts of money, through no fault of their own, due to the actions of these exchanges and we are determined to help them win that money back,” Seamus Andrew, founder and managing partner of Velitor Law, said. “We aim to show that these exchanges harmed BSV and caused financial hurt to many small, individual investors.”
Despite this growing list of regulatory lapses and lawsuits, CZ looks determined to become the reassuring rock on which crypto’s otherwise fragile foundation rests. How long will Binance hold out? Will Binance’s fall really spell the end for the digital asset space? Many would beg to differ as the industry is built not by and on Binance, but by the technology of digital money and blockchain.