Binance, can you be honest about the misappropriation of 1.8 billion dollars in assets?

Original Title: Binance Can't Keep Its Story Straight on Misplaced $1.8B USDC

Author: Coindesk David Z. Morris

Translation: Linn Liu, BitpushNews
Forbes has raised significant questions about Binance's management and custody of customer assets and stablecoin collateral based on a recent detailed investigation. The investigation mentioned some on-chain transactions' nature and intent, providing many possible explanations. However, so far, Binance has not provided a clear response to these on-chain transactions. This approach by Binance fails to restore confidence in the crypto industry, especially after the bankruptcy of FTX, as people are no longer easily trusting centralized platforms with off-chain balance sheets.

Forbes reported this week that on August 17, 2022, $1.78 billion was transferred from a Binance wallet to support Binance's stablecoin, particularly the wrapped version of Circle's USDC, known as b-USDC. According to Forbes' on-chain analysis, $1.2 billion was sent to trading firm Cumberland DRW, while other funds flowed to the now-defunct hedge fund Alameda Research, Tron founder Justin Sun, and crypto infrastructure and services company Amber Group. Binance did not dispute these facts. The investigation shows that most importantly, the outflow of these funds did not correspond with a reduction in the circulating supply of b-USDC tokens.

Before releasing a more targeted and detailed report on Wednesday morning, Binance provided many different, even contradictory explanations. This also indicates that Binance's response to the matter continues to maintain its historically defensive attitude when faced with close scrutiny.

Worst Case Scenario

As more evidence suggests that Binance's asset management practices have had issues in the past, Binance has also acknowledged that at certain times, it failed to provide 1:1 funding support for b-USDC in an isolated and transparent manner.

Binance CEO Changpeng Zhao even claimed that the Forbes report was merely "FUD," intended to incite panic. However, this instinctive denial overlooks a simple reality: failing to provide clear responses is more likely to cause panic.

Ram Ahluwalia, CEO and co-founder of Lumida, proposed a most unfavorable explanation of the Forbes findings during CoinDesk's "Pioneers" program on Tuesday, suggesting that Binance engaged in some form of re-hypothecation. In other words, the funds supporting b-USDC were lent to counterparties or otherwise put at risk. Based on this possibility, Forbes compared its findings to the bad practices that led to the collapse of FTX.

A report released by research firm ChainArgos on January 2 claimed that "someone received about $1 billion in loans over approximately 100 days," although it remains unclear exactly what happened. However, the amount is substantial, raising concerns about unusual activity.

Another theory implied in Forbes' report is that the net effect of the transactions was not high-risk re-hypothecation but rather converting USDC into BUSD issued by Paxos. This would allow Binance to collect the continuously rising interest generated, including U.S. Treasury bonds. This would mean that b-USDC was actually backed by BUSD at certain times rather than USDC.

Contradictory Arguments

Binance strongly denies that re-hypothecation occurred, but its initial explanations are severely inconsistent with the actual situation. Forbes interviewed Binance's Chief Strategy Officer Patrick Hillmann during the investigation, whose statements suggested that the on-chain wallets were merely "containers," while the internal ledger was the real place tracking the assets owned or custodied by Binance.

Another Binance spokesperson wrote in a statement to CoinDesk on Tuesday that "Binance does not invest or otherwise deploy user assets without consent, according to the terms of specific products." This contradicts Hillmann's statements during the Forbes interview. The spokesperson referred to "holding" customer assets "in segregated accounts," rather than tracking them on the internal ledger.

Meanwhile, Binance CEO Zhao refuted Forbes' findings on Twitter, and his explanation differed from what his team had previously provided. A Binance spokesperson told CoinDesk that these transactions were part of "internal rebalancing," but Zhao described them as "some old blockchain transactions completed by our customers, and our users can withdraw their assets freely at any time," adding that "their withdrawals turned into 'collateral received from billions transferred'." This explanation is not entirely convincing, as describing these as "blockchain transactions" seems to imply that they were not processed through Binance, which contradicts the description of the transactions as "internal rebalancing." Furthermore, Zhao's description suggests that Cumberland DSW alone holds or manages $1.2 billion worth of USDC.

Compared to the above explanations, a more reasonable inference is that the large transactions from Cumberland seem to represent a reconciliation of numerous customer operations on the blockchain over a period, which is both "rebalancing" and "customer withdrawals." However, this assertion was not explicitly made in Binance's response.

In Forbes' article, Zhao wrote, "My Chinese identity has been brought up again, as if it matters." Zhao has previously been targeted for discrimination due to his Chinese heritage, especially when attempts were made to link him to the Chinese government. Forbes aptly referred to him as a "Canadian Chinese" and only mentioned "China" or "Chinese" once in the introduction. This suggests that Zhao may be trying to use complaints against Forbes to divert attention from the actual findings of the investigation.

Whimsical and Blame-Shifting

After three different descriptions, Binance finally published a blog post titled "How Assets Move Between Binance Wallets and Why" on March 1, providing a single explanation for the Forbes findings: these asset movements were merely institutional clients withdrawing their assets from the Binance platform. Although this statement still does not clearly explain the specific reasons for the fund movements, it does not refute the core findings of Forbes and others. The article did not provide many details, thus requiring further scrutiny.

The blog post reiterated Hillmann's initial point that the blockchain accounts managed by Binance do not necessarily correspond to actual customer balances. For example, the assets used to support b-USDC may only be held elsewhere in Binance's blockchain custody system, rather than in the anchor wallet. The article mentioned "a vast network of hot wallets, cold wallets, and deposit wallets," and that "the movement of funds between wallets may serve multiple purposes," implying that the movement of funds between Binance's various accounts does not mean that their owners have withdrawn those assets.

The article also analyzed Binance's responses to the Forbes investigation, pointing out the unclear explanations regarding Binance's account management and asset verification, as well as its inconsistent attitude towards the media and regulators. Due to Binance's lack of clarity in its responses, there has already been a substantial outflow of Binance's assets and customers, necessitating more transparent and explicit explanations to restore market confidence.