The recent arrest of FTX founder Sam Bankman-Fried caused a frenzy of withdrawals from Binance, the world’s biggest cryptocurrency exchange, as investors worried about a possible crypto crisis. The said withdrawals amounted to around $3 billion.
Industry insiders say that the primary reason for the withdrawal frenzy was massive withdrawals from market maker Jump. Jump withdrew substantial amounts after several weeks sans deposits. This led to a small panic among investors who made their own withdrawals.
But spooked investors did little to worry Binance’s chief executive officer Changpeng Zhao. Indeed, Zhao remarked that this occurrence could be chalked up as normal market behavior. He said that Binance had its share of rough issues, but money was flowing back into the exchange.
However, Zhao also recommended a cautionary measure for other centralized exchanges: stress testing on a rotating business for withdrawals to test each exchange’s ability to handle a massive influx of requests.
Binance also stopped withdrawals of American stablecoin USDC as it was doing a token swap with its own BUSD token, though this was temporary. Related activities were paused only because US banking hours had ended, and the New York bank handling the transaction had closed for the day.
The Repercussions of the Bankman-Fried Issue
FTX and its founder are under the microscope now, as the US Securities and Exchange Commission (SEC) accused and formally charged Bankman-Fried of defrauding investors.
While Binance is expected to be one of the observers of the proceedings, it is expected that the crypto exchange will also be the focus of much regulatory scrutiny.
A couple of weeks ago, there was an update on a 2018 investigation wherein Binance’s Zhao and other executives were suspected of money laundering, economic conspiracy, and violating several economic sanctions. Several people involved in the investigation claim that there is enough evidence now to charge Zhao and his colleagues.
Binance’s proof of reserves and internal controls have also been called into question by critics. It has been claimed that only 9.7% of the company’s reserves are collateralized and that it has failed to give clear and adequate information on how its exchange liquidates assets.
Some industry watchers believe that Zhao and Binance ought to learn a lesson from the current FTX crisis and improve its governance controls to prevent a similar issue from happening to them. In this case, Binance should shore up its defenses and be ready to face even greater scrutiny by regulators.