Changpeng ‘CZ’ Zhao, CEO of leading cryptocurrency exchange Binance, recently defended the exchange’s holding of customer assets backed one-to-one, claiming that the exchange is not facing a liquidity crisis during a bank run.
Zhao defended Binance during an interview with CNBC Squawk Box hot Aaron Sorkin, claiming that the company does not have a liquidity crisis and is covering users’ withdrawals as they come in. Zhao stated:
People can withdraw 100% of the assets they have on Binance. We will not have an issue on any given day. So 100% of users withdraw 100% of assets, we’d be fine
Zhao pointed out that the business models of cryptocurrency exchanges are very different from the traditional business models used by banks, which rely on fractional reserves. Traditional finance professionals and regulators, in his words, believe that exchanges can run on fractional reserves as well, but “that is not okay.” He continued:
In crypto, there’s no central bank printing money to bail out banks when there’s a liquidity crunch. So, crypto businesses have to hold user assets one-to-one and that’s what we do. It’s very simple.
Binance has recently seen an increase in the volume of withdrawals from its platform due to concerns that users’ assets may not be held separately from the exchange’s own funds. The withdrawals come after Binance was chastised for only displaying “part” of its assets and liabilities in a proof-of-reserves and proof-of-liabilities verification report issued last week by Mazars’ South African affiliate.
“I can’t imagine it answers all the questions an investor would have about the sufficiency of collateralization,” said Douglas Carmichael, an accounting professor at Baruch College and former chief auditor of the U.S. Public Company Accounting Oversight Board.
Jesse Powell, CEO of Kraken, also criticized the report, claiming it contains “interchangeable” assets, negative balances, and aggregation by “class.”
Zhao stated during the interview that the company is working with auditors to increase transparency and disclose its liabilities. Binance, he claims, owes nothing to any other entity, has made no venture capital investments, and does not rely on loans from third parties.
People who are hurt by FTX are now worried about everybody else. They were defending FTX before, that’s why they had money on FTX. But just because they were bitten by one snake doesn’t mean that every other animal is the same.
Binance is a “very simple, very self-contained type of organization, and we manage our cash very simply,” according to Zhao. Notably, according to Nansen data, Binance still has over $52 billion in digital assets in its wallets, with over 50% in BUSD, USDT, and BTC.