Is Binance the Next Domino to Fall?

The world's largest crypto exchange is much like FTX — but with more red flags

It’s been almost two months since Sam Bankman-Fried’s crypto empire came crashing down. The collapse of crypto exchange FTX and hedge fund Alameda Research, which were used to perpetrate a fraudulent scheme some consider “worse than Enron”, changed public perceptions of crypto forever. Not that everyone knew the industry was ripe with fraud and bad actors but that the most trusted, respected figureheads were just as likely to be swindlers. Shortly after the downfall of SBF (Sam Bankman-Fried), the focus turned swiftly to Binance, the largest exchange and entity in crypto. Was it another FTX — or Celsius Network or Three Arrows Capital or BlockFi or Terra-Luna — that had yet to meet its demise?

But unbeknownst to many, the list of red flags at Binance has already grown so enormous that it outweighs the pre-collapse warning signs of SBF’s empire. For starters, Binance CEO, Changpeng Zao, known informally as “CZ”, has said repeatedly that the company has no headquarters, which sounds contemporary at first, but appears to be a diversion from the fact that Binance has been banned from operating in several countries.

As for the company’s financials, Binance has failed to produce audited revenue, profit, and cash statements, even though it’s the largest and most (ostensibly) esteemed crypto entity on the planet. Instead, CZ has only disclosed the company’s assets through a dubious “proof of reserves” system, which is futile without also revealing the company’s liabilities. According to him, this part of the balance sheet simply doesn’t exist. “We don’t owe anyone loans, etc.,” he once tweeted, implying the largest crypto exchange globally does not engage in basic accounting practices.

Worse, Binance might not even have a functioning balance sheet, a scenario that has grown increasingly plausible after a Reuters analysis revealed the company’s filings were a “black box.” By far the most ominous detail was that Binance’s former chief financial officer, Wei Zhou, never obtained access to the company’s full accounts during his three-year tenure. As the crypto saying goes, “probably nothing”.

Superior transparency is one of crypto’s offered benefits over traditional finance (TradFi), but many crypto-thought leaders like CZ have taken this concept a little too far: openly implicating themselves on social media platforms. Just as SBF took to Twitter several times to spill the beans and reveal all his wrongdoings, CZ has been engaging in similar activities. After announcing the launch of a “crypto industry recovery fund” (which recently affirmed it would buy the assets of Voyager, a company that lent a third of its assets to a “Madoff-Style Ponzi”), he deleted a tweet noting the fund had received “significant interest”. The most remarkable instance, however, occurred only days ago. Speaking in a Twitter Space, CZ appeared to confirm the hunches of crypto sleuth Dirty Bubble Media, who suspected Binance and its U.S. subsidiary — Binance U.S. — were commingling client funds to skirt U.S. regulations.

Before the FTX collapse, these actions may have been somewhat dubious to skeptics, who were already painting a mental picture that the crypto elite had no idea what they were doing. But the collapse of FTX and Alameda Research increased their conviction spectacularly. Suspicions arising from earlier bizarre comments and sketchy actions were then greatly amplified. Constance Wang, the head of risk management at FTX, had previously left the investment banking world, because she felt her previous role at Credit Suisse (an institution with an already infamous record of poor risk management) was “boring”. Meanwhile, it turned out that FTX’s chief regulatory officer, Daniel Friedberg, was the lawyer caught on tape trying to cover up a cheating scandal at the poker site, Ultimate Bet. These warning signs had been on display for years and were brought up by skeptics multiple times. Yet nobody got the memo until SBF’s empire imploded.

Alas, the same setup is likely to repeat, this time with Binance. FTX is one of many high-profile crypto entities run by those with dubious or inexperienced backstories — usually, sketchy dot-com businessmen looking to strike it rich, ex-Wall Streeters kicked out for malpractice, or the classic: individuals who sold all their possessions to buy unregulated securities. With Binance’s executives, it’s the latter. In a Bloomberg interview, CZ told reporters how he was persuaded, during a poker game, to invest in crypto and soon after ended up “selling his apartment for Bitcoin”. Binance’s other elusive co-founder, Yi He, used to work as a T.V. host — before establishing a multi-billion dollar crypto exchange.

The Binance crew, of course, is just the tip of the iceberg. During the Dot-com era, when now-prevalent crypto influencer Michael Saylor was settling with the U.S. Securities and Exchange Commission for alleged accounting fraud, Jeremy Allaire, the founder of notable crypto firm Circle, was being investigated for violations of securities laws.

Fast forward to today, and the founders of Nexo, another prominent crypto outfit, not only recently withdrew from the U.S. due to a “lack of regulatory clarity” but divulged they were operating as a bank, hedge fund, and currency exchange simultaneously. This is while appearing to have limited expertise in managing such a complex financial entity, apart from belonging to a payday lending group based in Bulgaria. It’s also not ideal that a company like Nexo running such an elaborate business model has been abandoned by its auditor — Armanino LLP — who also happened to be vetting Binance U.S., FTX, and other crypto entities.

It’s become clear, over more than a decade, that the crypto industry has failed to clean up its act, while TradFi — although still teeming with fraud, has at least tried to achieve some element of solidity. The last decade especially has been defined by an effort to reduce not only risk but foolishness. Systemically important banks are now almost twice as capitalized than before the 2008 subprime crisis, plus they have been forced to hold enough equity to absorb all losses from assets suddenly turning toxic.

These are just some of the shifts in modern finance that have resulted from rules imposed by domestic and international agencies. While U.S. Congress enacted the Dodd-Frank act to demarcate controversial areas of the finance industry, the Bank of International Settlements (BIS), the self-proclaimed bank of central banks, introduced its third round of Basel Accords, in an effort to improve financial stability. With these statutes in place, authorities worldwide have attempted to eradicate financial catastrophes, with the response to the market panic during COVID-19 showing they’ve (at least, for now) succeeded.

Crypto, however, has been trying its best to embrace financial chaos. No equivalent rules, regulations, and safeguards that would prevent disaster have made their way from TradFi into crypto. And according to many top advocates who adhere to the original crypto philosophy, this is a feature, not a bug. With opinions unchanged, financial destruction is not only assured but easy to recognize going forward.

In author Dan Davies’ book Lying For Money, he coined the “snowball effect”: financial frauds have a tendency to snowball, growing exponentially in a short space of time. “Anything which is growing unusually quickly needs to be checked out,” Davies wrote, “… in a way that it hasn’t been checked before.” So for any fraud hound or financial historian, the exponential growth of not only crypto prices but the rapid growth in the net worth of personalities offering crypto trading raised alarm bells. Sleuths already operating in what legendary short seller Jim Chanos called the “golden age of fraud,” quickly identified the epic rise in crypto riches as the most glaring sign of Ponzinomics. Binance’s self-issued crypto token “BNB” skyrocketing in value and CZ’s net worth climbing into the billions — in no time — will likely go down as the most conspicuous.

The authorities have not been twiddling their thumbs and ignoring Binance’s rapid rise all these years. Some federal agents are keen to pounce on CZ, and other executives, as soon as possible. Four years after launching an investigation into the crypto exchange for suspected money laundering and sanctions violations, many officials within the U.S. Department of Justice deem the evidence justifies “moving aggressively”. Other officials have argued to wait to gather more “evidence” .i.e allowing Binance to show more of its cards before making a move.

Either way, the clock is ticking for the largest crypto entity on the planet. And regardless of what law enforcement does, the endgame for Binance — and any other crypto black box — is more evident and identifiable than ever. Looking at financial history, both past and present, having no access to central banks, bypassing safeguards and regulations, and avoiding oversight wherever possible foreshadows a rather predictable outcome. One that devoted Binancians still deem as an outlier.

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