As FTX sinks, other crypto exchanges are showing their coins

As FTX, formerly the world’s third-largest cryptocurrency exchange by volume, files for bankruptcy and halts withdrawals, other exchanges are working hard to assure customers that they won’t be meeting the same fate. Binance, Crypto.com, and others have started releasing partial looks at their books, while Coinbase executives are on a media tour telling investors that it’s safe to store money with their company.

The moves are meant to assure people that their money isn’t being used on other investments and is instead held one to one. In other words, the exchanges want you to know that if you deposit a Bitcoin with them, they’ll keep a Bitcoin in reserve. That’s in contrast with FTX, which reportedly loaned billions of dollars in customer funds to Alameda Research, a trading firm also controlled by the exchange’s former CEO, Sam Bankman-Fried. Part of what triggered FTX’s spiral was a report that Alameda’s biggest asset was FTX’s token, FTT, creating a situation where the company seemed to use something akin to its own stock as collateral.

In response to this, Coinbase CEO Brian Armstrong tweeted that his company doesn’t lend customer funds and linked to a blog post from June that explains, “Coinbase always holds customer assets 1:1. This means that funds are available to our customers 24 hours a day, 7 days a week, 365 days of the year.”

Other exchanges have taken things even further, promising to show proof of reserves or evidence that they actually do have all the coins customers have deposited. Binance, the world’s largest exchange and a key figure in FTX’s downfall, put out a news post on Thursday titled “Our Commitment To Transparency,” where it shared the addresses of its hot (read: actively accessible) and cold (read: offline) wallets for the Bitcoin, Ethereum, Tron, and Binance networks. The post does say that the list is “not a complete set of data” and promises that will come with a full audited report, possibly within the next few weeks.

Nansen, a crypto analysis firm, worked with Binance to create a dashboard that visualizes the exchange’s holdings, according to Nansen’s CEO. As Bloomberg points out, Nansen’s data shows that around 40 percent of the holdings that Binance has revealed are comprised of Binance USD (BUSD), a stablecoin associated with the exchange, and BNB, the exchange’s native token.

Binance CEO Changpeng “CZ” Zhao tweeted a screenshot of what appears to be a paywalled version of Bloomberg’s article, calling it “[poop emoji] journalism.” He took issue with the fact that the outlet called BUSD Binance’s “own stablecoin” when it was issued by a third party and says that the numbers are incorrect. Binance’s website says that BUSD is issued “in partnership” with Paxos, which also holds the reserves that keep its value pegged to $1 USD, according to the exchange’s website.

Bloomberg’s reports of how much BUSD and BNB Binance holds appear to be accurate based on Nansen’s data.

Changpeng’s big issue, though, is one that Crypto.com also seems to be struggling with right now. Changpeng says these assets belong to users and are “in the form users choose to store with us. We don’t convert for them,” implying that it’s not similar to the FTX situation. His point is that users choose which assets Binance holds based on what they trade with the company.

On Friday, Crypto.com also released a Nansen dashboard showing a partial proof of reserve, with promises of a full audited report in the coming weeks. Almost immediately, people in the crypto community started pointing out how the company holds more SHIB (a meme coin worth around a thousandth of a cent) than Ethereum, with reserves of around $559 million for the former and $481 million for the latter. At $878 million, Bitcoin is the exchange’s largest reserve by far, but one crypto commentator went as far as to tell people to immediately pull their money from the exchange upon seeing the SHIB reserves.

Kris Marszalek, Crypto.com’s CEO, however, claims the company has a one-to-one reserve of its customers’ assets. If that’s true, it would mean that the reason it has more SHIB in its reserves is because its customers have simply bought more SHIB than Ethereum. (And who am I to judge them for that?)

There are definite grains of salt to be taken with these releases, though. For one, as both Binance and Crypto.com have pointed out, they’re currently unaudited and incomplete. Both say that the full set of data will be coming in a few weeks, but as we’ve seen, that’s a lifetime in cryptoland — on Monday, Bankman-Fried was worth an estimated $15.6 billion, and by Thursday, Bloomberg said he had “no material assets tracked by the Bloomberg wealth index.”

There’s also another big gotcha with the proof of reserves: while they may show what a company has on its books, they don’t prove those figures are actually a one-to-one match for what customers have traded. As a few commentators have pointed out, data on a company’s holdings won’t tell you much about the company’s liquidity unless you know how much the company owes. “Without reliable information on liabilities, proof of reserves is meaningless at best,” said Molly White, crypto researcher and skeptic, in a message to The Verge.

It is possible to get some idea of Coinbase’s assets and liabilities as it’s a publicly traded company. Crypto.com and Binance, however, are privately held and are not obligated to put out financial reports. Binance’s CEO has said he plans to take the company public in 2024.