SBF’s arrest by the Bahamian police on Monday at the request of the American authorities was a long time coming. The SEC, the US Attorney’s Office for the Southern District of New York, and the CFTC announced simultaneous charges against FTX’s founder, including wire fraud, conspiracy, securities fraud, and money laundering.
As the arrest appeared to be rather reassuring for the markets, another exchange was getting dangerously close to the spotlight.
Another controversy
Binance’s Changpeng "CZ" Zhao, founder and CEO of the exchange, was widely seen as one of the catalysers of the FTX fall, publicly denouncing the defunct exchange of wrongdoing. Now, he is facing a predicament of his own.
The exchange’s American branch, Binance US, has been under investigation by the DOJ since 2018 for alleged money laundering and evading sanctions. As reported by Reuters, the officials are ready to press charges, but Binance is supposedly trying to sway them to a plea deal, arguing that crypto markets would not take such prosecution well.
Binance made a lot of compliance efforts in 2022, obtaining licenses in 6 countries and strengthening its US legal team with five ex-officials from the IRS Criminal Investigation's Cyber Crime Unit. However, the exchange is indeed rumoured to have had legal troubles in the past, and a public AML-related conviction in the US would shake its current leading position.
Still, a much bigger risk for Binance and the whole crypto market would be a public doubt about the solidity of its reserves, and some have already started sowing it.
CZ was one of the instigators of a generalized “Proof of Reserves” – a tool that allows users to verify if their balance on the exchange is backed by real assets. However, as soon as Binance released its own version, it provoked a wave of criticism. The CEO of Kraken, an American exchange that had a PoR long before the FTX crash, has noted that Binance’s PoR lacked a crucial detail – an audited statement of liabilities. Without it, says Jesse Powell, the PoR becomes a simple statement of assets and cannot ensure that an exchange has more crypto in custody than it owes to clients.
A former SEC regulator John Reed Stark has alleged that Binance’s report “doesn’t address the effectiveness of internal financial controls” nor “expresses an opinion or assurance conclusion” and wondered why Binance had chosen an audit firm Mazars over a Big Four firm.
As the doubts were rising, an on-chain analytics firm Nansen registered a spike in crypto withdrawals from Binance, marking an impressive $1.9 billion over a period of 24 hours. CZ called it a “stress-test, which helps to build the credibility for exchanges that passes the test”, adding that “things seem to have stabilised” afterwards.
Coinbase too?
Another exchange suffering from the FTX-provoked confusion is Coinbase. Despite being a public company and due to that probably one of the most compliant exchanges in the US, it too is cause for concerns for investors.
$COIN (Nasdaq) has lost -85% over a year, and Coinbase's bonds are currently trading for $0.52 on the dollar, according to Morningstar. Whether this makes it a good entry point or marks an impeding danger is for investors to decide, but the recent price action in the crypto markets is giving hope.
Since the beginning of the week, Bitcoin has gained over 5%, likely reacting to a rather positive CPI report, alongside the stock market. So far this is good news, meaning that neither Binance’s controversies nor Coinbase’s bonds troubles haven’t (yet?) contaminated the crypto market and its sentiment is slowly improving.
Written by D.Center
