Summary Binance has been sued by the CFTC for allegedly helping American customers evade compliance. There has been a notable outflow of stablecoin assets from Binance's proof of reserve wallets. However, Coinglass shows a BTC inflow to Binance since the CFTC news. We simply don't know enough about how much BNB Binance truly controls and what the liabilities portion of the company's balance sheet looks like. It seems like each week in 2023 has provided a fresh set of bombs lobbed at the cryptocurrency industry from US regulators, and this week was no different. A new battlefront has emerged, and this one involves Binance ( BNB-USD ), the company's founder Changpeng "CZ" Zhao, and the Commodity and Futures Trade Commission. On Monday, the CFTC sued Binance and claimed eight infractions according to the Commodity Exchange Act: The lawsuit, filed in federal court in Chicago, Illinois, alleged that Binance, the world's largest crypto exchange, solicited U.S. users via unregistered crypto derivatives offerings despite having no authority to conduct business in the country. The lawsuit alleges Binance employees nudged US users to utilize VPN services to obfuscate location to enable usage of Binance's off-shore full site rather than the more slimmed-down US front-end application. Binance is the top global crypto exchange by trade volume and also offers DeFi optionality through its Binance Smart Chain, the native token of which is BNB. The BNB token is different from Binance USD ( BUSD-USD ), which I've covered for Seeking Alpha in the past. Binance Exchange Flows Unlike the FTX ( FTT-USD ) situation from November, we don't have a leak of Binance's internal balance sheet. Because of that, it's difficult (if not impossible) to assess what the solvency situation is for Binance as an exchange from the outside looking in. The Wall Street Journal recently reported over $2 billion in Ethereum-based ( ETH-USD ) outflows in response to the CFTC lawsuit. The overwhelming majority of that outflow has been in the stablecoins. And it's really just a continuation of what we've been seeing for months already: Binance Exchange Balance (Dune Analytics/KARTOD) On November 10th, Binance had a total stablecoin reserve balance of $26.2 billion. This would have been during the time the FTX drama really started to intensify. Since then, stables on Binance have fallen 60% down to $10.5 billion as of Thursday. Millions of $ 3/26/23 3/29/23 Change BUSD 7,308.9 6,970.6 -4.63% DAI 119.5 106.4 -10.96% PAX 82.3 64.1 -22.11% TUSD 294.2 264.1 -10.23% USDC 1,090.4 968.0 -11.23% USDT 2,661.6 2,109.7 -20.74% Source: Dune Analytics/KARTOD While BUSD has certainly been a part of that outflow, as a percentage of total funds pre-CFTC allegations, BUSD actually hasn't been leaving Binance exchange as much as other stables have over the last week. BUSD Circulating MC (CoinMarketCap) However, it's also important to note that BUSD is issued by Paxos Trust. So even though there has been a significant spike in BUSD redemptions over the last several weeks, it is a different entity that is handling those redemptions. So far, there hasn't been any break in the BUSD peg like we witnessed in USDC earlier this month . But I will reiterate that I don't personally advocate holding any of these centrally issued fiat-collateralized stablecoins if you're even slightly worried about third-party risk. Rank Exchange BTC Balance 24H Change 7D Change 30D Change 1 Binance 540,759.59 +4,178.59 +1,787.00 +12,570.72 2 Coinbase ( COIN ) 488,019.53 -146.46 +3,522.01 -2,507.28 3 Bitfinex 347,975.65 -4,836.59 -5,524.48 +2,919.40 4 OKX 123,169.65 -437.15 -1,585.94 -3,267.16 5 Gemini 107,892.06 -2,858.53 -17,359.23 -21,910.26 Source: Coinglass, as of 3/31 Despite the outflow in Ethereum-based stablecoins, Binance has actually seen Bitcoin ( BTC-USD ) inflow over the last week. Which is not typical compared to other centralized crypto exchanges. A Different Animal Than FTX? Aside from the fact that FTX customer funds made their way to Alameda Research balance sheets, what made FTT such an important instrument in the demise of both Alameda and FTX was that it was so tantamount to Alameda's solvency. This isn't explicitly the case with Binance because BNB is a much smaller portion of Binance's known wallet holdings according to this Nansen proof of reserves balance sheet: Binance Balance Allocation (Nansen) Just 5.3% of the $65 billion in known Binance-controlled wallets are made up of BNB, according to Nansen. This would seem to indicate BNB will not be as detrimental to Binance solvency if the CFTC lawsuit somehow leads to a dramatic BNB token price decline. Importantly, Binance's proof of reserves shows a BNB position only totaling about 10% of the BNB in circulation. However, utilizing on-chain wallet tracking it has been estimated by independent analysts that Binance actually controls far more BNB than its proof of reserves here indicates; possibly as much as 80% of BNB's circulating supply is under Binance control either directly or indirectly through employee holdings. Furthermore, we don't have the full scope on Binance's financial position because we only know what Binance's claimed assets are, we don't have clarity on the liabilities. That's a huge missing piece. And Binance's BNB position could be dramatically understated, according to chain sleuths. Summary There is a market expectation that Binance will settle with CFTC and pay a fine. It remains to be seen if that will happen and if so how big the settlement would be. But Binance could be in a tough position if this situation drags out for a long time. From where I sit, Binance does not have a reputation for being a leader in transparency and the blockchain itself is generally one of the more centralized chains in crypto by total validators. As investors, we can only make assessments based off what we know and what we can reasonably assume. Personally, I think the risk probably outweighs the reward in BNB.
