With Binance, Everything Is Not Fine

As the financial health of the exchange grows more uncertain, CEO Changpeng "CZ" Zhao has offered nothing but red flags, says Genevieve Roch-Decter (CFA), the CEO of GRIT Capital.

AccessTimeIconDec 19, 2022 at 4:28 p.m. UTC
Updated Sep 28, 2023 at 2:27 p.m. UTC

The current state of Binance can be summed up nicely in meme form:


In reality, everything is most definitely Not Fine.

Back in 2019 – when Sam Bankman-Fried (SBF) was still golden and FTX was on the up-and-up – Binance, the largest crypto exchange by trading volume, invested in the now-defunct crypto exchange’s series A. Last year, it exited that transaction after SBF bought out its stake for $2.1 billion.

That $2.1 billion payment, according to Binance CEO Changpeng “CZ” Zhao, was received through a combination of BUSD, BNB, FTT and IOUs (presumably – only half-kidding).

Genevieve Roch-Decter is the CEO of Grit Capital and writer of a finance newsletter on Substack.

In an interview this week, CZ told CNBC's "Squawk Box" anchors that, in fact, a “good chunk” of that payment was received in FTT – which, lest we forget, is now aggressively less valuable than an IOU – and that up until recently he had “actually forgot” about some $580 million FTT that Binance had left over from the transaction.

Coincidentally, his liquidating that FTT was the first domino in this saga, but I digress – is forgetting about over half a billion dollars supposed to make me feel more confident in Binance’s ability to properly run an exchange?

File under "Not Fine." ‎ ‎ ‎ ‎ ‎ ‎

In any case, CZ had better turn his attention to tracking down every last cent of that $2.1 billion because it may be going back.

You see, in the eyes of the bankruptcy proceedings, transactions made by FTX to outside entities (like the $2.1 billion payment to Binance) may be considered fraudulent conveyances.

This is just a fancy way of saying it has become a target, which means the bankruptcy court could potentially reach back into the transaction history and pluck (i.e., force Binance to pay back) that $2.1 billion in U.S. dollars, regardless of whether it was originally conveyed in FTT, IOUs or fairy dust – doesn’t matter.

File under "Not Fine." ‎ ‎

When CNBC’s Becky Quick asked him point blank if Binance could feasibly cough up such a large amount, CZ responded with the physical manifestation of the meme above, inelegantly fumbling his way to a weak “we’re financially strong.” ‎ ‎

‎File under "Not Fine." ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎

And remember when Binance released proof of reserves last month to calm the market in the fresh wake of FTX’s collapse?

It turns out the accounting firm that was assisting with that, Mazars Group, quite literally pulled the plug on the endeavor, effectively terminating the partnership by deleting the website containing the exchange’s proof of liabilities (or lack thereof, as it were).

‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎

File under "Not Fine."‎ ‎ ‎ ‎ ‎

Of course, that wouldn’t be an issue if Binance were to simply employ the services of a Big 4 accounting firm, as the CNBC anchors suggest it ought.

CZ, however, replied that those accounting firms don’t work with or understand crypto exchanges (Coinbase literally just received an attestation report from Deloitte), so that is why it has not been audited by one of them.

In the same interview – and with no hint of irony – he later said, “In this industry, everything is very transparent.”

Sir… ‎‎‎File Under "Not Fine." ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎

Over the past week, we’ve learned that Binance has experienced billions in net withdrawals as distrust swells and – though it hasn’t paused or appeared to have a problem processing them yet – uncertainty around the firm’s financial health looms larger.

In response, the only thing CZ has offered the crypto community is more red flags: evasive answers full of vague promises about “full audits” with no timelines; verbal assurances that the company is strong without any specific and verifiable evidence to support the claims.

Investors aren’t buying it anymore. Why would they?

One of the biggest concerns is that even if Binance is correctly collateralized, that could change quickly if there’s a run on the bank, or if one of its largest reserve holdings has issues.

This is a classic scenario for crypto exchanges, everything is fine … until it’s not.

If the stablecoins in Binance’s reserves hold to their peg, everything will be fine.

If it can provide true proof of reserves, everything will be fine.

If there’s no run on the bank, everything will be fine.

If it can deliver fully audited financials, everything will be fine.

If the U.S. Department of Justice decides not to strike with criminal charges (something we didn’t even get to in this essay), everything will be fine.

For each day that passes without specific and verifiable evidence to address all its issues, these “ifs” grow bigger for Binance.

Until that happens, everything is Not Fine (and deteriorating).

At GRIT Capital, we’re not holding our breath.

Then again … CNBC's Jim Cramer is now bearish on Binance, so maybe everything really is just fine.


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Genevieve Roch-Decter

Genevieve Roch-Decter is the CEO of Grit Capital and writes the number #1 finance newsletter on Substack. A CFA, she is a former $100M-plus portfolio manager.