In the crypto space, stablecoins are viewed as a hedge against the volatility of digital assets like bitcoin and ethereum, whose prices can fluctuate, sometimes wildly.
The premise of a stablecoin boils down to this: Put a dollar in, and get a dollar out when you withdraw it.
That’s why Jon Reiter, CEO of ChainArgos and Data Finnovation, was alarmed at what he discovered after analyzing stablecoins on Binance, the world's largest cryptocurrency exchange. At various points over the past few years, he found that versions of BUSD -- Binance’s native stablecoin -- USDC, USDT and TUSD on the exchange's blockchain appeared to be under-collateralized by up to $1 billion. That would mean, basically, that they were not backed dollar for dollar.
A Binance spokesperson said the exchange welcomes scrutiny and is fixing its “administrative errors” to more clearly show its tokens are fully backed. In a blog post Jan. 18th, Binance noted that while its “administration of hot wallets has not always been perfect,” its assets are “fully collateralized.” Binance said in the post that, in the past, it may have stored collateral in cold wallets not known to the public or not moved collateral fast enough to active hot wallets. This could make it appear, at least to some, that these assets were not fully collateralized.
The next day -- Jan. 19 -- Reiter joined Crypto DeFined and weighed in on the controversy. He also talked about the critical role of collateral and trust to the investing public, and why they're so important in the crypto space, especially right now.
Five takeaways from the interview (edited for clarity):
- Any sign of instability as it concerns stablecoin is troubling. Reiter’s analysis of Binance’s blockchain data yielded examples of some Binance-peg stablecoins having “too much backing,” but more often, stablecoins having “not enough backing." These stablecoins may originate on another blockchain, but Binance creates a synthetic version for its own blockchain.
In Reiter's view, “under-collateralization is only marginally worse than over-collateralization.” Both are a sign that assets are not linked one-for-one, he said. Why is that a red flag? “If there’s no correspondence there. . . the stability disappears.”
- Binance's control of its stablecoin collateral is still a question. According to Reiter, the number of daily transactions in Binance-peg stablecoin wallets is not huge. In practice, that means it doesn't require huge resources to ensure that they’re accounted for properly, dollar for dollar.
To put that in perspective, the volume of minting and burning of USD Coin, a popular stablecoin pegged to the U.S. dollar, on the Ethereum blockchain can reach thousands a day. In contrast, the USDC-Binance-pegged wallet only has a dozen or so transactions. Why Reiter finds this significant: “These are not complicated procedures, and it is concerning that this (collateralization) can’t be done correctly, and that nine- and 10-figure transfers of money are not subject to better control procedures."
Reiter stressed that he’s not taking a position on whether Binance is in control of all its customers’ money. But in his view, Binance’s procedures around its synthetic stablecoins “are not signs of a well-run process.”
Still, Binance’s admission of its flawed process for backing stablecoins is a “sign of maturity,” Reiter notes, and could be promising if it leads the exchange to take corrective steps.
- Crypto exchanges' “proof of reserves” fiasco, and why it's relevant here. Since FTX imploded in November, Binance, Crypto.com and other exchanges have brought in an accounting firm to assure customers that they have adequate ”proof of reserves,” or assets to meet withdrawals. The accounting firm's reviews were widely panned because of their limited scope. Critics also pointed out that the accounting firm, Mazars, allowed the exchanges to lump assets together interchangeably and not sign their wallets.
The way Reiter sees it, controversy over Binance's proof of reserves and its stablecoins share a common thread: lax internal controls. Said Reiter: “The control procedures around the various important wallets are not what they should be.” As a result, he said, it's hard "to believe that these are just short-term operational errors.”
- Stablecoin issues are more common than you might think. Synthetic versions of stablecoins created by exchanges are “pretty widespread,” Reiter notes. And, thus, so is the potential for collateralization problems. There's also the matter of the sheer number of stablecoins and wrapped stablecoins that are out in the market right now -- it's “kind of baffling,” he said.
While it's possible some exchanges’ tracking of collateral for synthetic stablecoins might be worse, Reiter says Binance, as the industry's leading crypto exchange, has a special responsibility to set a good example. Said Reiter: “It is concerning for the industry that the largest player is not doing a fantastic job at what should not be that difficult."
- Binance's native token surged with BUSD issuance. Reiter said his analysis found a close link at times between Binance’s stablecoin, BUSD, and its native token, BNB. He has no proof of market manipulation, to be clear, but he does have plenty of questions.
"We see a big run up in the quantity of BUSD on Binance’s smart chain almost exactly to the block, coincidental with the price of BNB starting to go sky worthy in early 2021,” he pointed out. "You would see that if huge amounts of money were pouring into Binance.”
While it might have been purely coincidental, Reiter said "it's also possible that someone was printing these tokens … to ramp up the price." He added: "The subsequent acknowledgment (by Binance) that the procedures are not fantastic certainly means it’s worth digging into (that) more."
Binance didn’t immediately comment on the relationship between its stablecoin and native token.