Changpeng Zhao pledges to verify Binance’s reserves amid FTX crisis

Cryptocurrency exchanges should adhere to a transparent approach regarding their reserves, and Binance will be open on this issue. This was stated by the platform’s CEO, Changpeng Zhao, a few hours after the announcement of a strategic partnership with FTX.

All crypto exchanges should do merkle-tree proof-of-reserves.

Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.

— CZ 🔶 Binance (@cz_binance) November 8, 2022

“All crypto exchanges should prove their reserves using Merkle trees. […] Binance will soon start proving reserves. Full transparency,” Zhao wrote.

This initiative was backed by KuCoin CEO Johnny Lyu. According to him, the company will release the corresponding document “in about a month.”

1/ Protecting user funds is the top priority at KuCoin. We will release Merkle tree proof-of-reserves or POF in about one month.

— Johnny_KuCoin (@lyu_johnny) November 9, 2022

A similar move was adopted by OKX, Gate.io and Huobi.

On November 6, Zhao stated the company’s aim to shed the FTX utility token (FTT). The assets, together with BUSD, totaling about $2.1 billion, were the result of Binance’s exit from its portfolio investment in the platform Sam Bankman-Fried.

At that time, the Binance chief stressed that the move was not aimed at a rival but was the result of “recent disclosures.” He presumably referred to CoinDesk’s investigation, which disclosed details of Alameda Research’s balance sheet, a firm closely tied to FTX.

On November 8, FTT fell by almost 30% amid concerns about the exchange’s financial stability. At the same time, Bitcoin price fell below the $20,000 mark, dragging the rest of the market.

The same day, Bankman-Fried and Zhao announced a strategic partnership. It is intended to resolve the liquidity crisis and envisages the possible acquisition of the FTX exchange by Binance.

After the announcement, Zhao said he had drawn two lessons from the situation:

• Using your own token as collateral is unacceptable;
• You must not borrow if you run a crypto business. You need to hold large reserves.

Two big lessons:

1: Never use a token you created as collateral.

2: Don’t borrow if you run a crypto business. Don’t use capital «efficiently». Have a large reserve.

Binance has never used BNB for collateral, and we have never taken on debt.

Stay #SAFU.🙏

— CZ 🔶 Binance (@cz_binance) November 8, 2022

The prospect of Binance’s potential acquisition of FTX sparked vigorous discussion not only in the crypto community. Thibault Schrepel, an associate professor at the University of Amsterdam, warned of possible legal consequences for the parties under antitrust regulation.

Next time, check the compliance of your tweet with antitrust laws before you post, @cz_binance. At this stage, I wouldn’t be surprised to find this tweet in a forthcoming court document/antitrust litigation. https://t.co/vUcx75BQCY

— Thibault Schrepel (@ProfSchrepel) November 8, 2022

“Next time, check your tweet for compliance with antitrust laws before posting,” he advised Zhao.

The expert’s view was supported by Brandon Kressin of the Kressin Law Group. In a CoinDesk piece, he noted that the likely deal would be a typical horizontal merger, which could raise regulators’ questions.

Kressin did not rule out that a lawsuit could ultimately ensue and authorities might seek to block the deal with FTX.

In May, Bankman-Fried pledged to spend billions on acquiring stakes in other companies. In the summer, entities linked to him allocated large sums to support the industry.

Meanwhile, the head of FTX expressed confidence that losses tied to the role of the “lender of last resort” would not affect the business.

In September he stated there was another $1 billion for acquiring crypto companies and repeated the stance of being ready to help participants “even if it is to the detriment of the firm.”

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