Will Changpeng Zhao "get burned by playing with fire"? The cryptocurrency storm has hit Binance

From the moment FTX collapsed, the storm seemed destined to hit Binance, which has a long history with it.

Recently, the account of a Binance user was banned by Binance because the user complained on Twitter that Binance and Zhao Changpeng did not help him recover the stolen funds in his account. Binance believed that the user had "threatened" their customer service staff.

These users thought they were signing up for a third-party trading bot such as 3Commas, but instead fell for a phishing scam where their exchange API identities were stolen and used to steal funds from their accounts.

At the time, Zhao Changpeng asked users to delete their API keys to prevent further attacks from third-party platforms, but did not propose further measures to compensate users.

According to the user, Binance was not very helpful in recovering the lost funds. Binance said the user made “threats” to their support staff, which resulted in the account being deactivated and the user having three days to request a withdrawal.

Binance’s Twitter account told the user:

You went even further and refused to report the case to the police. Instead, you tried to blame us and demand compensation. You even issued threats, which we cannot tolerate.

Users then began criticizing Binance, as the incident meant that anyone who criticized them could potentially have their account terminated.

A Twitter user shared a tweet expressing his concern that Binance was behaving similarly to FTX — facing bankruptcy due to its inability to compensate victims .

Financial report mystery

In order to appease investors, Binance took a series of measures after FTX’s bankruptcy to try to reassure customers about the security of their assets, but now it seems that this may have backfired.

On Wednesday, Binance released a "cryptocurrency reserve report" from Mazars - actually just a five-page letter from a partner in the firm's South African branch. The letter did not address the effectiveness of Binance's internal financial reporting controls and did not contain an opinion from Mazars.

Mazars said it carried out its work using an "agreed process" required by Binance and "we make no representations as to the appropriateness of that process".

But this brief "report" itself is full of doubts.

On the last page of the Mazars letter, there is a section called "Report Details" that includes three numbers, each denominated in Bitcoin. One number, labeled "Client Liabilities Report Balance," shows a balance of 597,602 Bitcoins. Another number, labeled "Asset Balance Report," shows a balance of 582,486 Bitcoins.

As a result, the total Bitcoin liabilities cited in Mazars’ letter were 3% greater than the Bitcoin assets included in the report as of the reporting date, November 22.

In other words, Binance did not achieve a 1:1 ratio of its reserves to customer assets. According to media calculations, in US dollar terms, based on the price of Bitcoin at the time, liabilities were about $9.68 billion, while assets were about $9.43 billion, or $245 million less.

The letter did not show Binance’s total assets or liabilities, only its bitcoin assets and liabilities.

Binance said that Mazars’ letter covers all of Binance’s bitcoin assets and bitcoin liabilities —even though Mazars’ letter itself did not say so. Binance also said that Mazars’ letter did not cover any assets and liabilities of Binance’s U.S. business, which may be disclosed later.

Binance referred to these numbers as “audit results” in a press release on Nov. 25. Carmichael, the former chief auditor of the U.S. Public Company Accounting Oversight Board (PCAOB), said:

Calling this an audit is seriously misleading.

We are from the same root

Users’ concerns are not unfounded. As exchanges, Binance and FTX are very similar.

But soon after, due to the high degree of overlap between the two businesses and direct competition, in July 2021, Zhao Changpeng announced that Binance had completely withdrawn from FTX's equity investment and officially announced to the outside world that the two parties had broken up.

On the surface, this stems from the conflict in the layout of the business ecosystems of both parties, but at a higher level it stems from the differences in their strategies and cultures.

After the breakup, Binance and FTX had been at peace until November this year, when the report that ignited the FTX crisis was leaked.

On November 6, Zhao Changpeng announced that he would sell all FTT on his books, and the price of FTT plummeted rapidly. Subsequently, he and SBF started another acquisition "tug-of-war", and the abandonment of the acquisition of FTX pushed it to the edge of the cliff - on November 11, FTX filed for bankruptcy.

After “helping” FTX’s fall, Zhao Changpeng also issued a warning, pointing out that the cryptocurrency world is facing a crisis similar to that in 2008:

The 2008 financial crisis may be an accurate analogy to this week's events.

But now, the fire may have burned Binance itself.