Binance, the largest global crypto exchange, has acknowledged to Fortune further management issues in how it oversees its stablecoin products after the publication of a new independent analysis calling attention to the company’s practices.
The analysis found that different synthetic Binance pegged tokens—tokens issued by Binance nominally pegged to the value of a separate asset—had irregularities when it came to the collateral held to back these tokens. The finding comes a week after Bloomberg reported similar irregularities in the case of the Binance-peg BUSD token, which Binance attributed to operational delays.
Many of these irregularities stem from the fact that Binance has its own blockchain called the Binance or BNB Chain, which hosts an ecosystem of decentralized applications built on top of it, such as the token trading service PancakeSwap.
To utilize decentralized applications, users need tokens native to the blockchain, such as Ethereum USDC, which is used for the Ethereum blockchain. If users hold Ethereum USDC and want to use it for BNB Chain applications, they can employ a mechanism that Binance has built to create Binance-peg tokens from their non-native tokens.
With Ethereum USDC, for example, owners can deposit their holdings with Binance, which holds the Ethereum USDC in escrow and gives the owners a corresponding number of Binance-peg USDC in return.
In a post on its website, Binance assures that these pegged tokens are always 100% backed by their corresponding native coin, and held in reserve wallets. The new analysis, published by Jonathan Reiter, co-founder of the blockchain analytics company ChainArgos, and reviewed by Fortune reveals that certain pegged tokens did not always appear to be backed 1:1.
One example is the synthetic BNB-version of Ethereum USDC, called Binance-peg USDC. On Aug. 17, 2022, Binance withdrew almost $1.8 billion of USDC from the escrow wallet, serving as the backing for the synthetic pegged token, and moved the USDC to a separate wallet, also controlled by Binance, with the majority soon shifted in and out of that wallet as well.
As Reiter details, over the next few months, Binance burned around $1 billion of its Binance-peg USDC. Burning is a process used by a number of crypto projects and describes the destruction of tokens either in response to redemptions or to increase the scarcity and value of tokens.
During this period, however, the Binance-peg USDC remained publicly unbacked. In other words, the escrow wallet no longer held the USDC that was supposed to be the collateral for around $1 billion in Binance-peg USDC.
That remained the case until Dec. 6, 2022, when Binance moved about $883 million of USDC back into its escrow wallet, once again matching the market cap of Binance-peg USDC.
When presented with the analysis, a Binance spokesperson said that assets on the exchange are always fully collateralized, or backed 1:1. However, the spokesperson admitted to issues with the management of wallets and transparency around where backing assets were held.
“Administration of hot wallets has not always been perfect,” they said. “Collateral had been stored in cold wallets that are not known to the public.”
This appears to be a separate issue from Binance’s stablecoin BUSD, which Reiter previously found was often undercollaterized between 2020 and 2021. The Binance spokesperson did not respond to a question from Fortune over whether the issues with its pegged tokens were related.
The spokesperson added that Binance is taking further steps to increase transparency for users, including a webpage that shows proof of collateral for its pegged tokens. At the time of publication, the spokesperson was not able to say when the page had been created, although the Internet Archive tool Wayback Machine first record of the page is Nov. 12, around the time that Binance’s founder and CEO Changpeng Zhao promised to release proof of reserves following the collapse of FTX.
Binance’s use of pegged tokens and the extent to which it collateralizes them have been a source of concern for crypto watchers, and likely contributed to the decision by investors in December to move billions of dollars off the exchange. The company has recently undertaken measures to reassure large investors, which include allowing them to park collateral they post for leveraged trades off the exchange.
The timing of the Binance-peg USDC issues also coincided with a decision by Binance to automatically convert three major stablecoins, including USDC, to its own proprietary stablecoin, BUSD—a move that many onlookers took to be an attempt by Binance to increase its share of the lucrative stablecoin market, which lets stablecoin issuers pocket the interest that accrues on the reserves they store.
Although the BUSD market cap initially grew by over $3 billion to a peak of almost $25.5 billion in mid-November, it has since fallen to around $16 billion amid broader concerns over the ecosystem.
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Leo Schwartz
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