Binance admits more issues with managing stablecoin assets

Binance, the largest global crypto exchange, recognizes the luck additional management issues with how stablecoin products are managed after publishing a new independent analysis calls attention to the company’s practices.

the analysis found that various synthetic Binance pegged tokens—tokens issued by Binance that are nominally pegged to the value of a different asset—had irregularities in the arrival of collateral held to support these tokens. The quest comes a week later 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 Binance or BNB Chain, which hosts an ecosystem of decentralized applications built on top of it, such as the token trading service PancakeSwap.

To use 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 use a MECHANISMS built by Binance to create Binance-peg tokens from their non-native tokens.

With Ethereum USDC, for example, owners can deposit their holdings with Binance, which holds Ethereum USDC in escrow and gives owners an equivalent amount of Binance-peg USDC in return.

In a post on its website, Binance assures that these targeted tokens are always 100% backed by their corresponding native coin, and stored in reserve wallets. The new analysispublished by Jonathan Reiter, co-founder of blockchain analytics company ChainArgos, and reviewed by luck reveals that some targeted tokens do not always appear to be backed 1:1.

An example is the synthetic BNB-version of Ethereum USDC, called Binance-peg USDC. On August 17, 2022, Binance mi withdrawn almost $1.8 billion of USDC from the escrow wallet, serving as support for the synthetic pegged token, and moving the USDC to a separate wallet, also controlled by Binance, with the majority soon moving in and out of that wallet as well .

As Reiter details, over the next few months, Binance burned nearly $1 billion in Binance-peg USDC. Burning is a process used by many crypto projects and describes the destruction of tokens in response to redemptions or to increase the scarcity and value of tokens.

During this time, however, Binance-peg USDC remained publicly unsupported. In other words, the escrow wallet no longer holds the USDC that was supposed to be the collateral for about $1 billion in Binance-peg USDC.

That remains the case until December 6, 2022, when Binance Moves about $883 million in USDC back to its escrow wallet, once again matching the market cap of Binance-peg USDC.

When presented with the analysis, a Binance spokesperson said that the exchange’s assets are always fully collateralized, or backed 1:1. However, the spokesperson admitted issues with the management of those wallet and transparency around where backing assets are created.

“Handling hot wallets isn’t always perfect,” they said. “The collateral is kept in cold wallets that are not known to the public.”

This appears to be a separate issue from Binance stablecoin BUSD, which is Reiter found before is constantly undercollated between 2020 and 2021. A Binance spokesperson did not respond to a query from luck if issues with targeted tokens are relevant.

The spokesperson added that Binance is taking additional steps to increase transparency for users, including a webpage which shows proof of collateral for its pegged tokens. At the time of publication, the spokesperson could not say when the page was created, although the Internet Archive Wayback Machine tool first recorded the page on November 12, when Binance founder and CEO Changpeng Zhao promised to release proof of reserves after the collapse of FTX.

Binance’s use of pegged tokens and the extent to which it collateralizes them has been a source of concern for crypto watchers, and may have contributed to investors’ decision in December to move billions of dollars from the exchange. The company has recently taken steps to secure major investors, which include allowing them to park collateral they put up for leveraged trades on the exchange.

The timing of the Binance-peg USDC issues also coincides with Binance’s decision to automatically convert three major stablecoins, including USDC, into its own proprietary stablecoin, BUSD—a actions that many viewers are trying Binance to increase its share of the profitable stablecoin market, which allows stablecoin issuers to pocket the interest accumulated on the reserves they keep.

Although BUSD’s market cap initially grew by more than $3 billion to a peak of nearly $25.5 billion in mid-November, it fell to around $16 billion amid broader ecosystem concerns.

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