According to Bloomberg’s report, Binance, a cryptocurrency exchange, mistakenly combined customer assets with cryptos in a “cold wallet” designated for reserves. Specifically, reserves for about 94 of the company’s tokens known as “B Tokens” were kept in the ‘Binance 8’ wallet which also held customer funds.
Binance’s own guidelines, listed on the company’s website, prohibit mixing client funds with collateral tokens. When contacted by Insider for comment, the company did not immediately respond. However, a spokesperson provided Bloomberg with a statement indicating that the mixing of funds occurred by mistake.
Binance has admitted that reserve tokens were mistakenly co-mingled with user funds.
— Morning Brew ☕️ (@MorningBrew) January 24, 2023
Binance Promises Redemption
Binance’s 8 wallets are home to roughly 40 B-Tokens which are each backed one-to-one in locked reserves with their underlying cryptocurrency. To ensure security, the crypto collateral is stored separately from client funds.
Binance has reported that the blending of collateral tokens with customer funds has complicated verifying the number of B-Tokens that are ready for redemption requests. However, the company reassured its clients that their assets have been secured with ample collateral to cover any redemption requests.
The FTX Issue
Amidst the increasing concern about redemptions in the crypto space, November saw Binance’s sale of FTX’s FTT tokens sparks a sequence of withdrawals from FTX that caused an unexpected liquidity crunch, eventually prompting its bankruptcy. Subsequently, reports indicated that billions of dollars in customer funds were moved from FTX to Sam Bankman-Fried’s Alameda Research trading division.
The recent crash of FTX caused a flurry of activity in Silvergate, the crypto-focused lender, resulting in customers withdrawing a total of $8 billion in deposits in the fourth quarter. In order to meet the spike in withdrawals, Silvergate has had to take significant steps, including the sale of certain assets at a loss and the liquidation of debt. Fortunately, Silvergate has been able to handle the withdrawals and retain the confidence of its customers.