So, to be clear, I’ve long followed this newsletter and found it valuable. I consider this a same-side conversation

Point 1 - I'd like the article to disambiguate Binance Chain from Binance Smart Chain. In the final section they are treated equivalently. When that is done, then I think the following points could be clarified.

Point 2 - The Binance Chain problem = the back door problem (fraud).

Point 3 - The BNB concentration problem = possible negative feed-back loop (flywheel). Though to get to this point definitely we'd need evidence of loans against BNB.

I appreciate this newsletter and read each one as soon as they arrive in my inbox. I think you are right to insist on two problem points here. I think could help clarify both (this discussion helped clarify the matter for me even).

Thanks again for all your hard work!

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Where there's smoke...

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Binance is insolvent and running as a fractional reserve. There is no chance that Binance has enough Bitcoin/Ethereum to cover their customers’ holdings.

BNB, and their manipulated price, is a veneer to cover their substantial hole in Binance’s balance sheet.

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How to short this? (with low counter party risk)

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Great post!

These self-issued tokens / “shares”’are just massive manipulation.

Inventing a currency which is also basically Trading your own shares on your own market place whilst holding them all, issuing them yourself too… it’s nuts

Strikes me that what is likely to happen is the US regulators will decide these tokens are a stock or security or something.. (or all)

… and then hammer someone for them…

Likely FTX?

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Awesome work, keep it up!

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Excellent article. Thank you! I follow you on twitter and see your work against multiple CEXs.

What I find striking here is that you use the word "suggest" a lot. In your earlier stories you provided facts. I appreciate the fact though, that this is at least alarming.

However, I think what you are doing highlights the benefits of blockchain. Nothing can stay hidden forever. There are many great people (including you) devoting their time to research into companies operating on blockchain. Essentially, FTX was brought down by this.

Regarding BSC chain not being a blockchain. As a blockchain it is only natural that any mistake you make while building that chain will stay visible on that chain forever. So the very fact that those issues come to light today highlights a greater adoption of that technology beyond price and speculation. I love this "trustless" world we could potentially live in.

If BSC was not a blockchain, I believe binance would have been able to "hide" those mistakes. A wallet missing a deposit? Of 22 Million? That would have been a very "stupid" mistake to make. So I personally find the explanation of an interface issue convincing.

A price candle reset at 00:00? does not sound very suspicious to me. I think you will find many systems do a lot of things at 00:00.

That being said, I agree with you that binance has to address the issues you mentioned. Either clarify, or fix them. Transparency is key. Binance claims to want to bring adoption to blockchain. So they should make their processes transparent and verifyable. There should be no need to trust.

I just wished you would use your reach to put pressure on binance to fix those issues, rather than declaring them bankrupt every other day (on twitter).

What is your take on regular banks, if I may ask? I am from germany. So banks use fractional reserves, and there is up to €100,000 protection for you in case your bank collapses (provided by the government). Still, a (proportional) bank run on any of those banks like the one on FTX would bring that bank down. Of course central banks and even other banks could try to step in for a time, but that will stop very soon if trust in that particular bank cannot be restored.

Don't we have the same issues with tradfi that we have with CEXs? Of course, those banks hold assets, but as you note with the FTT token, selling those assets all at once will only come at a great loss. And that could trigger the same domino effect we have seen in crypto. My opinion is that even though there still is less regulation in crypto than in tradfi, the standards with which we measure CEXs are higher than anywhere else. Imagine Binance suddenly showing only 99% of customer assets being backed... I am sure there are at least 10,000 bots worldwide just scanning these addresses in the same way Nansen did. If it ever so much as suggests to come off the 100% there will be a hailstorm of tweets declaring the end of crypto.

I sometimes have the feeling that regulation is not there to stop shady stuff happening in finance. It is there to make it legal...

Happy new year to you sir! and your team, if you have one =)

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No, the facts are facts. I say “suggest” when the interpretation of those facts is uncertain. You can debate whether, for example, the open interest in perp futures is what drove up the price of BNB. While the evidence provided suggests that this interpretation is correct, it is not certain without additional data.

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So the thing is… these CEX are NOT banks.

Not banks. In anyway. Specifically advertised as not banks. Very clearly stated they are not banks. Not defi banks. Not new banks. Not crypto banks. NOT BANKS.

So customer assets should never be at risk… the value of the assets may waver but the assets themselves…

When customers make withdrawals from FTX, Binance or any other CEX…

Those are not “bank runs”.

That is customers withdrawing the assets that’s should always be there.

It shouldn’t be possible to have a “run on the exchange” because the customers funds are always the customer funds and should always be there. Unless there is massive fraud.

Theoretically, if all the customers holdings were withdrawn from FTX nothing should fail.. just no transactions fees.

The reason they are not banks is likely that to be a bank is to have rules and regulations.

In fact, the crypto CEX’s appear to struggle to have bank accounts…

these self issued tokens… they are just dodgy in every way.

They should have no value. Their only value should be using them to pay the exchange fees. The whole thing with giving them a value and trying to turn them into a currency is just a massive amount of dodgyness.

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Good writeup, but none of this should be surprising.

There is no alternate reality where an internally issued "cryptocurrency" or "stablecoin" is not going to get abused in a way that benefits the parent company.

Whether FTT or BSC or whatever, these are inherently criminogenic issuances.

Of course, the same should be said for pretty much all of the 5000 or 10000 or whatever "altcoins" issued: mosquitos trying to suck some lifeblood out of the 1 or 2 actual cryptocurrencies.

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FTX went bankrupt because of the following actions:

1) Comingled customer deposits

2) Spent and loaned out those deposits to leverage returns

3) Backed the loans with FTT (its own controlled coin) and had FTT as assets on balance sheet

4) FTT precipitous declines led to withdrawals

5) Customer withdrawals lead to bankruptcy as the collateral in FTX is FTT not deposited currency

How does Binance go bankrupt:

1) Do they comingle customer funds (maybe?)

2) Do they have loans?

3) Have BNB as assets on its books

So even if BNB declines to near zero, only the exchange net worth would decline and no bankruptcy would occur.

Time will tell if they comingled customer funds and loaned them out, but it is awfully suspicious that their stablecoin BUSD rose lock step with the price of BNB, meaning there could be loans out backed by BUSD and the proceeds of which were used to pump the price of BNB.

The leverage might be hidden via another collateralized asset.

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I'm seeing lots of Fud for CZ and binance same way I saw for FTX. If most people had listened to me they would've pulled out before it collapsed. Still helping victims of FTX out so write me if you one; Rachelmillr4 {at} gmail, com.

But all binance needs is a decent bull pump and I believe they'll be in the clear.

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To be clear, I am no fan of Binance. This piece materially misrepresents the problem, however.

Binance Chain and Binance Smart Chain are different protocols. It is Binance Chain which does not (did not?) operate as a blockchain.

The danger in that case isn't a "flywheel" problem as a result. It's a back door problem. If the hashing matter on Binance Chain has been fixed, then there was a back door which is now closed.

The main concern going forward is thus whether they can reopen that door.

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You are confusing two separate issues- the price manipulation issue and the governance issue. Based its concentration and market activity, BNB had many of the hallmarks of an illiquid token with realizable value far below market price.

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