Since emerging as the world’s largest crypto exchange five years ago, Binance has made stablecoins—cryptocurrencies pegged to underlying assets like the U.S. dollar—a key part of its business strategy, largely through a partnership with the New York-based Paxos. Together, the two companies created a Binance-branded stablecoin called BUSD, which last November reached a market cap of more than $23 billion.
Binance has at times employed aggressive tactics to grow its share of the stablecoin market—maneuvers that generated ire among customers, competitors, and regulators. Most notably, the company announced a controversial policy in September to automatically convert customer holdings of three other major stablecoins into BUSD, a move that let Binance earn millions in additional interest from reserves that back its stablecoin.
Binance has also come under fire for how it has managed synthetic, unregulated versions of stablecoins. The company designed these synthetic stablecoins, which correspond to both its own BUSD and to competitors’ tokens, to operate on Binance’s proprietary blockchain, BNB Chain. Both Fortune and Bloomberg have reported on irregularities in how Binance has managed these assets, including evidence that the tokens have been undercollateralized for periods of time.
All of this contributed to a decision by the New York Department of Financial Services to effectively shut down the BUSD-branded stablecoin on Feb. 13.
Now, a new investigation by Fortune raises further questions as to how Binance used customer assets to increase its market share of BUSD, without user permission or knowledge. Blockchain transaction data indicates that in mid-August, several weeks before Binance announced its auto-conversion policy, the company converted hundreds of millions of reserve funds for a Binance-issued synthetic version of its rival USDC into its own BUSD—even as it told customers publicly that these reserve funds would always be held in USDC.
In the past, Binance claimed that irregularities related to its stablecoin operations were accidental and the result of haphazard management. The new findings cast doubt on this claim and suggest that the irregularities were part of a deliberate strategy to increase stablecoin business at a time when trading revenue had slumped significantly across the crypto industry.
“It’s either disastrous mismanagement or something intentionally in [Binance’s] favor,” said Jonathan Reiter, the cofounder of the blockchain analytics company ChainArgos, who reviewed the data and previously published findings on collateral issues related to Binance tokens.
A Binance spokesperson, when reached by Fortune, did not challenge the on-chain data, indicating that the publicly visible transactions related to internal wallet management.
“While Binance has previously acknowledged that these processes have not always been flawless, at no time was the collateralization of user assets affected,” the spokesperson said.
Stablecoins and the rise of BUSD
To understand the significance of stablecoins to Binance and the crypto industry more broadly, it’s important to understand their appeal to both crypto owners and the companies that issue the tokens. For users, stablecoins are a way to shield crypto holdings from the market’s broader volatility, and to avoid transaction costs that arise when converting crypto to fiat currency. For the likes of Binance or Coinbase, which created USDC in partnership with Circle, stablecoins offer a steady and high-margin source of revenue due to the fact that the companies keep the interest on the reserves backing the coins.
Stablecoin revenue has become particularly important for exchanges during the recent bear market since the tokens are not directly affected by drops in crypto prices and trading volume, and because interest rates have escalated in the last year—the rate for four-week Treasury bills, for example, has grown from 0.05% at the beginning of 2022 to around 4.5% today. In the case of Coinbase, even as its net revenue fell over 57% from 2021 to 2022, its “interest income” rose more than 1,160%, accounting for almost a third of its fourth-quarter net revenue.
After launching in 2019, BUSD quickly became the fruit of a successful partnership between Binance and Paxos, a New York trust company with a reputation for compliance. For the stateless Binance, Paxos helped provide credibility with U.S. regulators, while Paxos in return received a cut of the interest revenue the former earned on its stablecoin. (The companies have not disclosed specifics of the revenue split).
As interest rates soared in 2022, Binance moved aggressively to increase its share of the stablecoin market. This included the company’s September announcement that it would automatically convert customer funds held in three major stablecoins, including USDC, into BUSD. As a result, the Binance-branded stablecoin’s market cap soared by nearly 20% in just two months.
The arrangement let Binance customers make redemptions in the form of whatever stablecoin they had originally owned, but while those assets sat on Binance they were denominated in BUSD. The upshot is that Binance, without significantly disrupting customers, began capturing revenue from interest that previously went to competitors.
The new investigation by Fortune reveals that weeks before the auto-conversion policy, Binance appeared to be already moving USDC belonging to customers into BUSD—without their knowledge or permission—and with reserves that would not even be included in the later policy.
These reserves were being held for an arcane set of assets that Binance offers called “Binance-peg tokens.”
Binance’s wrapped tokens
Many cryptocurrencies only function on specific blockchains. Bitcoin transactions, for example, can only take place on its eponymous blockchain. To solve this, blockchain developers have developed so-called wrapped versions, where users can deposit Bitcoins and receive a corresponding amount of wrapped Bitcoin tokens that function on, say, Ethereum. In other words, wrapping is a common feature that allows non-native tokens to be used on different blockchains.
Binance’s BNB Chain hosts a number of popular decentralized apps, including PancakeSwap. To allow users to bring non-native cryptocurrencies on to BNB Chain, Binance offers a wrapping mechanic in the form of Binance-peg tokens.
To facilitate the wrapping arrangement, users deposit their original tokens with Binance, including BUSD (which counterintuitively only operates on Ethereum), or other non-native tokens, such as USDC. Binance holds the original tokens in an escrow wallet and issues a corresponding number of Binance-peg tokens that can operate on BNB Chain.
In a post published in 2019, Binance specified that the Binance-peg tokens are always “100% backed by the native coin in reserve.” This implied that customers’ USDC funds converted to Binance-peg USDC were backed one-to-one by an escrow fund containing the original token.
While these practices correspond with how wrapping arrangements take place on other blockchains, critics say the company’s handling of the Binance-peg tokens has been sloppy at best. Fortune previously reported an incident, described below, related to Binance-peg USDC.
Blockchain data from August shows customer accounts contained $1.779 billion of Binance-peg USDC, the BNB Chain-wrapped version of USDC. Binance held a corresponding amount of USDC as collateral in a designated escrow wallet.
But, as Fortune reported, Binance withdrew all USDC funds from the escrow wallet on Aug. 17, 2022, moving the tokens into exchange wallets, which normally hold standard customer assets. As a result, the company was storing the Binance-peg USDC collateral in the same wallets as customer funds for its exchange.
Binance acknowledged that the “administration of hot wallets has not always been perfect,” but still insisted that it was holding the proper collateral—just in offline “cold” wallets not visible to the public.
Blockchain data on Etherscan, a popular tool for parsing transactions on the Ethereum blockchain, shows that this may not have been the case.
How $750 million of USDC became BUSD
The new analysis of blockchain data from Fortune raises further questions as to how Binance managed collateral funds for its Binance-peg (wrapped) USDC token. The chart above shows evidence that Binance converted hundreds of millions worth of token reserves for the Binance-peg version of its rival USDC stablecoin into its own BUSD stablecoin, without customer permission or knowledge. Here’s how it worked.
Recall that on Aug. 17, 2022, Binance withdrew all of the USDC funds from the escrow wallet for the Binance-peg USDC token and moved them into exchange wallets. Blockchain data reveals that the transactions likely didn’t stop there. Starting on Aug. 18, Binance began to move large chunks of USDC into untagged, intermediary wallets, before converting them back into U.S. dollars with Circle and Coinbase.
In one such series of transactions on Aug. 18, illustrated in the graphic below, Binance moved $250 million of USDC from its exchange wallets into intermediary wallets, before sending the tokens to Circle and Coinbase and subsequently burning the funds—or converting them from USDC to U.S. dollars.
The same day, in a series of transactions illustrated in the graphic below, Paxos minted $250 million of BUSD—Binance’s proprietary stablecoin. The BUSD was then moved back into Binance exchange wallets, including one of the wallets from which the USDC initially flowed.
The same pattern of behavior was repeated on Aug. 19, with Binance moving an additional $250 million of USDC from exchange wallets and burning the funds at Coinbase and Circle, and a corresponding amount of BUSD minted with Paxos and moved to Binance exchange wallets. A total of $750 million of USDC was burned, with a corresponding amount of BUSD minted, during this time period.
All of this points to a broader strategy by Binance. While Binance publicly announced its auto-conversion policy in early September, the blockchain data above indicates the company was doing the same thing weeks earlier. The difference is that the later auto-conversion policy was for exchange funds. The movements laid out above show the company likely also applied the policy to Binance-peg collateral funds, without customer knowledge. This was the case even though Binance had said that the collateral was always held in its original, native token, which in this case should have been USDC—not BUSD.
The transactions suggest that the movements were part of Binance’s broader push to increase the market share for its own stablecoin—and make more money.
Jonathan Reiter, the data analyst and co-founder of ChainArgos, described the behavior as suspicious, especially considering the subsequent auto-conversion policy. Previous issues with how Binance managed the collateral for its peg tokens could be attributed to mismanagement. In this case, Binance’s apparent move to convert its USDC collateral reserves into BUSD—without customer knowledge or permission—suggests a deliberate, self-serving motive.
“This does feel like somebody transferred these tokens, and that wasn’t a mistake,” Reiter said.
A Binance spokesperson didn’t dispute the on-chain data but denied that the transactions affected the collateralization of user assets and said that the processes for wallet management have been fixed.
The core of the matter is that Binance had combined collateral for its Binance-peg tokens with customer funds, rather than keeping them in separate wallets. This entailed Binance moving all the Binance-peg USDC collateral from its designated escrow wallet into combined wallets that also held exchange funds in August.
With the collapse of FTX, wallet management and the commingling of assets became hot-button issues for exchanges. To be clear, the data here does not suggest that Binance was using customer funds to make its own bets, as FTX did. Instead, by mixing reserve funds and exchange funds in the same wallets, Binance made it impossible to tell whether the USDC it was converting into BUSD was the collateral for its peg tokens or unrelated funds.
“They didn’t make any effort to segregate that money,” Reiter told Fortune. “Doing the right and wrong things there are indistinguishable.”
For users, the downside of the arrangement is not as clear, except that Binance was likely using their funds without their knowledge or permission. Furthermore, with hundreds of millions of customers’ USDC now held as BUSD, users were not able to withdraw USDC as easily. After all, if users wanted to withdraw their USDC, Binance would have to go through traditional banking channels to convert BUSD back to USDC.
This was illustrated in mid-December when customers rushed to take out funds amid questions of Binance’s stability. Binance had to halt withdrawals of USDC as it rushed to swap out its positions in BUSD. A Binance spokesperson attributed this delay to the need to go through a bank in New York, which was not open during the time of peak demand.
More importantly, the behavior raises questions about how Binance conducts business, especially as it seeks to shed its reputation for playing hard and fast with the rules. In the post-FTX world, Binance is trying to secure its place at the top of the crypto world as a compliant actor.
Binance’s partnership with the regulated Paxos was part of that effort. With the recent crackdown by the NYDFS against Paxos, however, Binance is distancing itself from BUSD. In a Twitter thread on Monday, Binance founder and CEO Changpeng Zhao acknowledged that BUSD market cap would decrease now that Paxos won’t be issuing the token.
In an interview with Fortune, Binance Chief Strategy Officer Patrick Hillmann said the company is not considering launching a new Binance-branded stablecoin. Instead, he said the company’s preferred path is working with a third-party stablecoin that does not necessarily carry the company’s name.
Even as Binance moves away from its stablecoin ambitions, the evidence of its past actions remains publicly available through blockchain data. With regulators starting to hone in on its irregular management of customer collateral, Binance may not be able to shed its history with BUSD.
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