ENCOURAGING ANGELS: Binance-A Risk Not Worth Taking-No CFO, No Board, No HQ and Margin Hazards That Peril All You Have Worked For

UPDATE:

On Monday, February 13, 2023 CNBC reported …’Crypto firm Paxos to face SEC charges, ordered to stop minting Binance stablecoin’…

By Stan Szymanski

…’Every gambler knows

That the secret to surviving

Is knowing what to throw away

Knowing what to keep’…

(from The Gambler by Kenny Rodgers; words by Don Schlitz)

Binance, the concern that accounts for over half of all trading in the Cryprocurrency market, casts a large shadow in this corner of finance as the largest crypto exchange. That is why the news this week that…

…’According to a Twitter source, the Binance exchange abruptly declared that it would no longer handle USD deposit and withdrawal operations from February 9, 2023 due to the loss of a banking partner.’…(Coincu News 2/6/23)

That banking partner was Signature Bank of New York. Perhaps the reason that Signature Bank broke with Binance had something to do with the lawsuit that the bank was walloped with alleging it aided the activities of FTX prior to the collapse of that enterprise:

…’The lawsuit, filed in the U.S. District Court for the Southern District of New York on Monday by investment and algorithmic trading firm Statistica Capital, alleges that Signature “had actual knowledge of and substantially facilitated the now-infamous FTX fraud.”…(Yahoo  2/7/23)

Another thing to note regarding this halting of USD transfers is that it is  concerning those transactions that happen through US run international SWIFT system where Signature Bank was previously the ‘transfer partner’ with Binance.

So the bank that Binance was using to transact US Dollar trade is the subject of a class action lawsuit about its FTX involvement and is a member of SWIFT (Society for Worldwide Interbank Financial Telecommunication). According to the United States Attorney’s Office Southern District of New York, here are some of the charges levied against FTX CEO Sam Bankman-Fried:

…’conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the Federal Election Commission and commit campaign finance violations.’…

What, if any, is the role of Binance in all of this? Will the effect that Binance has be worldwide? Only time will tell but when one looks at some of the other characteristics of this crypto platform, it does not give one a ‘warm, fuzzy feeling’.

Allegedly, Binance has no CFO (Chief Financial Officer). Founder, CEO and self proclaimed value investor Mike Alfred

…’Specifically, Alfred said he had a phone conversation with “a fund manager closely connected to one of the earliest investors in Binance,” who told him that Binance has no single person acting as a CFO, as he detailed in a series of tweets published on December 22.

Instead, he alleges, a group of over 20 employees in the crypto exchange’s Treasury serves as a “decentralized CFO,” as its co-founder and chief executive officer (CEO) Changpeng Zhao “doesn’t want a single centralized CFO.”…(Finbold 12/23/22)

Binance.US does have a CFO, Jasmine Lee, but Binance.US operates only in the United States and is a separate business entity from Binance that has customers in over 100 countries around the world.

Binance did have a CFO (Wei Zhou), but he abruptly left in 2021 and apparently never had access to the company’s full accounts was not replaced:

…’Even Binance’s former chief financial officer, Wei Zhou, did not have access to the company’s full accounts during his three-year tenure, according to two people who worked with him. Zhou, who left last year, did not respond to requests for comment.’…(Reuters 11/19/22)

A company whose finances that Reuters refer to as a ‘Black Box’ and where there is no CFO does not engender confidence, does it? The worlds largest crypto exchange has teetered in the wake of FTX and the news of the last week is not adding any air of stability to its persona.

In 2022, Binance did hire the accounting firm of Mazurs to write a ‘proof of reserves’ report which the public often times construes as a legitimate financial statement. Shortly thereafter, Mazurs suspended all work with crypto clients stating specifically regarding the ‘proof of reserves’ reports:

…“They do not constitute either an assurance or an audit opinion on subject matter. Instead they report limited findings based on the agreed procedures performed on the subject matter at a historical point in time,” the statement continued.’…(CNBC Dec. 16 & 18, 2022)

So these ‘proof of reserves’ reports appeared to be of use to the crypto exchanges to engender confidence in them by the public. These reports are just one snapshot in time that does not, IMHO, relay the true gravity of the risk that the exchange may be taking.

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If you happen to have a brokerage account that is a ‘margin’ account (as opposed to a ‘cash’ account), you can buy stocks ‘on loan’ (margin). For most of the time in recent history, margin has been set at 50%. What that means is that if you have $10,000 and want to buy a stock, you can actually buy $20,000 worth of that stock. You then have 50% equity in the stock. If the stock goes down to the FINRA Maintenance Margin (25% equity) you will receive a Margin Call where you either come up with additional cash/securities to deposit in the account to meet maintenance or if you won’t or can’t do that you will have to sell securities in the brokerage account to meet your ‘call’. BTW, the ‘house’ usually has higher maintenance requirements that FINRA, so you would have gotten a ‘call’ earlier than in this example. This all has to be done in a very short period of time as markets can move quickly. In my time in the brokerage business I never opened a ‘margin account’. In 1987 and numerous other times of market turmoil I saw the angst, tears and destruction that the use of margin can cause.

So I tell you this little story about margin to relate my amazement and horror to the employment of margin at Binance in regards to derivatives.

In the above referenced article from Reuters, it refers to the amount of margin that the customer may employ (based upon the level of assets):

…’Binance allows users to deposit collateral in the form of crypto and borrow funds to leverage the value of their derivatives trades by as much as 125 times. For the user, this can lead to huge gains or huge losses. Hillmann (Binance Chief Strategy Officer) said Binance backs all user deposits for derivatives and spot trading with its own reserves at a ratio of one to one – meaning deposits should be secure and easy to withdraw. Binance, he said, has strict liquidation protocols that sell off users’ positions if their losses exceed their collateral’s value. If users’ positions become negative “due to extreme market volatility,” Binance has “very-well capitalized” insurance funds to cover the deficit, he said.’…(Reuters 12/19/22)

First of all the term ‘very-well capitalized’ is a term that can have a vast array of meaning. When it comes to fast moving markets- especially when they are moving severely to the downside-what was well capitalized yesterday is underwater today.

When you are margined at a ratio of 125 to 1, just the wind blowing in the market can produce a ‘hyper’ gain or a ‘hyper’ loss. Under normal conditions at Binance (please see Binance leverage chart) if you were margined 125:1 just a movement of .4% (that is 4/10 of 1%) of the underlying asset would bring on a margin call. And although Binance has strict parameters about trading in this manner-in times of turmoil a market can just gap to the down side.

For instance, if an asset was trading at $50 a unit and then the market just stopped trading due to a catastrophic occurrence (for example a nuclear event), when the market does open, price wise it may not open where it closed. What happens when the market does open and the first trade for the asset is not $50, but $40 when you are leveraged 125:1? First of all, no matter what they say they can do, Binance cannot save you with a stop-loss order at $49.20 because the market blew straight through $49.20 and is now $40 for the asset. More importantly, if you originally had the asset with a total starting value of $10,000 you would have been controlling $1,250,000 ($10,000 X 125 or 25,000 units x $50) through the employment of leverage.

So now, your asset went down $10 in value. Now you are controlling $1,000,000 (25,000 (units) x $40 (price) ) instead of $1,250,000.

Your margin call would have happened at $49.20. You have to get your total assets back to $1,230,000 (25,000 x $49.20). That means that  you either have to deposit more cash and/or securities -or- sell assets in your account to make up the difference. You have to get back to $1,230,000 to meet your margin requirement and you are only worth 1,000,000.

Either deposit 230,000 in cash/securities or sell assets in your account. But you have nothing to sell. Your total equity was only $10,000 to start with. You can only pay back to the lender what is not theirs. So you are busted. You will have to surrender other assets to raise the cash-like your house. I do not know the terms of the margin agreement at Binance are and in truth, I don’t want to know just how draconian it might be. This amount of leverage at 125:1 is simply ungodly.

Do the 120 Million users of Binance know what they could be in for in the event of a break in the market lower due to a catastrophic event? How many of them have a margin account and are trying to get rich using someone else’s money? I don’t know about crypto accounts, but at least at one of the discount brokers, if you don’t know to ask for a -cash- account when you open your account you will be given a -margin- account by default. So many more people may have a margin account than they realize.

The amount of financial cataclysm that is possible may be unparalleled. If one has knowingly or unknowingly employed margin, they could be in for a severe shock. This could be one way where the words of Klaus Schwab may ring true: ‘You will own nothing and you will be happy’… Except of course you won’t be happy at all.

Binance does not have a Board of Directors that I can see. It does have a GAB, a ‘Global Advisory Board’ but it does not look like the GAB have any liability or actual responsibility to Binance. To me they look more like gateways into new markets for Zhou.

In addition to all the money that Binance is making on loaning crypto, when you are the biggest of any business in the world that would normally mean that you have a brick and mortar establishment somewhere, right? Not Binance.

Almost unbelievably, Binance has apparently no permanent headquarters. When asked about this at the ConsenSys’ Ethereal Summit in 2020 Zhou said:

…’”Wherever I sit, is going to be the Binance office. Wherever I need somebody, is going to be the Binance office,” he said.’…(Coindesk 5/8/20)

This reminds me of stories I once heard (a long time before the internet and Las Vegas) about gambling establishments running their businesses on riverboats. If there was any shady doings it was hard to put a finger on them because they could (and would) pull up anchor and move on to the next city on down the river before they were caught up to. In the age of Cyberspace, a constant online presence and hype give the illusion of constancy but in reality, it is anything but surety. A customer with a legitimate concern or gripe has no physical locale for proper redress of grievance. A modern day riverboat, if you will.

And when you step foot on that riverboat, not a minute goes by when you aren’t thinking about the risks in front of you. The amount of systemic risk that a firm like Binance poses to the system is something that is hard to quantify when times are relatively ‘normal’. When it comes under the pressure of accelerated sell off or withdrawal of assets and the world is faced with all out war, grid down or a stock market collapse (which would force a selling of crypto assets IMHO) just how wide and deep will be the additional effect of a Binance deterioration? I believe that the cards have already been dealt and Binance is not a place where you want to have a seat at the table.

You got to know when to hold ’em

Know when to fold ’em

Know when to walk away

And know when to run

You never count your money

When you’re sittin’ at the table

There’ll be time enough for countin’

When the dealing’s done

(The Gambler, Kenny Rodgers; words by Don Schlitz)

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Stan Szymanski (or Encouraging Angels) is not a medical doctor. This is not medical advice. In all matters pertaining to the health and care of a human being consult a medical doctor. This is not legal, financial or personal advice. Consult appropriate professionals in those fields for that type of advice.