The cryptocurrency giant has mixed client funds and pledged tokens in the same cold wallet, while promising strict separation in this area.
Following the FTX crash, Binance head Changpeng Zao (CZ) touted the merits of reserve testing, a means of proving that an exchange actually holds its clients’ assets and is creditworthy. However, being transparent about its reserves, an issue has been identified on a Binance cold wallet, dubbed “Binance 8”, used as part of its bridge.
To understand what happened, we must first go back to the notion of a bridge in the cryptographic universe. While cryptocurrencies circulate on their parent blockchain (e.g. bitcoin on the Bitcoin blockchain or ether on Ethereum), a bridge allows cryptocurrencies to circulate on other blockchains. Basically, it is a bridge that creates links between different blockchains. More precisely, a bridge consists of two contracts that will block a set amount of chips on one side and create the same amount of chips on the other side.
94 B tokens
As part of its bridge, Binance can issue 94 different B-tokens (synthetic tokens). They must be equal to the amount of collateral deposited by customers on an original blockchain, in order to guarantee the 1:1 ratio: therefore we have 1 bitcoin B-Token for 1 bitcoin, 1 XRP B-token for 1 XRP, etc. . Let’s take an example.
“If a user wants ether on a non-Ethereum blockchain, they use the bridge which will transfer their ether to Binance’s wallet and use it as collateral to ensure they can get it back when they decide to return to the blockchain. In return, Binance will create synthetic tokens – here B-token – on the blockchain. Then, when the user has completed his operations, he will have to return the synthetic tokens to Binance to recover his cryptocurrencies on the blockchain”, explains Sébastien Leguell, founder of the media Around the block.
Binance’s cold wallet, known as Binance 8, must contain the collateral of the issued B-Token. However, this wallet contains more tokens “than would be needed for the amount of B-Tokens Binance has issued, indicating that the collateral is mixed with customer funds rather than stored separately,” it reports. Bloomberg.
An “error” being resolved
Concretely, this means that the wallet contains both client funds and tokens placed as collateral (as collateral) corresponding to the issued B-tokens.
“Binance is aware of this error and is in the process of moving these assets to dedicated collateral wallets,” a Binance spokesperson said. Bloomberg.
Bloomberg clarifies that Binance had until then ensured that its clients’ funds and its collateral tokens were held in different wallets. In any case, these mixes occurred in a strategic cold wallet for Binance, as Binance 8 currently holds the equivalent of $9 billion in cryptocurrencies.
What is the share of B tokens on this wallet? “Binance has issued over $539 million in total through the 41 B-Tokens that have Binance 8 as a collateral portfolio,” according to calculations by Bloomberg. In other words, of the roughly $9 billion in cryptocurrencies in the Binance 8 wallet, nearly $539 million is pledged collateral for B tokens.