A Tale of Three Exchanges

It was the craziest of times, it was the maddest of times. Every crypto exchange is pointing the finger in a pyrrhic competition to be publicized as the lesser evil. There has always been significant conjecture surrounding crypto companies and their operations. Todays rumor is tomorrows civil suit, and next weeks history. Remember, the majority of crypto enthusiasts refer to the community at large as a "space" instead of an "industry," due to the lack of regulation. The gap between centralized exchanges and proper regulation is coming to a close. In a lackluster display of transparency, many cryptocurrency groups accidentally communicated their solvency or lack thereof over the past month with each exchange making Proof of Reserves press releases. The next several minutes will be rife with conjecture and graphic images, yet we still remain positive. We sing the songs that remind us of the good times, we sing the songs that remind us of the better times.

FTX Rundown

SBF has been arrested by Bahamian authorities under directives from the U.S. the day before he was supposed to testify via Zoom TM during an impromptu congressional hearing on the cryptocurrency industry. News outlets are reporting that Bahamian authorities are upset about the stain on their reputation that FTX has caused. The islands have always been a place to launder money and avoid taxes, but ought never to facilitate the whimsical chicanery of confidence men and charlatans. The crown prince of bankruptcy court and current FTX CEO, John Ray lll, instead filled SBF's previously allotted time by explaining the situation at FTX as he sees it. Among the dozen or so high profile companies Ray lll has led in-hand through bankruptcy court, including Enron, he believes FTX is both the most bizarre and fraudulent. He described to the surprise of an self-indulgent committee, how the executives at FTX (avg age 29) handled invoicing and expense reporting through Slack (a chatroom for businesses). FTX also used Intuit Quickbooks to sporadically update the record keeping and manage accounts for the $12 billion exchange they operated. This begs the question to other groups in light of the new Proof of Reserves movement; if the golden child of crypto ran their operation so obscenely, what the hell are the others doing?

*"But muh effective altruism!" Credit Eric Wall

Binance.US

Lines of succession can vary by institution. Historically, the secretary of state in the U.S. was the batter on deck to run for president in the following election cycle. It was a way to signal to both parties and the general public, this person is fit to lead. Binance.US has a very peculiar leadership history following a ban on operations of Binance.com in the U.S. starting 2019. Both the tenure and personality varied wildly between CEO's:

Catherine Coley June 2019 - May 2021

• Former Head of Liquidity at XRP

Brian Brooks: April - August 2021

• Former Comptroller of the currency of the United States Office of the Comptroller of the Currency, Current CEO of Bitfury (we snapshotted him in a prior edition)

Brian Shroder: October 8th 2021 - Present

• Former Head of Business Development at Ant Group

Some may call the above transitions a hot potato toss to see who the fall guy will be. The most interesting person on the roster is Coley. She served as the first executive to not just Binance.US, but also BAM Trading Services . BAM, founded by Harry Zhou in February 2019, is Binance's primary method of allowing U.S. users to transfer funds to their U.S. exchange. Days after BAM's formation in Delaware, they partnered with Binance to license Binance's name and effectively become Binance.US. "A fully independent entity" to serve U.S. customers. It is unclear when Coley moved from BAM to Binance.US as allegedly both groups reported directly to the Binance Bahamian Holding Company and its CEO, Changpeng Zhao from the start of 2019. The announcement of her role as CEO was not published until July of 2019. This strange entity mingling underscores Binance's continued criticism from regulators that the exchange did little prevent U.S. customers from trading on Binance.com.

*Brian Shroder in 2023

Following reports which claim Binance helped facilitate $8 billion in trading between Iranian firms, U.S. regulators are rumored to step up the pressure and to announce multiple criminal suits against the worlds largest crypto exchange. Hopefully someone on the inside will be receptive to the governments inquiry. Coley has not been seen or heard from since her departure as CEO. If she fails to make an appearance in the near future, she would not be the first crypto CEO to fall off the face of the earth. It will be interesting to see how Binance fairs against the U.S.. CZ has sprung into infamy by delivering the deathblow to FTX with a single tweet. He was deeply upset by SBF holding secret meetings with Gary Gensler to eliminate the competition.

We understand FTX laundered, stole, or misused customer funds in various capacities. Miami Heat stadium rights, political donations to the Democratic party, and Tom Brady's likeness. It is estimated $10 billion of real USD actually existed while the rest was margin or apart of their FTT exchange token. Lets take a peak at Binance and see how they are holding up.

*Lion share of their own coin. Uh-oh

Binance published the results from a Mazars procedural Proof of Reserves review. This is not an audit by the way. The exchange simply hands the accountants a grading rubric to locate and describe the data they see, which for crypto is coin balances or assets at a specific point in time. No liability for the third party accountant. Binance of course passed with flying colors by having 101% of their Bitcoin collateralized on the exchange. Kraken CEO, Jesse Powell, was quick to comment that unless liabilities were posted along with Proof of Reserves, Binance's publication is meaningless. Should negative balances exceed assets then they truly do not have all their customer deposits. Time will tell.

*We have investigated ourselves and found no wrong doing

Crypto.com

Who has a better name than crypto.com (CDC)? You cannot discuss them online without creating a link to their website. Incredible branding! Anyways, CDC was rumored to be next on the chopping block after FTX. Riddled through the headlines with casual mistakes such as accidentally sending $10 million to a random women in Australia and "accidentally" sending $400 million in Ethereum to a corporate held account at Gate.io, the community at large believed CDC had mismanaged user deposits and would soon announce freezing withdrawals. Fortunately this scenario never materialized. CDC CEO, Kris Marszalek, was quick to jump in and produce information regarding user deposits. As a potential repeat offender, Marszalek previously ran an e-commerce website that resulted in online sellers losing access to their funds earned on the platform. Drumroll please..............

You wouldn't leave your dog in a kennel for 6 months. Why leave your Doge or Shiba on the exchange?

The scariest part of the pie chart is the second largest meme coin, Shiba Inu makes up a large portion of the holdings. Remember this is a representation of user deposits held by exchange accounts. In reality, the exchange can not micro manage every persons account and properly hold records. A customer's account is calculated in a separate database and merely expressed on the platform's front-end. FTX was revealed to be holding synthetic Bitcoin as they had stolen it long before people went to withdrawal. The real Bitcoin was gambled away, while users assumed their deposits were safe as reflected when they were to log in. It is entirely possible that CDC sold assets they know people will never withdrawal. Doge and Shiba Inu investors may have no understanding of self-custody wallets.

*I would hate to see me in the comment section

The actual Proof of Reserves came weeks after Marszalek's tweets, coincidentally also performed by Mazars. Thank you head of legal for not answering our question! By taking the time to read their Proof of Reserve process, we realized it is almost no different from Binance. How is handing instructions to a third party with directive any different than doing an internal tally? The exchanges are just adding an extra step. You will notice Justin Wales does not directly answer the question. In our question, CDC would fail their own Proof of Reserves test when they accidentally sent 82% of all CDC Ethereum to Gate.io in October. The real question is, why would they move Ethereum to Gate.io? Margin trading, gambling, commingling funds, assisting in customer deposits, synthetic asset printing, fractional reserve systems. It could be some or all of the above.

Our key takeaway is the Proof of Reserve process is flawed and pointless. The ability to bank yourself was created through Bitcoin and iterated in friendlier formats by other networks. If you own any crypto, please withdrawal it from opaque exchanges immediately!