Binance Holdings Ltd. is shifting to a “semi-automated” process for handling the reserves that back tokens it issues, following years of mismanagement in which reserves were mixed with other customer funds and at times appeared to be partially missing.
The world’s largest crypto exchange acknowledged last month that it had mistakenly kept collateral for more than 40 of its 94 Binance-peg tokens in a single $16 billion wallet that also held exchange-customer funds, following inquiries from Bloomberg News. Reserves for one major stablecoin were also not properly documented between 2020 and 2021, at times leaving gaps of up to $1 billion in externally visible funds.
Binance has now set up a partially-automated process that ensures so-called B-Tokens are “always transparently backed” via a system that only allows minting of new coins to take place after collateral has been added to the appropriate wallet, a spokesperson said on Wednesday. Reserves have also been distributed across 36 dedicated collateral wallets.
“Over the last few weeks, we have been moving the collateralized assets to dedicated wallets, one for each network, to make the 1:1 backing clearly visible,” the spokesperson said. “This collateral has always been backing our users’ B-token assets and has always been available for withdrawal at any time. We are now simply showing it on-chain in dedicated wallets where it will remain until it may be required.”
- Binance Concedes User Funds Mistakenly Stored With Reserves (1)
Cryptoassets are often only compatible with the blockchain they were built on, meaning developers have had to figure out ways that allow them to use tokens like Bitcoin on other networks. BINANCE mints billions of dollars’ worth of its own versions of third-party tokens like Ether, Circle’s USDC and Tether’s USDT to make them usable on other blockchains, such as the platform’s own BNB Smart Chain and BNB Beacon Chain.
When a user asks Binance to mint a new B-Token, an equal amount of collateral denominated in the original coin is supposed to be locked up in a dedicated wallet before the exchange creates the new token on the user’s chain of choice. That way, B-Tokens should always be backed one-to-one by reserves kept separately from other funds on the exchange.
A previous mixing together of more than $539 million in B-Token reserves and customer funds in an exchange wallet known as “Binance 8” saw some B-Tokens appear significantly overbacked, with the collateral ratio for one token as high as nearly 22,700%. After the changes, some tokens may remain slightly overcollateralized to counteract any “unexpected spikes in demand,” the spokesperson said.
The exchange opted to make its new process for managing reserves semi-automated to reduce security risks, the spokesperson said. “Processes that require manual intervention are slower, but more secure,” the person added.
A semi-automated system may allow Binance to quickly intervene if a hack or other kind of incident were to impact the B-Token reserves, said Conor Ryder, research analyst at blockchain data firm Kaiko. “This still gives them the ability to hit the switch, if the worse comes to worst and to save their face a little bit,” he added.
“But it isn’t an ideal fully-automated system and we’ve seen before that Binance has mismanaged the kind of minting process that goes on here,” Ryder said. “Ideally, we’d like to see that process fully automated just to ensure that that doesn’t happen again. There’s still potentially an element of trust that needs to be placed in Binance and its management of these reserves.”
