LONDON, Dec 19 —The world’s biggest crypto exchange, Binance, is battling to shore up confidence after a surge in customer withdrawals and a steep drop in the value of its digital token.

The exchange said it dealt with net outflows of around US$6 billion (RM26.6 billion) over 72 hours last week "without breaking stride” because its finances are solid and "we take our responsibility as a custodian seriously.” After the collapse of rival exchange FTX last month, Binance’s founder Changpeng Zhao promised his company would "lead by example” in embracing transparency.

Yet a Reuters analysis of Binance’s corporate filings shows that the core of the business - the giant Binance.com exchange that has processed trades worth over US$22 trillion this year - remains mostly hidden from public view.

Binance declines to say where Binance.com is based. It doesn’t disclose basic financial information such as revenue, profit and cash reserves. The company has its own crypto coin, but doesn’t reveal what role it plays on its balance sheet. It lends customers money against their crypto assets and lets them trade on margin, with borrowed funds. But it doesn’t detail how big those bets are, how exposed Binance is to that risk, or the full extent of its reserves to finance withdrawals.

Binance is not required to publish detailed financial statements because it is not a public company, unlike US rival Coinbase, which is listed on the Nasdaq. Nor has Binance raised outside capital since 2018, industry data show, which means it hasn’t had to share financial information with external investors since then.

And as Reuters reported in October, Binance has actively avoided oversight. Zhao approved a plan by lieutenants to "insulate” Binance’s main operation from US regulatory scrutiny by setting up a new American exchange, according to company messages and interviews with former employees, advisers and business associates. Zhao denied signing off on the plan and said the unit was set up with advice from top law firms.

Binance’s huge role in the crypto market - it accounts for over half of all trading volume - has made its operations a keen topic of interest for US regulators. The company is under investigation by the US Justice Department for possible money-laundering and sanctions violations, and Reuters reported this month that some prosecutors believe they have gathered sufficient evidence to charge Binance and some top executives.

In an effort to look inside Binance’s books, Reuters reviewed filings by Binance units in 14 jurisdictions where the exchange on its website says it has "regulatory licenses, registrations, authorisations and approvals.” These locations include several European Union states, Dubai and Canada. Zhao has described the authorisations as milestones in Binance’s "journey to being fully licensed and regulated around the world.”

The filings show that these units appear to have submitted scant information about Binance’s business to authorities. The public filings do not show, for example, how much money flows between the units and the main Binance.com exchange. The Reuters analysis also found that several of the units appear to have little activity.

Former regulators and ex-Binance executives say these local businesses serve as window dressing for the main unregulated exchange.

"They are co-opting the nomenclature of regulation to create a veneer of legitimacy,” said John Reed Stark, a former chief of the U.S. Securities and Exchange Commission’s Office of Internet Enforcement. Stark said Binance’s operations were more opaque even than those of FTX. "There is absolutely no transparency, no sunlight, no confirmation of any kind about its financial position.”

Binance Chief Strategy Officer Patrick Hillmann said the Reuters analysis of the units’ filings in the 14 jurisdictions was "categorically false.” "The amount of corporate and financial information that has to be disclosed to regulators in those markets is immense, often requiring a six-month-long disclosure process,” he said. "We are a private company and are not required to publicize our corporate finances,” he continued, comparing the exchange to privately-held firms such as U.S. candy maker Mars. In a statement, Mars said it was "absurd” to compare its corporate governance and financial reporting requirements with Binance’s, adding that its goods and services are "highly regulated.”

Hillmann also noted that FTX’s founder stands accused by U.S. authorities of fraud. If those allegations are true, he said, "it would have been fraud regardless of what regulations were in place.”

Pieces of a jigsaw

Binance’s surge in outflows last week was attributed by analysts to concern over how crypto exchanges hold user funds and the Reuters report on the DOJ investigation. The exchange also halted withdrawals of some crypto tokens. On Friday, Binance’s attempts to reassure investors were set back when an accounting firm it hired to verify its reserves suspended all work for crypto firms.

There are glimpses of Binance’s finances in public comments by Zhao, past company statements, blockchain data and venture capital deals.

Binance has said it has over 120 million users. Its trading volumes totalled US$34 trillion in 2021, Zhao said in June. He told an interviewer last month that "90-something percent” of Binance’s revenues depend on crypto trading. The company is profitable and has "fairly large cash reserves,” he added. Binance has made over 150 venture investments totalling US$1.9 billion since 2018, according to PitchBook data. Zhao also created a US$1 billion fund to invest in struggling crypto companies after the fall of FTX.

Reliable estimates of Binance’s trading-dependent revenues are scarce, however, despite the public availability of trading volume data.

Binance charges fees of up to 0.1 per cent on spot trades, with a more complex fee structure for derivatives. On spot trading volume of US$4.6 trillion in the year to October, Binance may have earned revenue of up to US$4.6 billion, Reuters calculated, based on data from researcher CryptoCompare. Charging fees of up to 0.04 per cent on its derivatives volumes of $16 trillion, Binance may have earned revenues of up to $6.4 billion.

John Todaro, a senior analyst covering crypto and blockchain firms at US investment bank and asset manager Needham & Company, and Joseph Edwards, an independent investment consultant, said the Reuters calculations appeared to be in the right range. Binance’s promotions such as zero-fee trading and other discounts may mean the revenues were lower, Edwards said. A third crypto analyst who declined to be named also agreed with the figures.

Binance’s Hillmann did not comment on the Reuters estimates. "The vast majority of our revenue is made on transaction fees,” he said, adding that the exchange has been able to "accumulate large corporate reserves” by keeping expenses down. Binance’s "capital structure is debt free” and the company keeps its money made from fees separate from the assets it buys and holds for users, Hillmann said.

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 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 capitalised” insurance funds to cover the deficit, he said. Hillmann did not provide specifics and Reuters could not independently verify all of his statements.

Asked about the scale of any losses at the exchange this year, Hillmann said: "Binance’s risk department manages what is one of the industry’s most risk-averse programs. This protects our users and our platform.”

The guarding of Binance’s financial information by Zhao, a Canadian citizen who was born and raised in China, echoes the strict culture of secrecy he has enforced throughout his company’s rise, the Reuters report in October showed. The article was one of a series of reports this year by the news agency on Binance’s financial compliance and relationship with regulators across the world.

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.

"Full transparency”

Zhao and other executives have consistently declined to publicly identify which entity controls the main exchange. But in a private court submission filed in 2020 in an arbitration case in the Cayman Islands, Chief Compliance Officer Samuel Lim said it is owned and operated by a Cayman Islands company, Binance Holdings Limited.

This year, Binance has won licenses or approvals from authorities in locations including France, Spain, Italy and Dubai. Zhao lauded these advances, saying in May that Binance’s registration as a crypto service provider in Italy would allow it to operate "in full transparency.” Yet none of the units registered with local regulators provide a clear window into the main Binance exchange, the Reuters analysis showed.

Reuters asked authorities in all 14 jurisdictions about their oversight of Binance’s local units. Of the eight that responded, six - in Spain, New Zealand, Australia, Canada, France and Lithuania - told Reuters their role did not involve supervising the main exchange, and said the units were only required to meet local requirements on reporting suspicious transactions.

Reuters also asked representatives of the local Binance units and affiliates about their relationship with the main Binance exchange. Only one responded, a South African firm called FiveWest. Its managing director, Pierre van Helden, said Cape Town-based FiveWest receives a "minimal yearly license fee” from Binance to facilitate crypto derivatives trading for Binance’s South African users.

"How Binance operates globally is unclear to us,” van Helden said. He added that Zhao’s company was "cooperative” on compliance and said FiveWest has regular meetings to ensure requirements are met.

In Italy, Binance’s public corporate filings detail just the unit’s capital base and its ownership by a separate Binance company in Ireland. The Italian company, Binance Italy S.R.L., has its listed address in a block of shops and apartments in the southern city of Lecce. It did not respond to a request for comment, nor did the Organismo Agenti e Mediatori authority with which it is registered.

Just two of the Binance units analysed by Reuters offer more substantial details in their filings.

One, a Lithuanian firm called Bifinity UAB, offers the most detailed picture. Bifinity described itself in one regulatory filing as the "official fiat-to-crypto payments provider for Binance.” Fiat means dollars, euros and other traditional currencies.

Bifinity also disclosed that Binance and its companies are its "main strategic business partners.” In a 2021 annual report, Bifinity reported €137 million (RM643 million) in net profit and assets of €816 million . Bifinity said it had made payments of €421 million to a single related party, with some 185 million euros in "related expenses,” but did not specify whether this party is Binance.

Bifinity, whose annual report said it has 147 employees, does not have a website or publicly provide any contact details. The company’s chief executive, Saulius Galatiltis, did not respond to requests for comment. At its registered address at a business centre in Lithuania’s capital Vilnius, Bifinity is not listed on the tenants’ board.

The other Binance unit that offers more than barebones financial details is in Spain. It registered in July with the Spanish central bank and reported meagre revenue of some 1.5 million euros last year and a profit of just 9,000 euros. Reuters could not reach anyone from the unit, Binance Spain SL, for comment. A reporter visited its registered address, at a co-working space in Madrid. The receptionist said a small Binance Spain team had relocated a month ago, without leaving contact details.

In the Gulf, Binance has won a license or permission this year in Abu Dhabi, Bahrain and Dubai. Zhao told Bloomberg in March that he will be based for the "foreseeable future” in Dubai. Filings by Binance’s Dubai entities give no details of its financial activity or its ties to the main Binance platform.

Even for some employees inside the company, such details were unclear.

Binance didn’t disclose global profit figures during its application for a license in Dubai, according to a person with direct knowledge of the application. Nearly all clients in the United Arab Emirates registered with Binance’s main exchange, and until at least late summer the licensed Dubai firm was not experiencing significant trading revenues, the person said.

Reuters was not able to contact the unit, Binance FZE, registered to a WeWork office by the Dubai World Trade Centre. Binance’s Middle East and North Africa head did not respond to a request for comment. Nor did Dubai’s Virtual Assets Regulatory Authority.

"Proof of reserves”

Many crypto exchanges, including Binance competitors Huobi and OKX, operate from offshore locations such as the Seychelles - as did Bahamas-based FTX. Standards on corporate transparency and financial reporting are typically looser in such jurisdictions than in the United States.

Coinbase, the biggest U.S. exchange, listed on Wall Street in 2021. Like other public companies, it must file audited quarterly earnings statements and annual financial reports. In its latest earnings statement, Coinbase reported data including revenue, profit, cash holdings and trading volumes.

"It’s really night and day,” said Mark Palmer, head of digital assets research at U.S. financial services firm BTIG, of the difference between disclosures by a listed company and other offshore exchanges.

"Coinbase is a publicly traded company and is required to share that information with investors, whereas we are a private company and do not have public investors to whom we are beholden,” Binance’s Hillmann said. "The main reason to go public is to raise money, but as Binance doesn’t need to raise money, there is no need to go public at this time.”

A Coinbase spokesman, Elliott Suthers, said the company’s financials were reviewed quarterly by Deloitte, one of the "Big Four” accounting firms, "so customers don’t have to rely on our word.” "We believe exchanges have a responsibility to share their financials with their customers,” Suthers said. "We encourage other exchanges to take this same approach.”

Some privately held exchanges reveal financial data during fundraising, as did FTX prior to its collapse. Binance, however, has not raised money from outside investors since 2018, according to data from business information provider Crunchbase. "We do not have VC investments, so we don’t owe anybody any money,” Zhao told CNBC on Dec. 15.

US prosecutors last week charged FTX founder Sam Bankman-Fried with defrauding equity investors and customers of billions of dollars. It has emerged that money was secretly moving from FTX to Bankman-Fried’s hedge fund, Alameda Research, which functioned as a market maker, a dealer that deepens liquidity by buying and selling the same assets.

Reuters could not determine if Binance or Zhao also own any market-making firms that operate on its platform. In December 2020, the SEC issued a subpoena to Binance.US, the separate American exchange, requesting it provide information about all its market makers, their owners, and their trading activity.

As part of a "commitment to transparency,” Binance last month published on its website a "snapshot” of its holdings of six major tokens and promised to share a complete set of data at an unspecified future date.

Data firm Nansen said the holdings, worth around US$70 billion at the time of the Nov. 10 snapshot, had fallen to $54.7 billion by Dec. 17 after withdrawals and price fluctuations. Two "stablecoins” that are pegged to the dollar - Binance’s BUSD and market leader Tether - accounted for almost half of its holdings. Around 9% of the assets were in BNB, its in-house token which Binance itself has issued, the Nansen data showed.

BNB is the fifth-largest crypto coin in circulation with a market value of around $40 billion, industry data show. Holders of the token receive discounts on Binance’s trading fees. Zhao has said that Binance does not use BNB as collateral. Alameda used FTX’s in-house FTT token as collateral when borrowing from FTX and other lenders.

After FTX’s collapse, Zhao said audits of crypto exchanges were not guaranteed to prevent bankruptcies. "More audits are really good, but I’m not sure if they would prevent this particular case,” he told a TechCrunch interviewer.

Zhao told a conference in April that Binance is "fully audited.” Asked by the Financial Times who was auditing Binance’s financial results and balance sheet, Zhao said the company had "multiple auditors in multiple places ... I don’t have all of the list in my head.”

He now advocates so-called "proof-of-reserves” checks on the crypto holdings of exchanges. The system is supposed to allow users to confirm that their holdings are included in checks of blockchain data and that the exchange’s reserves match clients’ assets.

Binance hired accounting firm Mazars to check Binance’s bitcoin holdings. The firm examined the holdings as they existed at the end of one day in November. In a Dec. 7 report, Mazars found that Binance’s bitcoin assets exceeded its customer bitcoin liabilities. It said the check, known as an "agreed-upon procedures engagement,” was "not an assurance engagement” in which auditors personally sign off on their attestations of accounts. Nevertheless, Zhao tweeted, "Audited proof of reserves. Transparency.”

Mazars later deleted the webpage containing the report. Its communications director, Josh Voulters, said on Friday it had "paused” its proof-of-reserves checks for crypto firms "due to concerns regarding the way these reports are understood by the public.” Voulters didn’t respond to requests for more detail.

While this checking system offers a degree of insight into an exchange’s reserves, it’s no substitute for a full audit, seven analysts, lawyers and accountancy experts told Reuters.

In offering only a limited snapshot of an exchange’s crypto, the system lacks safeguards, two lawyers said. Others said it could not yield the same level of detail on corporate finances as a traditional audit.

"In terms of the balance sheet from Binance, there really is no colour,” said Todaro, the analyst at Needham & Company. — Reuters