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Binance admits reserve tokens were mistakenly co-mingled with user funds, making ability to redeem coins difficult to verify

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Cryptocurrency exchange Binance founder and CEO Changpeng Zhao speaks at a Binance fifth anniversary event in Paris, France, July 8, 2022.Binance founder and CEO Changpeng Zhao.

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  • Binance admitted to accidentally mixing client funds with reserve tokens in a cold wallet, according to Bloomberg. 
  • Reserves for nearly half of the Binance-peg tokens, or “B-Tokens,” were stored in a wallet that also held customer assets.
  • Binance has maintained that its client assets were backed by enough collateral to meet any redemption requests.

Crypto exchange Binance admitted to mistakenly mixing client funds with reserve cryptos in a cold wallet, according to a report from Bloomberg

Reserves for roughly half of Binance’s 94 self-issued “B tokens” are stored in a wallet named “Binance 8,” which also maintains client funds, the report said.

Mixing client funds with collateral tokens goes against Binance’s own guidelines as listed on the company’s website. 

Binance did not immediately respond to Insider’s request for comment. A spokesperson for Binance told Bloomberg the funds were mixed in error.

“Binance is aware of this mistake and is in the process of transferring these assets to dedicated collateral wallets,” the world’s largest crypto exchange told Bloomberg. 

The B-Tokens are meant to be backed one-to-one in locked reserves by the cryptos they’re based off of, and the collateral should be stored separately from client funds. Roughly 40 B-Tokens are listed on Binance’s website as being stored in the Binance 8 wallet. 

The mixing of the collateral tokens with client funds makes it difficult to verify the amount of B-Tokens available for client redemption requests. Binance has maintained that its client assets were backed by enough collateral to meet any redemptions.

But the issue of redemptions has grown in importance in the crypto industry since Binance’s sale of FTX’s FTT tokens in November triggered a wave of withdrawals from FTX that eventually led to a liquidity crisis and its bankruptcy.

Reports have since emerged that FTX transferred billions of dollars of client funds to Sam Bankman-Fried’s Alameda Research trading arm.

FTX’s crash also sparked a bank run on crypto-focused lender Silvergate, with customers pulling $8 billion in deposits in the fourth quarter. To meet the spike in withdrawals, Silvergate has had to sell assets at significant losses, liquidating debt the firm was holding on its balance sheet.

Binance and other crypto firms have vowed to be more transparent and have touted so-called proof of reserves as a way to ease concerns, though analysts point out they are incomplete and can be misleading.

Read the original article on Business Insider

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