Bad news from Binance: Why has it become more dangerous to work with the exchange?

If you like Binance and work with it a lot, you will probably be interested in two recent pieces of bad news about the exchange. First, the Santiment platform has documented an example of insider trading, allegedly by Binance employees against their users. Second, it became known about the recent blocking of a $1 million corporate account with no way to appeal against such a decision.

Is this really insider trading?

Analyst agency Santiment wrote an ironic article titled “STG: a tale of a modern Nostradamus” about suspicious trends related to Stargate Finance’s (STG) listing on Binance on August 19. With this example, in a half-joking tone, Santiment describes a well-documented example of insider trading on the largest crypto exchange in the world.

The main idea of the report is that about 10 minutes before the announcement about adding STG trading pairs, the number of active addresses, trading volume and STG rate started to grow rapidly. The dynamics of change in the number of wallets, where many coins were stored (from 1000 to 1 million) are suspicious and unexplainable. Immediately before the announcement of the listing, their number had grown sharply almost twice, and then within two days, the number fell by 42%. The agency describes a typical “pump & dump” pattern for shitcoin built around some artificial news event.

Binance has not yet commented on these listing oddities described in the article. 

A new mechanism for blocking accounts

The second significant event related to Binance is introducing a unique interaction mechanism between the exchange and the governments of different countries.

Binance has launched a “system of assistance” to regulators and law enforcement agencies called the Law Enforcement Request System (LERS). Now law enforcers and authorities can send requests to the exchange to provide information about users necessary for investigations and to block their accounts, using a separate interface.

LERS interface simplifies and speeds up the processing of such requests, creating a unified channel of interaction between the cryptocurrency exchange and the governments of different countries.

And as a high-profile example of how the interaction mechanism works is the news from late last week.

On Thursday, Binance announced that it had restricted access to its Tezos Baking Bad account at the request of law enforcement agencies. The account owner claims that the trading platform blocked access to a Tezos corporate account containing BTC, ETH, Polygon (MATIC), Tether and other assets without any explanation or warning.

Our corporate @binance account is blocked since July 1 without any explanations. Today all our balances were set to zero (more than $1M). We have all the materials to begin the investigation and inform the community, but for now just stay away from Binance and @cz_binance #SAFU pic.twitter.com/PpZSBhYpZS

— Baking Bad (@TezosBakingBad) August 25, 2022

Under pressure from the community, Binance confirmed only that the account had been blocked, citing a law enforcement request. The company did not provide any evidence, such as a court order. Tezos Baking Bad was forced to contact the U.S. Justice Department to clarify the situation but received no response there either. In fact, the company had withdrawn its funds in favor of third parties, presumably the U.S. government.

Our brief commentary

Both trends are scary. Besides standard risks for a crypto investor, such as market crashes or regulators’ legislative attacks, the exchange introduces new systemic risks from its side.

If both described stories are true, it becomes quite dangerous to trade or just keep large amounts of money in the exchange. It is rather unpleasant that this large exchange has chosen to prove loyalty not to its users but to the governments and their supervisory authorities, which now have an effective tool for taking away user funds without explaining why.