Binance, the cryptocurrency exchange at the centre of a recent global regulatory crackdown, may have covered up the extent of client liquidations during the May 19 crypto crash, according to new research by Carol Alexander, professor of finance at the University of Sussex.
There’s also prima facie evidence that Binance may have closed its trading platform on May 19 to prevent a $1bn hit to its own insurance funds, says Alexander.
That day marked not only one of the biggest one-day price declines in cryptocurrency, but also one of the largest-ever liquidations of traders’ positions.
On May 19, bitcoin’s dollar price plunged temporarily by over 30 percent, with the second most widely held cryptocurrency, ethereum, dropping over 45 percent.
According to bybt.com, derivatives contracts on $9bn of underlying cryptocurrency were liquidated on May 19, with the bulk of liquidations coming as traders’ leveraged long positions in bitcoin and ethereum were extinguished by the exchanges at which they held them.
However, says Alexander, the liquidations reported by Binance, the world’s largest cryptocurrency exchange, do not add up.
Her calculations refer to the bitcoin price against tether (USDT), since Binance’s most popular leveraged trading contract—the bitcoin perpetual swap—is priced in tether. Tether is a dollar substitute widely used by cryptocurrency traders.
“I do not believe these data”
“On 19 May the BTC/USDT price fell by more than 30 percent, yet Binance reported liquidations of merely 24 million USDT,” Alexander wrote in her blog.
“But I do not believe these data because on 19 May other exchanges together reported $8.6bn liquidations, Binance is larger than all the other exchanges combined, the trading volume on Binance’s BTC/USDT perpetual alone reached almost $100bn on May 19, and there are numerous press reports of huge losses experienced through liquidations on Binance on 19 May,” she said.
According to Alexander, back-of-the-envelope calculations suggest that Binance’s insurance fund should also have been fully depleted by the May 19 crash, yet the exchange reported that it wasn’t.
By contrast with traditional futures exchanges, which use central counterparty clearing houses to guarantee that client trades are fulfilled, cryptocurrency exchanges run internal insurance funds to compensate traders with winning positions in the event that the margin payments of losing traders prove insufficient.
“I no longer believe the figures that Binance shows on its website for its insurance funds, and I maintain that a figure of only 3 million USDT for the BTC/ETH insurance fund pay-out on May 19 is grossly inconsistent with the actual number of liquidations on BTC and ETH products on that day.”
“If the futures platform had not closed, Binance would have had to subsidise its insurance fund by a billion USDT or more”
“In fact, if the futures platform had not closed, I believe that Binance would have had to subsidise its insurance fund by a billion USDT or more,” Alexander wrote.
On May 19 Binance’s entire trading platform crashed at 13:30 UTC. By the time it re-opened soon after 15:00, bitcoin and other crypto prices had recovered to pre-crash levels and the short positions were no longer in profit.
According to Alexander, Binance may also be implicated in the long-standing concerns about tether’s collateralisation.
In May 2021, Tether Limited, the issuer of tether tokens, reported that only 2.9 percent of all tethers are actually backed by cash reserves, with around 50 percent in commercial paper, a form of unsecured debt that is normally only issued by firms with high-quality debt ratings.
“The simultaneous growth of Binance and tether begs the question whether Binance itself is the issuer of a large fraction of tether’s $30bn commercial paper,” Alexander said.
***POSTSCRIPT (August 7)***
According to Francis Kim, an Australian tech founder and Binance client who lost over $170k on May 19, the exchange stopped reporting full liquidation data in April, around a month ahead of the crash. While previously Binance had reported all liquidations in the data feeds it gave out, after April the exchange started reporting only the last liquidation per minute. This change had the effect of substantially understating the aggregate liquidation activity at Binance, Kim told New Money Review.
Sign up here for the New Money Review newsletter
Click here for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes
Related content from New Money Review
The wild world of crypto derivatives