Author: Javier LianGuaiz Source: Forbes China
Although the myth of its rise is impressive, the world’s largest cryptocurrency exchange founded by Zhao Changpeng is on the verge of collapse. A survey by Forbes shows that Binance’s initial coin offering (ICO) in 2017 was actually a failure, but it quietly accumulated cryptocurrency assets that could generate substantial profits through this ICO. According to Forbes’ investigation, many reasons that led to the “victory” of the company at that time have also created the extreme difficulties it is currently facing.
CEO Zhao Changpeng described Binance’s initial coin offering, Binance Coin (BNB), as a “great success.” However, blockchain data tells a different story. Image source: GETTY IMAGES
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01. Forbes Investigation: Analysis of BNB’s Initial Coin Offering
Sam Bankman-Fried, the founder of Binance’s former competitor FTX, has fallen into disrepute and is currently being tried in New York for fraud and money laundering charges. At the same time, the world’s largest cryptocurrency exchange, Binance, is also facing an existential crisis. Binance has been sued by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), accusing the exchange of defrauding customers and deceiving regulatory agencies. Last week, payment processor LianGuaiysafe “suddenly decided” to stop processing euro transactions for Binance, and Binance also withdrew from the European market, including the Netherlands. In addition, the company is also plagued by the problem of key employees leaving globally. Forbes has invited Binance to respond to these issues several times, but Binance has not commented, although the company has taken action to apply for the dismissal of the CFTC’s lawsuit, claiming that there are multiple errors in the allegations and that the SEC’s allegations are too broad.
Nevertheless, the biggest problem Binance faces may still be the decrease in trading volume, as the digital asset market has been struggling in the cryptocurrency winter since 2022. This has put heavy pressure on the cryptocurrency BNB issued by Binance, which has depreciated by 68% since reaching its all-time high of $675 in May 2021.
BNB, currently valued at $33 billion, has been an important part of Binance’s business model for a long time. A careful study of its ICO in 2017 reveals that Binance’s early years were much more difficult than people generally believed.
Binance founder Zhao Changpeng said that the idea of issuing its own token, BNB, came from a dinner in Chengdu, Sichuan on June 14, 2017. On June 18 of that year, he announced a 17-page white paper, which is a foundational document similar to a project charter in the cryptocurrency field. This white paper included a timetable for rapid operation, detailing the new digital token BNB and stating that it would be issued through a three-week auction. Unlike its U.S.-based competitor Coinbase, Binance does not accept fiat currencies such as the U.S. dollar or traditional currencies. The Binance exchange platform is only used for cryptocurrency trading and claims that its engine can process 1.4 million orders per second.
It was a good time to enter the emerging cryptocurrency market. The price of Bitcoin had doubled in the previous year, reaching nearly $2,800. With the success of hundreds of digital currency ICOs, this entrepreneur, who came from a video game player background, proposed many thought-provoking ideas in the whitepaper and made a lot of money from them. In the first half of 2017, the cryptocurrency market grew fivefold, reaching over $100 billion.
This Shanghai-based project didn’t start operating until mid-June 2017, but it progressed quickly. According to a post by Zhao Changpeng on LinkedIn (he is now a billionaire known as CZ), the ICO of 100 million tokens was completed on July 3. He announced that the auction was a “huge success” and claimed to have raised $15 million, with an average price of 15 cents per BNB token, in that post. Part of the proceeds from the new tokens would be used to establish the exchange’s platform, but most of the proceeds would be used for brand promotion and marketing of Binance. BNB tokens based on Ethereum could be traded like stocks, although they did not provide ownership to the holders.
Trading tokens is a strange creation. Unlike company stocks, they are more like airline miles used to cultivate customer loyalty, mainly to provide discount rewards to customers who trade or recruit new accounts. However, like stocks, they can also serve as a corporate currency. During the cryptocurrency crisis last year, Binance used its holdings of BNB tokens to purchase shares of promising startups. According to the Binance whitepaper, there were actually 200 million BNB tokens issued, but only 100 million were made available to the public in the ICO. Binance insiders would retain 80 million tokens, and another 20 million would be allocated to angel investors such as Matt Roszak, founder of Bloq, early Bitcoin investor Roger Ver, and NEO co-founder Da Hongfei. In addition, Binance promised that over time, it would repurchase or destroy the initial 100 million tokens minted.
Over 20,000 cryptocurrency enthusiasts registered to participate in the BNB auction, and Zhao Changpeng said that many people had deposited funds in advance. At the time, Zhao Changpeng expected some of these funds to remain in Binance’s trading accounts. In July 2017, Zhao Changpeng wrote on LinkedIn, “We have conducted a lot of public relations in our core target markets to make the Binance brand well-known and also obtained investments. As a new platform, what more can we ask for with such achievements?”
Zhao Changpeng’s optimistic attitude towards the success of his ICO was widely praised. The initial trading price of these tokens was 15 cents each, and now they are priced at $213. In 2021, their price even soared to $675 at one point. Today, BNB has become the world’s fourth most valuable digital asset, worth $33 billion. According to Forbes’ calculations, founder Zhao Changpeng’s net worth is $10 billion, but our calculations reflect his business value and do not include the large number of BNB tokens he may own.
Forbes conducted an investigation with the assistance of cryptocurrency analysis companies Gray Wolf Analytics and Inca Digital, revealing that Binance’s ICO was actually a failure.
In fact, Binance did not sell 100 million tokens during its initial token offering. Analysis of its cryptocurrency wallet showed that during the summer of 2017, the number of BNB tokens transferred to investors participating in its public ICO did not exceed 10.78 million, while an additional 20 million tokens seemed to have been quietly transferred to angel investors, doubling their allocation to 40 million tokens. In short, the funds raised by Binance during the issuance process may have been less than $5 million, while Zhao Changpeng had claimed to have raised $15 million with an implied price of 15 cents.
Despite multiple requests from Forbes, Binance has refused to answer questions about its 2017 ICO and has also refused to provide detailed accounts of its holdings of BNB tokens.
It is not illegal for an issuer to retain the unsold portion of an auction, as long as the company discloses such practices. However, Binance’s whitepaper does not mention what would happen if ICO sales fell short. This issue is not unique to Binance. A report published in Financial Markets and Portfolio Management in 2020 reviewed 306 ICOs between March 2016 and March 2018, and found that 45% of issuers retained unsold tokens, while the remaining issuers either distributed the tokens proportionally to investors or permanently removed them from circulation.
Very few people were aware of the initial failure of BNB, partly because ICOs in the cryptocurrency industry are unregulated and do not require any form of disclosure to the U.S. Securities and Exchange Commission. However, Binance’s ICO issues seem to have brought some additional gains to its founder. As of September 2018, the exchange’s founders, including Zhao Changpeng, still held 145 million BNB tokens, instead of the initially planned 80 million. During the ICO, the 65 million unsold tokens were worth less than $10 million, but their value is now approximately $14 billion.
According to forensic analysis from blockchain data (see Part 2 below), Binance controls many large cryptocurrency wallets that store millions of BNB tokens, which are frequently moved in and out. In addition, the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against Binance in March 2023, alleging that Zhao Changpeng directly or indirectly controlled 300 different cryptocurrency accounts, including trading cryptocurrencies such as BNB. (Binance has currently applied to dismiss the CFTC’s lawsuit, claiming regulatory overreach).
Price of BNB since its launch
Is Binance really using its BNB token to conduct so-called “wash trading” between accounts, as alleged by the U.S. Securities and Exchange Commission in its lawsuit in June, in order to artificially inflate the price of BNB? Since 2019, BNB trading has been very active, especially in 2019 when the BNB token was transferred to Binance’s own Beacon blockchain, after two years on the Ethereum blockchain. However, Binance stated in a court filing on September 21 that these allegations of wash trading are “without merit.”
According to Pitchbook data, since its founding in 2017, Binance has acquired stakes in at least 199 companies through its venture capital arm, Binance Labs, including well-known companies such as FTX, Trust Wallet, Coinmarket Cap, GOLianGuaiX, and Tokcrypto. The BNB token has also become a favorable condition for facilitating some of these transactions. On May 30, 2018, Binance also established a $1 billion fund using BNB, which is managed by Binance Labs.
How many BNB tokens are yet to be issued? According to Binance’s website tracking BNB circulation, there are currently 154 million unissued BNB tokens. Therefore, in the past six years, the exchange has destroyed 48 million tokens. According to GrayWolf’s forensic analysis, we have determined that as of August 31, 2023, Binance has control over nearly 117 million tokens, accounting for 76% of the total circulating supply. This number is derived from combining the publicly issued token quantity by the founding team with proprietary probability analysis, and this analysis has confirmed the existence of secret wallets for holding customer funds and completing other company purposes.
If tracking Binance’s BNB tokens seems daunting, you’re not alone in feeling that way. However, one thing is clear. The BNB token is key to Binance’s rise as a major global cryptocurrency market, and maintaining currency competitiveness has always been at the core of its success. Just like FTX, its FTT token has proven to be crucial to its ultimate solvency.
Below is Forbes’ analysis of BNB’s initial token offering and the flow of tokens between wallets in the years after the ICO.
02. Binance ICO Data Analysis
How it unfolded
ICOs were all the rage during the period of 2017-2018, with hundreds of projects (including many scams) raising billions of dollars from investors by selling tokens created out of thin air. They may have looked similar to IPOs for stocks, but they cannot be compared to IPOs in terms of investor disclosure and protection.
Binance announced its ICO on June 14, 2017, with the goal of raising $15 million from investors who could potentially become active traders on its platform. Twelve days later, the auction was launched on June 26, five days ahead of the timeline specified in the whitepaper, and was completed 18 days ahead on July 3.
Binance’s Genesis Myth
Archived articles from the Binance.com website show the rapid development of the exchange and its BNB token in June and July 2017.
Binance’s ICO process timeline. Image source: INTERNETARCHIVE’SWAYBACKMACHINE
What is even more confusing is that the exchange’s statement on Binance.com claimed that the ICO was “completed within 3 minutes” (this statement has been deleted, but can still be seen on the Wayback Machine of the Internet Archive). Binance, in small print, stated: “This page is the homepage during our ICO, now saved here for you to view.” Most (if not all) of the pages on Binance.com related to the ICO have been deleted, including the original whitepaper.
Three-Minute Hero
The archived Binance.com post stated that the initial token sale of BNB was sold out within three minutes instead of the planned three weeks.
Binance’s homepage during the ICO. Image source: INTERNETARCHIVE’SWAYBACKMACHINE
ICO Process
Tokens issued in an Initial Coin Offering (ICO) typically come from a so-called deployer wallet, which is a generic term for computer code used to create new tokens and then send them to digital wallets, each with a unique alphanumeric identifier. Gray Wolf stated that when the auction started, all 200 million BNB tokens “were minted and sent to the address ‘0x00C5E04176d95A286fccE0E68c683Ca0bfec8454’ controlled by Binance.” These tokens represented the entire initial supply of BNB.
With the tokens in the deployer wallet, the next step of the ICO would be for Binance to distribute the tokens won in the auction to buyers. Forbes tracked the receiving wallets and analyzed their profiles using blockchain records. Gray Wolf and Inca Digital reviewed and verified Forbes’ auditing methods and data for individual wallets.
According to the whitepaper, Forbes expects that shortly after the end of the ICO, 100 million tokens will flow to ICO participants, 20 million tokens will go to Binance’s angel investors, for a total of 120 million tokens. Binance started distributing tokens on July 7th, but only 55 million tokens out of the expected 120 million became liquid, with the rest being locked up for over a year. “These 55 million tokens were distributed through 13 transactions between July 6th, 2017 and August 14th, 2017,” said Gray Wolf. “These transactions are the only transactions in which BNB was sent by the deployer personnel from July 2017 to August 2018, during which approximately 145 million BNB was held in the deployer personnel’s addresses.”
Although Forbes and Gray Wolf consider it unlikely, the undistributed tokens could potentially represent holdings of buyers on the Binance exchange, which started operating on July 14th, 2017. The usual practice is to send tokens to external wallets, as investors typically do not want to keep them in exchanges that have not yet established security. Alternatively, Binance may have issued non-blockchain receipts for the tokens, which is a highly unusual practice and cannot be verified by third parties.
Which wallets received tokens
The following is an analysis of the main wallets that directly received BNB from the deployer. Apart from identifying each wallet by alphanumeric strings, there is no other information about their owners on the blockchain, although sometimes we can learn some facts through other means. Therefore, linking wallet owners to specific wallets is often a combination of art and science. The size of the wallet, the frequency of transfers, the transfer dates, as well as the source and destination of the tokens can all indicate the situation of the owners.
Binance Angel Wallet 1 (20 million tokens). Forbes, Gray Wolf, and Inca Digital all identified this wallet as the source of tokens distributed to early investors, as the amounts it received and subsequent transactions were predominantly high-value transfers. In the month of the ICO (July 2017), Binance distributed 17.84 million BNB tokens from this wallet to 678 different addresses. From August to November 2017, the exchange distributed an additional 2.15 million tokens to 226 different addresses.
Binance Angel Wallet 2 (20.7 million tokens). We refer to this wallet as Angel Wallet 2. In the first two days after the launch of the Binance exchange in mid-July 2017, this wallet received a total of 20,069,440 tokens from the deployer through three transfers (20 million + 69,420 + 20). Although this wallet received slightly more tokens than the integer 20 million sent to Angel Wallet 1, we speculate that these tokens were also allocated to angel investors, as a similar pattern of numbers and subsequent distribution is detailed in the next chart. It is worth noting for cryptocurrency investigators that there is an intermediary wallet between Angel Wallet 2 and the token recipients, but for the sake of simplicity, we still refer to it as Angel Wallet 2. Out of the 20.7 million BNB tokens transferred to Angel Wallet 2, Binance distributed 17.4 million BNB to 531 wallets in July 2017. From August to December 2017, the exchange distributed an additional 2.66 million BNB to 79 wallets.
Angel Wallet 2 distributed 20.7 million BNB to 610 wallet addresses.
Binance 9 Wallet
This wallet’s name appears on the Etherscan blockchain analysis service, and it has received the remaining 15 million tokens from the deployer in a staggered manner. As of the end of July, Binance had only provided 11 million tokens to this wallet. Out of the 11 million BNB tokens, we believe Binance sent 10.78 million BNB to up to 400 assumed retail wallets, as most of the payments were small amounts. Then, from August 2017 to July 2022, the exchange sent the remaining tokens to 31 wallets.
Within the first month after the ICO ended, our comprehensive examination of angel investors and retail investors only accounted for less than 2,000 addresses, which is approximately 10% of the 20,000 users Zhao Changpeng claimed were registered on the exchange.
In 2017, Binance’s 9th wallet distributed BNB tokens to approximately 431 addresses, most of which seemed to be owned by individual investors.
BNB Chaos
Although the number of Binance angel investors and individual investors participating in the ICO seems to be less than 2,000 people, there is a large amount of overlap, transfers, and mixing between various wallets, making it difficult to determine the exact number of participants in each group.
For example, in July 2017, 56 recipients received transfers totaling 3.98 million tokens from two Binance angel wallets. If the Binance 9th wallet is also included, a total of 22 recipients received tokens from three wallets, totaling 2.94 million BNB tokens. In addition, the angel wallet 2 sent nearly 1 million tokens to Binance, and according to the company’s plan, Binance intends to send these tokens for destruction in the first quarter of operations, reducing the supply to 100 million tokens.
The transfer of 1 million tokens to the Binance 9th wallet is one of dozens of similar actions indicating that these wallets were used for various purposes. For example, we found that in three transactions, 5 million BNB tokens were transferred from the Binance 9th wallet to the Binance 5th wallet through a single intermediary wallet (which is actually owned by the exchange itself). In addition, Binance also withdrew a total of 4.1 million tokens from the Binance 5th wallet and the Binance 6th wallet (another wallet) from circulation. This practice makes it difficult for external observers to distinguish between tokens owned by users and tokens owned by the exchange.
The Fate of Unsold ICO Tokens
The table below shows that from September 2017 to August 2018, the spending of the deploying wallet was zero. In this table, it can also be seen that in 2018, Binance had its deploying wallet send nearly 65 million BNB tokens to the Binance 5th wallet, which seems to be the unsold tokens from the ICO. This makes the wallet hold 99.4 million BNB tokens, accounting for half of the total supply. According to the terms of the whitepaper, Binance and its executives were supposed to hold an additional 80 million tokens.
Deploying Wallet
BNB transaction list from Binance’s deploying wallet, including the transfer of nearly 65 million tokens in September 2018, more than a year after the ICO.
List of beneficiaries’ wallets from the initial issuance of BNB tokens. Image source: ETHERSCAN
Gray Wolf concludes: “The differences between the content described in the whitepaper and the actual on-chain transaction volume, combined with contradictory documents on the ICO timeline, paint a confusing picture. Stakeholders and the broader crypto community cannot help but question the true nature of the progress of the ICO, the authenticity of reported transaction volume, and the adequacy of consumer protection. These lingering questions highlight the crucial role of blockchain technology in improving transparency and accountability in the cryptocurrency ecosystem, where trust is absolutely necessary.”
Inca Digital CEO Adam Zarazinski added, “Binance claims to have fully achieved all the goals set for their ICO, but in reality, data on the blockchain shows that less than half of the 120 million tokens have been distributed and are circulating among multiple wallets that may be controlled by Binance. The dissemination of misleading information about the actual results of the ICO has led BNB investors to have an overly optimistic view of the token’s future success, allowing Binance to artificially maintain an inflated price for BNB.”
Expected and Actual Distribution of BNB ICO
Data in millions of tokens indicates that the number of tokens issued in this sale is far less than the quantity outlined in the Binance whitepaper.
Data source: Forbes, with Etherscan data
Binance claims to have raised $15 million in July 2017, which is unbelievable. If Binance sold approximately 11 million BNB tokens at a listing price of only $0.15, they would have raised $1.65 million from retail investors in the ICO. If Binance’s angel investors purchased 40 million tokens at the same price, Binance could have raised $6 million from them, still below $15 million. The result of all this is that the additional 65 million tokens obtained from the low-priced ICO, almost at zero cost, have given Binance a dark pool of freely disposable assets with a maximum value exceeding $40 billion.
Total Holdings of BNB by Binance
There is hardly any verifiable information about the total amount of BNB held by Binance. As of September 1, the company claimed to have a net customer balance of 30.3 million tokens supported by 34.5 million tokens held by the exchange, which is a slightly excessive collateral. The company’s reserve proof webpage states that these amounts do not include BNB held by Binance.
Forbes and Gray Wolf have developed a method to identify all wallets on Binance that contain BNB, including customer funds and exchange funds, to validate these figures. This method involves tracking the creation and movement of BNB on three blockchains in the Binance ecosystem, quantifying token flow, identifying wallets, and determining wallet functions and potential ownership based on unique characteristics.
It is worth noting that our analysis below involves wallets existing on Binance’s proprietary blockchains, BNB Beacon Chain and BNB Smart Chain, where BNB was transferred in 2019 and 2020 respectively. We divide BNB wallets on Binance into wallets disclosed by the exchange, which the exchange claims are comprised entirely of tokens owned by the company and its founders, followed by a series of hot wallets and cold wallets on the platform, which may contain a mix of customer and exchange tokens. For example, as part of the effort to enhance transparency after the collapse of the FTX cryptocurrency empire, Zhao Changpeng publicly disclosed four Binance team wallets in November 2022. He stated that these wallets collectively control 22 million tokens. As of October 1, known Binance wallets hold 53.8 million BNB tokens, worth $11.6 billion.
The wallet at the bottom of the table has not been disclosed by the exchange, but based on probability analysis and considering its direct connection, holdings, transaction patterns, main wallets for interaction with Genesis wallet (the Ethereum deployer wallet) and other factors, we have determined that it is likely located on the Binance platform. Cold wallets 1-3 on Binance hold a total of 51.5 million tokens, worth $11.5 billion. In cryptocurrency terms, wallets are typically divided into cold wallets and hot wallets. Cold wallets are generally more secure as they are not directly connected to the internet and are used to hold larger assets with lower frequency. Hot wallets, on the other hand, are connected to the internet and are usually used for more frequent and smaller transfers.
Exchanges like Binance typically cycle assets between hot wallets and cold wallets. Customer deposits usually enter the hot wallet first and then transfer to the cold wallet for long-term storage. On the other hand, exchanges may transfer funds from the cold wallet to the hot wallet to meet the demand for withdrawals. For exchanges, the best practice is to keep in the hot wallet only the funds needed for daily liquidity. At the bottom of the chart, we found multiple hot wallets, with the 20th wallet being the largest so far, holding 11 million BNB. Some hot wallets had nothing in them on the day we took the snapshot.
All the suspected Binance wallets listed hold a total of 63.1 million BNB, worth $15.7 billion. Combined with the assets held in known wallets, Binance controls 11.69 million tokens, worth $27.3 billion.
Translated from https://www.forbes.com/sites/digital-assets/2023/10/05/how-binance-turned-its-failed-token-ico-into-a-billion-dollar-windfall/?sh=48cf0abe529b
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