The collapse of FTX has shown the importance of transparency in cryptocurrency exchanges. It’s also shown that having an emergency fund that can bail out a cryptocurrency exchange is a very nice thing to have. Binance actually has an emergency fund – Secure Asset Fund for Users (SAFU) – for exactly this purpose. It has over one billion dollars worth of assets in it.
But what exactly is in this emergency fund? Is it actually secure?
This article will explain exactly what is in the SAFU and why it might not be as safe as Binance leads you to believe.
What’s in Binance’s SAFU?
SAFU is composed of three different cryptocurrencies:
- Binance Coin (BNB): $367 million
- Binance USD (BUSD): $300 million
- Bitcoin: $270 million
The amount in USD varies depending on the price of the underlying assets. This is why the fund currently has less than 1 billion USD in it. Remember, the price of Bitcoin has fallen by quite a large amount over the past few weeks. You can see more detailed information on WorldCoinStats.
The Problem with SAFU
We love the idea of SAFU. A cryptocurrency exchange having a user fund that can be used to bail out the exchange in the event of a liquidity crisis is an excellent idea. However, it has to be done right in order for it to work in the event of a liquidity crisis.
It’s our opinion that Binance does not have the proper asset diversification for a user safety fund.
The biggest problem is that over a third of the fund is made up of BNB.
That’s a huge problem in the event of a liquidity crisis because the price of BNB will collapse in any crisis. Binance would also have to sell BNB in order to receive fiat currency, which would further crash the price of BNB as its falling.
The Binance stablecoin makes up another third of the fund. That’s slightly better than BNB, but it still has the same problems – will BUSD be safe in the event of a liquidity crisis at Binance?
It should be since it is backed 1:1 and they actually release monthly audits. We’d still like to see more separation from Binance owned assets in the SAFU, but BUSD seems relatively safe compared to other stablecoins.
Binance’s Emergency Fund Has Too Much BNB
To summarize, the SAFU holds over a third of its assets in Binance Coin (BNB). That’s a major problem because the price of BNB will likely rise in the event of a liquidity crisis at Binance.
We can actually draw parallels between Binance holding BNB in SAFU and FTX using FTT as collateral for loans. Once the price of FTT fell due to CZ dumping the tokens, FTX collapsed as the company could not pay back its loans.
Note: FTX obviously had more problems than using FTT as collateral on loans. But that certainly is a problem.
When was SAFU Launched?
SAFU was launched in 2018. Binance was launched in 2017, so this is actually pretty impressive. The fund has grown over time as it’s funded by trading fees collected by Binance.
Now, the fund did not actually become official until 2022. Binance had simply been collecting the fees and storing them in the fund for the eventual official launch. The fund officially launched with over a billion dollars of reserves (the price of cryptocurrency was relatively high at the time of launch).
Will Binance Ever Use SAFU?
Binance appears to have no major issues with liquidity. The exchange itself has been very solid since its launch and has not had many major controversies related to liquidity.
We find it unlikely that Binance will collapse in the current environment. The founder of Binance, Changpeng Zhao (CZ), does a very good job running the company as demonstrated by the lack of issues it has had over the past 5 years.
Due to that, it’s unlikely that Binance will need to touch SAFU. It’s still nice to have it. However, we did wish it contained less Binance Coin and more cryptocurrencies not associated with Binance.
That pretty much covers it for all you need to know about Binance’s emergency fund. We like the idea of it. But having over a third of the assets in BNB seems counterintuitive – the price of BNB will surely collapse in any situation where Binance has to use the funds in the emergency fund.