On-Chain Analyst Raises Alarm Over Binance SAFU Fund Backed by BNB

Binance SAFU fund comprises 44% BNB of the total fund.
It consists of $270 million in Bitcoin, compared to $300 million in Binance’s BUSD.
One of the reasons FTX failed was that it relied too heavily on the native FTT token.

Binance’s Secure Asset Fund for Users (SAFU) Insurance Fund has come under fire from prominent on-chain expert Willy Woo. It is not a good idea, in his opinion, to invest “incidence-correlated BNB” in the SAFU fund. Willy Woo draws parallels between this and how the cryptocurrency exchange FTX handled its insurance fund, which is backed by the exchange’s native FTT token. 

In a tweet published on November 25th, the on-chain analyst revealed that the SAFU fund now consists of $367 million worth of BNB, accounting for 44% of the total fund. Also, it only has $270 million in Bitcoin, while Binance’s dollar-pegged stablecoin BUSD accounts for $300 million. Due to swings in cryptocurrency value, the value of the fund has plummeted well below $1 billion. 

The Binance $1b SAFU insurance fund today:

BNB: $367m (44%)
BUSD: $300m (32%)
BTC: $270m (24%)

While I commend Binance for having such a fund, there’s no sense putting incidence-correlated BNB in there.

How would we feel about FTX having an insurance fund filled with FTT?

— Willy Woo (@woonomic) November 24, 2022

Binance SAFU Fund Backed by 44% BNB, not “SAFU”

According to Willy Woo, the SAFU insurance fund is risky because BNB only backs up 44% of the fund’s reserves. He compares this to the sharp drop in the FTT token during the FTX crisis which was the native currency of the doomed exchange. It would be the same as if FTT tokens were the main backing for an insurance pool for FTX. He notes:

“While I commend Binance for having such a fund, there’s no sense putting incidence-correlated BNB in there. How would we feel about FTX having an insurance fund filled with FTT?”

On November 9th, Binance, the world’s largest cryptocurrency exchange, added $300 million in Bitcoin and $700 million in BNB and BUSD tokens to its obligatory insurance pool. Woo, however, pointed out that the fund has shrunk to $837 million due to market volatility.

The on-chain analyst also provided Bitcoin and BSC addresses that can be used to confirm SAFU’s proof of reserves. The exchange plans to use a Merkle tree-based proof of reserve system to prove that its holdings are worth their full value. Still, the $837 million is close to the $68 million in Binance’s reserve proof and the approximately $800 million in Binance’s custody.

On the Flipside

Historically, according to Willy Woo, the Binance SAFU fund might take a blow in volatile market conditions. Binance’s stability and success are directly correlated to BNB’s performance. As such, it raises concerns about including BNB in the insurance fund.

Why You Should Care

As the crypto industry continues to confront the risk of contagion from the FTX crisis, a rescue fund could help restore investor confidence. But it’s worth noting that Sam Bankman-Fried apparently used FTT to prop up his exchange and its subsidiary trading firm, Alameda Research, which ultimately led to the scheme’s downfall.

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