Binance, confidence and the ledger question

Last month I wrote about bank runs, using the run on George Bailey's Building and Loan in It's a Wonderful Life. The point was that a sound institution can fail on a bad day, because the real buffer is confidence. The past week offered a live example, though not from a bank.

The facts so far, as at Monday 2 November:

·       On 29 October, about US$6.3 billion was drained from Binance's hot wallets in roughly 20 minutes, the largest crypto theft on record. The FBI has since said North Korea was responsible, naming its TraderTraitor operation.

·       Withdrawals were suspended for three days and reopened in phases on Sunday. In the first nine and a half hours, customers withdrew US$4.65 billion and deposited US$1.01 billion, a net outflow of about US$3.6 billion.

·       Binance says customers will not bear the loss and, using its own funds, has now replaced about 95% of the stolen assets. Circa US$3 billion has been frozen on-chain, but frozen is not recovered. Every recovery figure so far is Binance's own, and a full proof of reserves, which customers can check themselves, is expected by 3 November.

I do not understand why this is not bigger news. The largest theft on record has been met with comfort that circa US$3 billion is "safe" because it has been frozen. What about the other US$3 billion? It is being converted into assets no issuer can freeze, and is most likely gone for good. Binance has filled the gap from its own balance sheet, so the loss has not disappeared. It has moved to the exchange, and customers are being asked to trust that the balance sheet can carry it.

Withdrawals paused, an assurance that funds are safe, a wait for proof, and then US$3.6 billion out the door within hours of reopening. That is the anatomy of a run. To paraphrase Bagehot, once a banker has to prove he is worthy of credit, his credit is already gone.

The important distinction is what sits behind the assurance. A bank under pressure has a central bank lender of last resort, a deposit guarantee and a prudential regulator. None of that exists here. The backstop is the exchange's balance sheet and its word. Binance may well honour it. But confidence is carrying all of the weight.

Many of you will know my long-held view that crypto does not belong in a family portfolio. This note is about something broader.

An early thought on the technology

A common line has been: I don't like crypto, but the technology makes sense. This week tests that. A distributed ledger is meant to be secure and unchangeable. Yet US$6.3 billion moved in about 20 minutes, and the ledger recorded every transfer faithfully. Recording a theft accurately does nothing to reverse it.

Recovery so far has relied on central parties: token issuers freezing balances, exchanges and law enforcement. The ledger itself has recovered nothing.

Many central banks are exploring or piloting digital currencies, and payments are moving away from cash. If more of the system runs on digital rails, then security, recoverability and who can freeze or reverse a transaction become questions about everyone's money, not just crypto holders'. The answers are not clear yet, but the questions are worth asking.

Old things also have a habit of coming back. Vinyl records are selling again, and some people are going back to DVDs rather than relying on streaming. Part of the appeal is owning something you can hold. After a digital theft of this size, I wonder whether that instinct returns to money as well, including cash.

Whatever the format, the practical tests remain: where is the asset held, in whose name, and what happens if the institution in the middle cannot pay? That is the standard we apply for families: assets sit with a custodian, within a regulated framework, and you can see what you own.

As I said in October, the question was never whether the loans were good. It was whether everyone else would wait. When withdrawals reopened, many of Binance's customers chose not to. Binance replaced the stolen coins within days; confidence will take longer.