The mythology surrounding the rise of the world’s largest crypto exchange is impressive. However, a Forbes investigation reveals that Binance’s 2017 initial coin offering was a flop, that it quietly took advantage of to amass a lucrative crypto warchest.

_{By Javier Paz, Forbes Staff}

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^{PART I}

As Sam Bankman-Fried, the disgraced founder of its former rival FTX, goes on trial for fraud and money laundering in New York, the world largest crypto currency exchange, Binance, is having an existential crisis. It has drawn lawsuits from the U.S. Securities and Exchange Commission and Commodities Futures Trading Commission, with accusations of fraud against customers and deceiving regulators. Last week, payment processor Paysafe made a “sudden decision” to stop handling euro transactions for Binance, according to the exchange, which has also exited European markets including the Netherlands. The company has also been plagued by an exodus of key employees around the world. Binance did not respond to multiple requests from Forbes for comment on these issues, but the company has moved to dismiss the CFTC suit, claiming it is faulty on several grounds, and has stated that the SEC action is overly broad.

Despite it all, Binance’s biggest problem may be dwindling trading volume, as the digital-assets market is still struggling through a crypto winter which began in 2022. This is weighing heavily on its own cryptocurrency, the bnb token, which has lost 68% of its value since reaching a record $675 in May 2021.

BNB, currently valued at $33 billion, has long been an important part of Binance’s operating model, and a close examination of its initial coin offering in 2017 reveals that Binance’s early days were rockier than widely believed.

The idea for launching Binance’s own coin grew out of a dinner in Chengdu, Sichuan, on June 14, 2017, according to founder Changpeng Zhao. On June 18 he circulated a 17-page white paper, the foundational document that acts as a kind of charter for projects in the crypto world. It contained a speedy timetable for the start of operations, detailing a new digital token, known as Binance coin (BNB), which was to be issued in a three-week auction. Unlike U.S.-based rival Coinbase, Binance would not accept fiat, or traditional, currencies such as the U.S. dollar. The exchange would be a crypto-only trading platform, and it touted a matching engine that could process 1.4 million orders each second.

It was an auspicious time to be entering the nascent market for cryptocurrencies. Bitcoin’s price had quadrupled over the preceding year to nearly $2,800, and video gamers-turned-entrepreneurs were getting rich floating dubious ideas in white papers as hundreds of digital currencies were launched in initial coin offerings, or ICOs. In the first six months of 2017, the cryptocurrency market swelled fivefold to more than $100 billion.

Things were moving fast for the Shanghai-based project, which had only been in existence since mid-June. The 100 million token ICO was completed on July 3, according to a LinkedIn posting that day by Zhao, who is now a billionaire and widely known as C.Z. He proclaimed the auction a “huge success” and wrote that $15 million had been raised, indicating an average price of 15 cents per BNB token. Some of the proceeds from the new token would be used to build out the exchange’s platform, but most would go toward Binance branding and marketing. The Ethereum-based BNB tokens would trade like stocks even though they offered no equity to their owners.

Exchange tokens are odd creations, more like airline loyalty miles than shares in a company. They are mostly used to reward customers with discounts for trading or recruiting new account holders. Like stocks, however, they can also serve as a form of corporate currency. Binance used its BNB holdings to pay for stakes in promising startups during last year’s crypto crisis. According to the Binance white paper, 200 million BNB were actually minted, but only 100 million were being offered to the public in the ICO. Binance insiders would keep 80 million, and 20 million would be allotted to angel investors, like Matt Roszak, founder of Bloq, early bitcoin investor Roger Ver and Da Hongfei, co-founder of NEO. Moreover, Binance pledged to buy back and destroy, or burn, half of the 200 million tokens it had initially minted over time.

More than 20,000 crypto fans registered for its BNB auction and, according to Zhao, many deposited funds in advance. At the time, CZ expected some of those funds to remain in Binance trading accounts. “We got tons of PR in our core target market,” wrote Zhao on LinkedIn in July 2017, “making the Binance brand known, while getting investment at the same time. What more can a new platform ask for?”

Zhao’s rosy proclamations about his ICO’s success were well received. Those tokens, which initially traded for 15 cents each, now sell for $213, but they soared as high as $675 in 2021. Today BNB coin is the fourth-most-valuable digital asset in the world, worth $33 billion. Founder Zhao is worth $10 billion by Forbes’ reckoning, however our calculation reflects the value of his business interests and does not include the massive amount of BNB he presumably controls.

An investigation by Forbes with the assistance of two crypto forensic firms–Gray Wolf Analytics and Inca Digital–reveals that behind the scenes, Binance’s launch was actually a flop. Binance did not, in fact, sell 100 million tokens at its initial offering. An analysis of its crypto wallets reveals that no more than 10.78 million BNB tokens were transferred to investors that participated in its public ICO in the summer of 2017, although an extra 20 million coins appear to have been quietly transferred to the angel investors, doubling their allocation to 40 million. All told, Binance likely raised less than $5 million in its offering, versus the $15 million that Zhao had claimed at the implied price of 15 cents.

Despite repeated requests from Forbes, Binance has refused to respond to questions about its 2017 ICO or give a detailed accounting of the BNB it controls.

There is nothing illegal with an issuer keeping the remainder of an unsold auction provided the firm discloses it is doing so, but Binance’s white paper did not mention what would happen if the ICO undersold. The issue is not unique to Binance. According to a 2020 report in Financial Markets and Portfolio Management that reviewed 306 ICOs between March 2016 and March 2018, 45% of issuers kept unsold tokens, while the rest either proportionately handed them out to investors or permanently removed them from circulation.

Few knew about BNB’s initial misfire, in part because crypto ICOs are unregulated, and there are no SEC filings with disclosures of any kind. But there appears to have been a silver lining to Binance’s ICO troubles. The exchange’s founders, including Zhao, were left with 145 million of its minted BNB tokens by September 2018, instead of the 80 million initially planned. At the time of its ICO, the 65 million unsold tokens would have been worth less than $10 million, today they are worth about $14 billion.

According to forensic analysis derived from blockchain data (see Part II, below) Binance controls many large crypto wallets where millions of BNB tokens have been stored and occasionally transferred into and out of. Also, a March 2023 complaint filed by the CFTC against Binance, alleges that Zhao controls directly or indirectly 300 different crypto accounts that are trading crypto, including BNB. (Binance has moved to dismiss the CFTC suit, claiming overreach by regulators.)

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BNB PRICE SINCE INCEPTION

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Could Binance have used its BNB tokens to trade between accounts in what is called “wash trading” to help prop up the price of BNB, as the SEC alleges in its June lawsuit? Since 2019, trading in BNB has been brisk, especially during the period in that year when BNB token moved to Binance’s own Beacon blockchain, after being based on Ethereum blockchain for the prior two years. Binance said in a September 21 court filing that the wash trading allegations were “unsubstantiated with facts.”

We also know, according to Pitchbook, that through its venture capital arm Binance Labs, Binance acquired stakes in no fewer than 199 companies since its launch in 2017, including famously FTX, Trust Wallet, Coinmarket Cap, GOPAX and Tokocrypto. BNB token was used as a sweetener on some of these deals. Binance also established a $1 billion fund using BNB for Binance Labs to manage on May 30, 2018.

How many BNB tokens are outstanding today? According to a Binance website tracking BNB circulation, there are now 154 million BNB tokens outstanding, so over the last six years the exchange has burned 48 million. Based on forensic analysis with Gray Wolf, we’ve determined that Binance controlled nearly 117 million tokens on August 31, 2023, good for 76% of the total outstanding supply. We arrive at this figure by combining disclosed tokens that were issued to the founding team along with a proprietary probabilistic analysis that has identified previously secret wallets used to hold customer funds and serve other corporate purposes.

If tracking Binance’s BNB seems confusing, you are not alone. However, one thing is clear. BNB token has been a critical factor in Binance’s rise as the world’s dominant marketplace for cryptocurrencies, and maintaining a strong native currency has been core to its success, just as it was for FTX, whose FTT token proved to be a linchpin in its ultimate solvency.

Below you will find details of Forbes analysis of BNB’s initial coin offering and the movement of the token between wallets in the years following its ICO.

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^{PART II}

Binance ICO Drill Down

How It Was Presented

ICOs were popular between 2017-2018, when hundreds of projects–including a good deal of scams–raised billions of dollars from investors by selling tokens minted out of thin air. They may appear similar to initial public offerings (IPOs) for stocks but offer nothing comparable to the same level of investor disclosure and protection.

Binance announced its ICO on June 14, 2017, with a $15 million target to be raised from investors who might become active traders on its platform. The auction launched 12 days later on June 26, five days earlier than prescribed in the white paper and finished 18 days ahead of schedule on July 3.

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BINANCE’S CREATION MYTH

Archived post from the Binance.com website that shows the rapid development of the exchange and its BNB token in June and July 2017.

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Adding to the confusion is the exchange’s declaration on Binance.com that has since been taken down but is still viewable on the Internet Archive’s Wayback Machine, saying that the ICO was completed “within 3 minutes.” Binance indicates in small print that “this page was our front page during our ICO, and is now kept here for your review.” Most if not all ICO-related pages have been removed from Binance.com, including the initial white paper.

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THREE MINUTE HERO

Archived Binance.com post that claims that its BNB initial coin offering sold out in one three-minute session, instead of three one-week sessions as was planned.

The ICO Process

Tokens issued in initial coin offerings (ICOs) usually come from what is called a deployer wallet, a generic term for computer code that mints new tokens and then sends them out to digital wallets, each of which has a unique, long alphanumeric identifier. Gray Wolf stated that at the auction’s launch, all 200 million BNB “tokens were minted and given to address 0x00C5E04176d95A286fccE0E68c683Ca0bfec8454, which is a Binance-controlled address.” These tokens represent the entire initial BNB supply.

With the tokens in the deployer wallet, the next step in the ICO would be for Binance to distribute those won at auction to the buyers. Forbes tracked the receiving wallets using blockchain records and analyzed their profiles. Gray Wolf and Inca Digital reviewed and validated Forbes’ auditing methodology and the data for individual wallets.

Based on the white paper, Forbes expected to see 100 million tokens going to ICO participants and 20 million to Binance angel investors shortly after the conclusion of the ICO - a total of 120 million tokens. Binance started the token issuance on July 7, but only 55 million of the expected 120 million moved, and then distribution froze for more than a year. “The 55 million was disbursed through 13 transactions between July 6th and August 14th, 2017,” said Gray Wolf. “These transactions are the only ones where the Binance Deployer sent BNB between July 2017 and August 2018, and during this time period approximately 145 Million BNB were in control of the Binance Deployer address.”

It is possible, though Forbes and Gray Wolf consider it unlikely, that the undistributed tokens were held on the Binance exchange–which began operations on July 14, 2017–on behalf of purchasers. The common practice would be to send the tokens to an external wallet because investors would typically not want to keep them on an exchange whose security had not been established. Alternatively, Binance may have issued non-blockchain receipts for the tokens, a highly unusual practice and one that would be unverifiable by third parties.

Which Wallets Got The Tokens

What follows is an analysis of the major wallets that received BNB directly from the deployer. Other than the alphanumeric string that identifies each wallet, there is not any other blockchain information available about the owner, though sometimes facts become known through other means. Consequently, linking owners to specific wallets is often a mix of art and science. The size of a wallet, transfer frequency, transfer date and where a token came from and where it went afterwards may tell a story that indicates the owner.

Binance angels wallet 1 (20 million). Forbes, Gray Wolf and Inca Digital have identified this wallet as the source of tokens to be distributed to the earliest investors because of the amount received and subsequent transactions having been dominated by high-value transfers. During the ICO month (July 2017), Binance distributed 17.84 million BNB tokens from this wallet to 678 different addresses. The exchange distributed an additional 2.15 million from August to November 2017 to 226 different addresses.

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ANGEL 1 WALLET

Distribution of 20 million BNB to 904 wallet addresses

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Binance angels wallet 2 (20.07 million). This one, which we dubbed angels wallet 2, received 20,069,440 tokens from the deployer in three transfers (20 million + 69,420 + 20) during the first two days after the exchange launched in mid-July. Although this wallet received slightly more than the round number of 20 million sent to angels wallet 1, we surmise these tokens were also meant for angels due to the similar numbers and onward distribution patterns detailed in the next chart. For crypto sleuths, it is worth noting there was an intermediary wallet between angel wallet 2 and token recipients, but to keep things as simple as possible we will maintain the reference to wallet 2. Of the 20.07 million transferred to angel wallet 2, Binance distributed 17.4 million BNB to 531 wallets during July 2017. The exchange distributed an additional 2.66 million BNB to 79 wallets between August to December 2017.

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ANGEL 2 WALLET

Distribution of 20.07 million BNB to 610 wallet addresses

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Binance 9. This wallet, the name of which appears on the Etherscan blockchain analysis service, gradually received the remaining 15 million tokens from the deployer. Binance made available only 11 million tokens to Binance 9 through the end of July. Of the 11 million BNB tokens, we believe that Binance sent 10.78 million BNB to as many as 400 presumed retail wallets because for the most part the disbursements were in small amounts. The exchange then sent the remaining tokens to 31 wallets from August 2017 to July 2022.

Our combined estimate of angel and retail investors during the first full month after the ICO closed comes to less than 2,000 addresses, approximately 10% of the 20,000 users CZ claimed had registered with the exchange.

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BINANCE 9 WALLET

Distribution of BNB tokens to about 431 wallets, most of which seem to be owned by retail investors, in 2017.

BNB Spaghetti

While the maximum number of Binance angels and investors participating in the ICO appears to be shy of 2,000, there is significant overlap, interwallet transfers, and commingling among the various wallets, making it difficult to determine the precise number of participants in each group.

For instance, there were 56 recipients that received transfers from both Binance angel wallets in July 2017 for a total 3.98 million tokens. When Binance 9 is included, 22 recipients were sent coins from all three wallets, 2.94 million BNB overall. Moreover, angel wallet 2 sent close to one million tokens to Binance 9 and from there Binance sent them to be destroyed during the firm’s first quarterly burn operation under the program to eventually trim the supply to 100 million.

This transfer of one million tokens to Binance 9 was one of dozens that indicated the wallet is/was used for multiple purposes. For instance, we identified the transfer of 5 million BNB tokens to Binance 5, a wallet whose beneficial owner is the exchange itself, from Binance 9 in three transactions via a separate intermediary wallet. Binance also sent a combined 4.1 million tokens from Binance 5 and Binance 6, another exchange, to be taken out of circulation. This kind of practice makes it difficult for outside observers to parse the difference between user and exchange-owned tokens.

The Fate Of The Unsold ICO Tokens

The following table then shows that there were zero disbursements from the deployer wallet from September 2017 to August 2018. Also visible in this table are nearly 65 million BNB tokens that Binance had its deployer wallet send to Binance 5 in 2018, which appear to be those unsold in the ICO. That left the said wallet holding 99.4 million BNB, half the total supply. Binance and its executives were to have held an additional 80 million tokens, according to the terms of the white paper.

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DEPLOYER WALLET

A list of BNB transactions from the Binance deployer wallet, including the transfer of nearly 65 million tokens in September 2018, more than a year after the ICO.

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Gray Wolf Analytics concluded: "The discrepancies between what was stated in the white paper and actual on-chain transaction volumes, coupled with conflicting documentation of the ICO timeline, paint a perplexing picture. Stakeholders and the wider crypto community are left to wonder about the true nature of the ICO's progression, the authenticity of reported trading volumes, and the adequacy of consumer protections. These lingering questions emphasize the pivotal role of blockchain technology in enhancing transparency and accountability within the cryptocurrency ecosystem, where trust stands as an absolute imperative."

Inca Digital CEO Adam Zarazinski added: “Binance claimed to have fully achieved all the goals set for their ICO but in reality, the on-chain data suggests that less than half of the 120 million tokens were distributed, and were then circulated between multiple, presumably Binance-controlled, wallets. The dissemination of misleading information regarding the actual ICO results provided BNB investors with an overly optimistic perception of the token's future success, leaving the possibility for Binance to maintain an artificially high BNB price.”

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EXPECTED VS. ACTUAL BNB ICO DISTRIBUTION

Data, in millions of tokens, indicate that far fewer were sold in the offering than outlined in the Binance white paper.

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Binance’s claim that it raised $15 million in July 2017 strains credulity. If Binance only sold around 11 million tokens of BNB at the listed price of 15 cents, then it would have raised $1.65 million from retail investors in the ICO. If Binance angels bought 40 million at the same price, Binance would have raised $6 million from them, still short of $15 million. The upshot to all of it is that the extra 65 million tokens obtained at virtually zero cost from the undersold ICO gave Binance a dark and discretionary asset pool valued at over $40 billion at its highest point.

Total Binance BNB Holdings

There is little verifiable information about Binance's BNB holdings. As of September 1, it claimed to have net customer balances of 30.3 million tokens backed by 34.5 million held by the exchange, a modest overcollateralization. The company's Proof of Reserves web page says these amounts did not include Binance's corporate holdings of BNB.

Forbes and Gray Wolf developed a methodology to identify all wallets on Binance that contain BNB, counting both customer and exchange funds, to verify these numbers. The methodology consisted of tracking BNB creation and movement across the three blockchains in the Binance ecosystem, quantifying token flow, identifying wallets, determining wallet function and likely ownership based on unique characteristics.

It is worth noting that our analysis below relates to wallets that exist on Binance’s proprietary blockchains BNB Beacon Chain and BNB Smart Chain, to which BNB was moved in 2019 and 2020, respectively. We divided the BNB wallets on Binance into those disclosed by the exchange, which it states are made up entirely of tokens owned by the company and its founders, and then a series of hot and cold wallets on the platform that likely commingle customer and exchange tokens. For example, in the chart below the four Binance team wallets were publicly disclosed by CZ in November 2022 as part of a transparency exercise following the collapse of the FTX cryptocurrency empire. Together, he said, these controlled 22 million tokens. The known Binance wallets held 53.8 million units of BNB worth $11.6 billion as of Oct 1.

The wallets on the bottom of the table have not been disclosed by the exchange, but our work with Gray Wolf has determined that they likely sit on the Binance platform based on probabilistic analysis that considered direct links to the Genesis wallet–a successor to the deployer wallet on Ethereum–size of holdings, transaction patterns, primary wallets interacted with and other factors. Binance cold wallets 1-3 held a combined 51.5 million tokens worth $11.5 billion. In crypto parlance, wallets are usually either hot or cold. Cold wallets are typically more secure because they are not directly connected to the internet. They are used to hold higher amounts of assets and are employed less frequently. Hot wallets are connected to the internet and often facilitate more frequent and smaller-value transfers.

Exchanges like Binance typically cycle assets between hot and cold wallets. Customer deposits typically first go into a hot wallet and can then be moved to cold wallets for long-term storage. On the other hand, exchanges might move funds to a hot wallet from a cold one to meet demand from a surge in withdrawals. Best practice is for an exchange to keep no more funds in a hot wallet than are necessary for daily liquidity purposes. At the bottom of the chart we identified multiple hot wallets, with number 20 being the largest by far with 11 million BNB. Some hot wallets held nothing on the day that we took the snapshot.

All of the suspected Binance wallets that we list held 63.1 million units of BNB worth $15.7 billion. Combined with the assets held in the known wallets, Binance controls 116.9 million tokens worth $27.3 billion.

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BINANCE WALLET ROSTER

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