[Feature] Will Crypto.com Become the Next Bank Run Victim?

Funds, investors’ sentiment, and risk appetite were all overwhelmed during 2020’s crypto bull run. The greed and the fear of missing out (FOMO) blinded people to think twice about the asset they invested in. Just like the subprime mortgage crisis back in 2007, the culprit that caused the global financial crisis is none other than “leverage”. In economic terms, leverage is a strategy that involves borrowing funds to invest in assets. In short, borrow to invest. Leverage can turn your investment principle from one to two, increasing efficiency to make profits during a bull run, as the price of investment assets has only one direction – up. However, everything has its limits. When the price hits a certain level that all market participants think is expensive, the price will drop because of profit-taking. Leverage becomes the killer when the price starts to fall. One can earn in multiplier during a bull run and, when it ends, lose in multiplier. We have already seen a lot of great examples this year, namely 3AC, Celsius, Voyager, and now, FTX.

Besides leveraging, another factor that causes the above crypto giants to collapse is heavily relying on a single cryptocurrency. In the first half of 2022, we have Luna-Terra and FTT in the second half. FTT belongs to the category of the exchange token distributed by FTX, the once second-largest and now-bankrupt crypto exchange. As FTT's heavy price dump inevitably caused the fall of FTX and Alameda Research, all eyes are now on the exchange-related tokens, for instance, Binance-BNB, Crypto.com-CRO, Huobi-HT, OKX-OKB, Bybit-BitDAO, etc. Among them, the CRO of Crypto.com sparks off the most discussions.

Sponsorships

It is not hard to understand why Crypto.com becomes the centre of discussion following the FTX collapse. They did almost the same stuff FTX did during the crypto bull run – buying arena naming rights and giving out tons of sports sponsorships. The list goes by:

And many more sponsorships are not listed in the table.

The lump sum of sponsorships seems pretty huge, but the CEO of Crypto.com, Kris Marszalek, clarified that the cost is around 10% of the company revenue and contracts are paid yearly. There isn’t any news that the exchange has pulled out of any ongoing sponsorship yet, except for the five-season UEFA Champions League deal, which has not commenced.

Crypto.com Assets & Proof of Reserves

After realising the severe consequences, Crypto.com immediately published a press release on 11^th November, sharing some of the largest assets stored in their cold wallets. In the press release, Crypto.com stated there is about 53,024 BTC, 391,564 ETH, and combined with other assets for a total of approximately $3.0B.

According to the blockchain analytics platform Nansen, the total holdings of both BTC and ETH in the addresses provided by Crypto.com are respectively 45,290 and 286,100, a discrepancy of 7,734 BTC and 105,464 ETH, which are worth $264.6M in total as of the time of writing. While there is no explanation for why the crypto holdings do not add up, Crypto.com promised a full audited Proof of Reserves (PoR) confirming a full 1:1 reserve of all customer assets in the next couple of weeks.

Crypto.com’s statement and the BTC holdings in the said cold wallets. The screenshot was taken on 15^th November. Source: https://portfolio.nansen.ai/dashboard/crypto.com

If you look at Crypto.com’s portfolio carefully, you might be surprised by the amount of Shiba Inu Coin (SHIB) that Crypto.com is currently holding. One-fifth of the crypto exchange portfolio is made up of the meme coin. According to the exchange spokesperson, "the reason our Proof of Reserves includes Shiba is because we hold customers' balances 1:1. Thus, our Proof of Reserves are dictated by our customer holdings." That equals 20% of Crypto.com users holding SHIB in their accounts. This is totally fine, in my opinion, if what the spokesperson said is true. However, if these SHIB tokens are not customer holdings but actual company reserves instead, Crypto.com might be getting into a bit of trouble here.

ETH and ERC-20 token holdings in Crypto.com's cold wallets. The screenshot was taken on 15^th November. Source: https://portfolio.nansen.ai/dashboard/crypto.com

Controversy 1 - Mistaken Transfers

Two days after publication, Twitter User Conor (@jconorgrogan) discovered that Crypto.com sent 320K ETH to a rival exchange Gate.io on 21^st October. Not only that, Gate.io is sending back the majority of these ETH, a shortfall of 35K ETH, 5 to 7 days later. The funds are sent and received by two addresses cited by Kris in their PoR. In light of this discovery, speculation and rumours started to spread around the crypto space. The FUD emotion caused Crypto.com’s token CRO to slump more than 16% to $0.0666. After a long 6 hours of waiting, Marszalek indirectly admitted the fund was mistakenly sent. As for the shortfall of 35K ETH, it is due to the price change in ETH between these two dates: the opening price of ETH was $1,282 on 21^st October, while it was between $1,460 to $1,554 on 26^th - 28^th October. Either Crypto.com or its customer is losing money in this case.

Transaction record of the 320K ETH transfer:

https://etherscan.io/tx/0xb426efda7525776e856b414c87ec0d7859e9bccafe727c174c7b51ed7ada6bee

Explanations by the CEO of Crypto.com, Kris Marszalek

Even though Marszalek explained further how things happened, CRO token price didn’t recover to the level where it started to fall.

By the way, this is not the first time that Crypto.com fat-fingered. The crypto exchange made it to the global news headlines for sending $10.5M mistakenly to a user instead of a $100 refund. What’s more ridiculous is that Crypto.com only realised this mistake seven months after the transfer, after which the user happily bought a property in Melbourne.

Controversy 2 – Misuse of Customer Deposits

Crypto.com was suspected of using customer deposits for trading activities, according to Twitter User WIZE (@TraderWize), who found transaction records of stablecoins worth over $1B sent from Crypto.com to FTX during the past year. Marszalek explained, “we deposit USDC, use it to buy other coins on the exchange and withdraw back to our wallets.” The CEO’s explanation spurred further confusion as his statement somehow agreed that the exchange is hedging customer trades instead of settling them. Marszalek did not provide a different reason upon questioning.

Transaction records of stablecoins sent to the now-bankrupt FTX, and Marszalek’s explanation

Spike of Withdrawals

On the same day, nearly 90,000 withdrawals were processed on one exchange transaction wallet. Bear in mind that the number is only limited to Ethereum and ERC-20 tokens withdrawals, withdrawals of other blockchains are not counted.

https://etherscan.io/address/0x46340b20830761efd32832a74d7169b29feb9758#analytics

To stop the FUD and control damage, Marszalek collected questions and did an AMA on 14^th November. There are a few key takeaways from this AMA session:

1. Crypto.com has a strong balance sheet

2. The exposure to FTX was limited to $10M

3. Crypto.com managed to recover $990M from FTX

4. 20% of SHIB reserves are to back customer deposits of the same amount

5. Withdrawals are working as expected; only certain coins are halted

6. CRO has never been used as loan collateral, unlike FTT

What Now?

According to Marszalek, most of the withdrawal queue has been cleared. On-chain data also shows that the number of withdrawals decreases gradually, with no sign of halting.

Stablecoins were flowing in one of the Crypto.com PoR cold wallets. The total net inflow of stablecoins was $305.7M over the past 30 hours.

https://etherscan.io/tokentxns?a=0x72A53cDBBcc1b9efa39c834A540550e23463AAcB

Conclusion

The FUD of Crypto.com started on 13^th November, and it seems like there is a sign of easing as of the time of writing (16^th November). Crypto.com claimed they have an entire 1:1 reserve of all customer assets and never use their exchange token, CRO, as loan collateral. Moreover, the exchange has minimal exposure to FTX of only $10M. Withdrawals are being cleared, and no sign of stoppage. These are good signs. Nevertheless, users of Crypto.com might still need to think twice if to continue using the centralised service. A couple of things to consider: the ETH withdrawals to Gate.io, the possibility of trading activity using customer deposits, and the credibility of upcoming PoR. As suggested by the CEO of Binance, CZ, the wisest decision is to use a non-custodial crypto wallet to store our crypto assets. Learning from the FTX fiasco, “our keys, our coins”, is what matters the most.