As a seasoned crypto investor with over a decade of experience in traditional finance, I must say that this incident involving FalconX and Binance is nothing short of baffling. The fact that a brokerage firm, whose primary job is to keep track of assets, failed to do so for years is simply unacceptable.

As an analyst, I’m responsible for managing assets on behalf of our clients, ensuring meticulous record-keeping of ownership details.

There appears to be some confusion regarding how FalconX managed their cryptocurrency holdings, and it seems that Binance has been struggling to account for funds over an extended period. This state of affairs brings up concerns about the robustness of their accounting procedures and internal controls.

‘Reconciliation anomaly’

Upon inquiry from CoinDesk, FalconX admitted to an inconsistency in their Solana token data. After investigating their records across all trading platforms, clients, and associates, they found no trace of the reported transaction, as stated by a representative from FalconX.

When reached out to by CoinDesk, Binance stated that their customers were always safe from financial loss due to the given circumstances. Binance would have covered the loss on its own if the missing 1.35 million tokens hadn’t been recovered.

In general usage: Prime brokerage companies such as FalconX usually make money by employing the assets they manage, either using them as security, loaning them out, or taking advantage of arbitrage chances. However, in this specific instance, the assets were kept securely, according to a FalconX representative.

Shortly following queries from CoinDesk regarding misplaced Solana tokens, the involved firms issued a unified statement, confirming that these assets were returned to Binance and that the issue has been completely resolved.

“Binance and FalconX continue to operate business as usual,” the firms said in an email.

‘Weaker control environment’

In traditional finance as well, there can be puzzling cases of unresolved transactions and balances left unexplained. However, the decentralized nature of cryptocurrency may make it more susceptible to situations where assets remain unclaimed for extended periods, during which their value significantly increases. It’s important to note that the world of crypto is a relatively new field in finance, built upon rapidly developing technology, and characterized by highly volatile digital assets.

As a researcher delving into the realm of cryptocurrencies, I can attest that the less regulated aspects of this relatively new landscape are still maturing and present challenges in terms of control environments. In essence, these areas lack robust systems to ensure reconciliation, as pointed out by Peter Brewin, a partner at PwC Hong Kong who specializes in digital assets, Web3, and the metaverse with a focus on taxation and regulation.

Established in 2018 and currently valued at $8 billion, FalconX provides institutional clients with a platform to oversee their portfolios and link to multiple cryptocurrency exchanges, custodians, market makers, and proprietary trading firms. On a monthly basis, this brokerage manages more than 100 million transactions, utilizing a sophisticated network of omnibus and sub-accounts.

Recently, Binance took steps to shut down a fee loophole exploited by high-end brokerages, stating that there was insufficient clarity in how these brokerages arrange their client’s accounts, leading to potential issues with transparency.

Following the downfall of FTX, crypto trading companies are prioritizing the secure separation of essential operations, a fact highlighted by Anatoly Crachilov, CEO and co-founder of Nickel Digital Asset Management.

In a recent email, Crachilov stated that trading platforms, which operate through matching engines, don’t possess assets themselves. Instead, custodians are responsible for securely holding clients’ assets. Lastly, the market value of these assets is verified and reported by an independent fund administrator.