Binance Pauses Bitcoin Withdrawals Amid Crypto Freefall

Binance's CEO assures investors their funds are safe.

Crypto prices were in turmoil this morning after disappointing inflation news and a Celsius halt on withdrawals severely knocked the market. At one point, Bitcoin (BTC) slipped below $23,000 according to CoinGecko data -- falling over 18% in 24 hours. In the midst of extraordinary market chaos came a tweet from Binance CEO, Changpeng Zhao, aka CZ, saying the crypto exchange had paused Bitcoin withdrawals.

"Temporary pause of $BTC withdrawals on #Binance due to a stuck transaction causing a backlog," he said. "Should be fixed in ~30 minutes." Zhao later updated customers tweeting, "Likely this is going to take a bit longer to fix than my initial estimate. More updates soon. Thanks for your patience and understanding."

'Funds are SAFU'

Zhao assured customers "Funds are SAFU" -- using a phrase coined by Binance several years ago. SAFU refers to the Secure Asset Fund for Users, a billion-dollar fund that's there to safeguard users' money. Crypto investors love a bit of lingo, so SAFU became another word for customer protection.

Zhao also pointed out that the pause on Bitcoin withdrawals was only affecting the Bitcoin network. "You can still withdraw Bitcoin on other networks like BEP-20," he said. BEP-20 is the utility token on Binance's own smart chain network. Given that Binance's issues come on the same day that Celsius has paused all withdrawals from its platform, this reassurance was crucial.

At time of writing, Bitcoin withdrawals had been reinstated. The pause lasted for three hours. and Binance published a detailed post-mortem explaining what had caused the issue.

What it means for crypto investors

Binance's issues today are a reminder of the risks of leaving assets in custodial wallets on crypto platforms. Cryptocurrency markets are highly volatile and things can change very quickly. Here at The Ascent, we advocate long-term investing rather than short-term trading, but even so, it can be frustrating to find your transactions are blocked at a crucial moment.

Centralized platforms often suffer outages during extreme market conditions, and there is always a risk you won't be able to move your funds when you want to. For example, Binance also halted Tera (LUNA) withdrawals in the early stages of the platform's collapse due to a high volume of pending transactions.

Another issue for crypto investors to consider is what may happen to their assets if their crypto exchange goes bankrupt. Coinbase caused a stir when it announced that users' assets could be at risk in the event of bankruptcy. Unlike funds in your bank account, crypto assets are not protected by FDIC insurance. Given that there is a chance some platforms will fail at some point in the future, it's worth knowing whether a platform failure could leave you high and dry.

In contrast, Zhao has assured Binance customers verbally that their funds were kept separate from operational money. According to the CEO, this means users would be refunded before any shareholders or other creditors. However, this is not mentioned in Binance's terms and conditions, and it would be nice to see more transparency.

Bottom line

If investors want complete control over their crypto assets, a non-custodial crypto wallet is the way to go. Custodial wallets mean your digital assets stay on the exchange and there may be technical or legal blocks that stop you accessing your funds. One example of this is how Binance users in the U.K. were temporarily prevented from depositing or withdrawing pounds from their accounts due to regulatory issues last year.

There are advantages and disadvantages to both types of crypto wallet. Billions of dollars are stuck in inaccessible crypto wallets because people lost the passwords to their custodial crypto wallets. This is less of an issue with a custodial wallet. On the other hand, a non-custodial wallet frees you from the types of technical or regulatory issues that could restrict your activity.