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Regulators now directly targeting Binance and their U.S. partners and affiliates

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(Kitco News) - The SEC and the New York Department of Financial Services (NYDFS) attacked Binance by proxy with their action against Paxos, the issuer of their BUSD stablecoin earlier this week. Now, new revelations about Binance’s dealings with other U.S.-based partners and affiliates have the world’s largest cryptocurrency exchange facing direct action from regulators.

Late Thursday evening, Reuters reported that Binance maintained “secret access” to a bank account belonging to Binance.US, the American exchange that is supposed to be independent from the international entity, and transferred hundreds of millions of dollars to a trading firm managed by Binance CEO Changpeng Zhao (CZ). This raised alarm bells for many as it was similar to back-end activities between Sam Bankman-Fried’s crypto exchange FTX and hedge fund Alameda Research in substance if not in scale.

The report cited banking records and company messages which indicate that between late 2020 and March of 2021, more than $400 million was transferred from an account at California’s Silvergate Bank belonging to Binance.US to Merit Peak Ltd, a trading firm controlled by CZ.

The customer deposits of Binance.US were also held at Silvergate and with Prime Trust LLC, a custodian firm based in Nevada. Bank records show Prime Trust moved $650 million in wire transfers to the Binance.US account during Q1 2021, and it was unclear why the transfers were made or whether the money belonged to Binance.US customers.

Binance.US spokesperson Kimberly Soward issued a statement which did not address the transfers shown in the bank records, claiming that the report was based on “outdated information." Soward added that "Merit Peak is neither trading nor providing any kind of services on the Binance.US platform," and "only Binance.US employees have access" to the bank accounts in question.

Soward did not dispute the authenticity of the bank records or the specifics of the transfers themselves. Also, her characterizations of the role of Merit Peak and the access by outsiders to the accounts were present-tense only and did not address whether these things had been different during the period covered by the records.

The Binance global exchange and Prime Trust did not respond to questions about the transfers, and a spokesperson for Silvergate Bank said it is their policy not to comment on individual customers.

According to internal correspondence, Binance.US executives were worried about the transfers because they were being done without their knowledge or authorization. "Where are those funds coming from?" asked then-CEO of Binance.US Catherine Coley to Susan Li, a finance executive at the global exchange, in late 2020, adding that the transfers were "unexpected" and that "no one mentioned them."

Li did not elaborate on the nature of the transfers, saying only that Merit Peak was a "vendor that facilitated trading" and “provided loans and capital injections” to the Binance.US platform.

Neither Li, who remains at Binance, nor Coley, who left Binance.US later in 2021, responded to questions from Reuters. However, Li did appear to have control over the Binance.US account at Silvergate, as a message to Li from a Binance.US finance manager asked her to give another Binance.US employee authority to approve payments from the account.

The account access and the money transfers seem to confirm what many have long suspected: that the global Binance exchange, which is not licensed to operate in the United States, effectively controlled the finances of Binance.US. Both the Justice Department and the Securities and Exchange Commission (SEC) have ongoing investigations into “whether Binance is using the American exchange as cover for doing business in the U.S.” The SEC and Justice also declined to comment on the report.

Friday morning brought a new report from Bloomberg that Binance was considering pulling out of the U.S. market altogether amid the mounting regulatory pressure against U.S. partners Paxos and Silvergate. The report quoted an unnamed source who claimed the exchange is “looking at whether to sever ties with intermediary firms such as banks and services firms and is reassessing venture-capital investments in the US,” and is also weighing “de-listing tokens from any US-based projects'' such as Circle’s USDC stablecoin. Binance.US said it planned to continue operating in the United States.

CZ himself took to twitter later on Friday to attempt to clarify some of the assertions in the reports, but like the Binance.US spokesperson, he did not dispute their substance as he has with other reports in the past.

The steady stream of regulatory actions and bombshell revelations have taken their toll on the world’s largest crypto exchange. Binance’s global platform has seen $1.9 billion in net outflows according to blockchain research firm Nansen, while the action against stablecoin issuer Paxos over their relationship with the exchange has led to $2.3 billion in redemptions of BUSD this week.

BUSD now has $13.5 billion in market cap, compared to nearly $42 billion for main rival USDC, while Tether’s leading USDT took advantage of the BUSD exodus to break through to $70 billion late this week.

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