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(Kitco News) -
Binance, the world’s largest cryptocurrency exchange, commingled the customer and company funds in their U.S. bank accounts from 2020 to 2021 in violation of U.S. law, according to a Reuters report published Tuesday.
The report cited three sources with first-hand knowledge of the exchange’s operations as well as bank records and other documents to back up the allegations. One source with direct knowledge of the exchange’s internal finances said the sums “ran into billions of dollars and commingling happened almost daily.”
The mixing of funds was allegedly done through Binance’s accounts at Silvergate Bank, the U.S.-based lender which imploded in March, sparking the ongoing banking crisis and renewed fears that crypto losses could jeopardize the broader financial industry.
Reuters cited bank and company records from 2019-2021 as well as “interviews with former insiders” which showed that Binance used Silvergate as “the lynchpin of its financial operations.” One bank record showed that on Feb. 10, 2021, “Binance mixed $20 million from a corporate account with $15 million from an account that received customer money.”
According to the inside sources and bank records, the exchange’s Cayman Islands holding firm, Binance Holdings, maintained one Silvergate account for dollar-denominated company revenue, while U.S. dollars from customers went into another Silvergate account of Seychelles-based Key Vision Development which was “controlled by Binance CEO Changpeng Zhao.”
The report claimed Binance told Silvergate that “the Key Vision account’s purpose was to receive dollar deposits from non-U.S. customers.” According to the sources and bank records, “Binance mixed customer money and company revenues in a third Silvergate account, belonging to a Zhao-controlled Cayman firm.” The exchange then converted the money in this third account into BUSD, Binance’s branded U.S. dollar stablecoin.
BUSD was itself the focus of a major enforcement action in February when Paxos Trust revealed they were ordered by the New York Department of Financial Services (NYDFS) to stop minting the stablecoin for Binance. The order came following an investigation by the NYDFS and the SEC that lasted through the November collapse of number-two exchange FTX and the ascendance of Binance to a near-monopolistic position in the global crypto market.
When news of the Paxos decision broke, CZ attempted to distance himself from the issuer and minimize Binance’s involvement with the BUSD token. “Paxos is regulated by NYDFS. BUSD is a stablecoin wholly owned and managed by Paxos,” he wrote, adding that “The lawsuit is between the US SEC & Paxos.”
But the wording of the NYDFS statement on their enforcement action suggested that U.S. regulators saw Binance and not Paxos as the bad actor. The NYDFS cited “several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.”
The regulator explained that while they “authorized Paxos to issue BUSD on the Ethereum blockchain,” they did not authorize “Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.” This directly contradicted CZ’s assertion that Paxos is solely responsible for all BUSD.
Binance mints billions in ‘Binance-peg’ or ‘B-Tokens,’ which are its own versions of third-party coins like Bitcoin, Ether, USDC and USDT, and it deploys them on its own BNB Smart Chain. But Binance has acknowledged that they have failed to maintain 1:1 collateral for these B-tokens, with a Bloomberg source claiming that “on one occasion, Binance only had $100 million in stored collateral to support $1.7 billion in Binance-peg USDC.”
Reuters cited multiple former U.S. regulators who said that moving money between the various Silvergate accounts and into their own stablecoin “could have enabled Binance to shield funds from tax authorities in countries where it operates.” The former regulators said “the commingling of these funds put client assets at risk by obscuring their whereabouts.”
Reuters also cited a statement from Binance in which the exchange denied mingling customer and company funds. “These accounts were not used to accept user deposits; they were used to facilitate user purchases” of crypto, said Binance spokesperson Brad Jaffe. “There was no commingling at any time because these are 100% corporate funds.”
Jaffe claimed that when users sent money to the account, they were not depositing funds but buying the exchange’s B-Token, BUSD, which was “exactly the same thing as buying a product from Amazon.”
But the former U.S. regulators told Reuters that Jaffe’s claims were undermined by the exchange’s own documentation. “From late 2020 and throughout 2021, Binance’s website told customers their dollar transfers were ‘deposits’ that would be ‘credited’ to their trading accounts in the form of BUSD,” the report said. “Customers were told they could ‘withdraw’ their deposits as dollars,” creating the expectation that “clients’ funds would be safeguarded in the same way as traditional cash deposits.”
