Binance Faces Allegations of Mixing Customer Funds with Company Revenue

Updated: 24 May 2023

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Cryptocurrency exchange Binance faces allegations of mixing customer funds with its revenue at a U.S. bank in 2020 and 2021.

A source with direct knowledge of company finances told Reuters about the commingling. It occurred almost daily in Binance accounts at Silvergate Bank and involved billions of dollars.

Binance Under Fire for Mixing Customer Funds with Revenue

Three former U.S. regulators cited in the Reuters’ report stated that the fund flows indicated a lack of internal controls to ensure customer funds were identifiable and segregated from company revenues. They also mentioned that the “commingling” of funds obscured the location of customer funds.

In response to the Reuters report, Binance’s Chief Communications Officer, Patrick Hillmann, criticized it as “weak” and full of “conspiracy theories.” He took to Twitter, describing the journalist’s desperation to publish a negative story but not outright denouncing the allegations made in the report.

Let me explain just how desperate a journalist @Reuters is to publish a negative story. The whole base of their story this morning, is that when users purchased BUSD (Paxos) from Binance, they were taken to a transaction page that had the term “deposit” on it. Users were making a…

— Patrick Hillmann (@PRHillmann) May 23, 2023

Hillmann further stated that Binance had addressed the issue multiple times, asserting that user and corporate funds were kept on separate ledgers. He also suggested that the news outlet would be embarrassed when the identities of their sources became public.

The alleged actions raised concerns among three former U.S. regulators who claimed that Binance had risked customer assets by obscuring their location, indicating deficiencies in the exchange’s internal controls.

Binance spokesperson Brad Jaffe denied mixing customer funds and revenue, stating that the accounts were used for user cryptocurrency purchases, not deposits. Jaffe emphasized that the funds were entirely corporate.

Binance in a statement said:

“These accounts were not used to accept user deposits; they were used to facilitate user purchases” of crypto, said spokesperson Brad Jaffe.

“There was no commingling at any time because these are 100% corporate funds.”

5/

— Kashif Raza (@simplykashif) May 23, 2023

However, Binance’s website allegedly referred to customer dollar transfers as “deposits” that could be credited to trading accounts in BUSD. The site also reportedly mentioned the ability to “withdraw” deposits in USD. Former U.S. regulators believed this language created the expectation of safeguarding funds like traditional cash deposits.

Binance Legal Battles and Regulatory Scrutiny

Binance is currently facing legal trouble in the United States. The Commodity Futures Trading Commission (CFTC), has accused the company of operating illegally in the country and violating financial laws. According to the CFTC’s complaint, Binance mixed customer and company funds, leading the agency to seek permanent trading and registration bans against the defendants, including Binance CEO Changpeng Zhao.

Binance has claimed to block U.S. users based on nationality, IP address, and mobile carrier. Additionally, the U.S. Justice Department is reportedly investigating Binance for potential violations of sanctions imposed on Russia. Binance has decided to exit the Canadian market in response to stricter cryptocurrency regulations.

FTX Also Faces Similar Allegations

A similar situation involving the commingling of funds arose with FTX, another cryptocurrency exchange founded by Sam Bankman-Fried. Bankman-Fried has denied knowingly mixing funds and has pleaded not guilty to fraud charges.

22) And, finally:

I sincerely apologize.

We'll keep sharing updates as we have them.

— SBF (@SBF_FTX) November 10, 2022

Federal prosecutors have amassed substantial evidence, including emails and Slack messages, to support their criminal case against Bankman-Fried. Last year, FTX experienced a collapse triggered by Binance initiating a bank run on the company. Although Binance initially intended to acquire FTX, they withdrew from the deal after examining FTX’s financial records.