Reuters claims Binance mixed customers' money with company funds

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A new report from Reuters details how Binance, the largest cryptocurrency exchange in the world, violated U.S. financial regulations by mixing consumer money with company revenue in the years 2020 and 2021.

A bank document examined by the news organization revealed that on February 10, 2021, Binance combined $15 million from a customer-funded account with $20 million from a company account.

According to three former U.S. regulators, the money transfers at Binance outlined by Reuters show a lack of internal controls to guarantee that user cash were readily identified and segregated from business income. They claimed that by hiding the whereabouts of client assets, the mixing of these funds put client assets at danger. Customers of Binance shouldn’t “need a forensic accountant to find where their money is,” according to John Reed Stark, a former director of the Securities and Exchange Commission’s Office of Internet Enforcement.

Targeted by the SEC

We previously reported that the Securities and Exchange Commission (SEC) has targeted several exchanges operating in the United States for operating in violation of the security laws.

Gary Gensler, the chairman of the SEC, made the claim that many cryptocurrency exchanges that provide securities to consumers in the United States are in violation of regulations requiring licensed broker-dealers to protect client funds by segregating them from business assets. He stated at an event in May that “their business models tend to be built on taking customer funds and commingling it.” The SEC has initiated a crackdown on a number of cryptocurrency companies this year. Even though it has not specifically targeted Binance (the CFTC did), it has sued Changpeng Zhao, its founder and CEO.

According to three former U.S. regulators, the money transfers at Binance outlined by Reuters show a lack of internal controls to guarantee that user cash were readily identified and segregated from business income. They claimed that by hiding the whereabouts of client assets, the mixing of these funds put client assets at danger. John Reed Stark, a former director of the Securities and Exchange Commission’s Office of Internet Enforcement, said that:

Customers of Binance shouldn’t need a forensic accountant to find where their money is.

Financial company customers may suffer significant losses as a result of the mixing of consumer and business cash. The founder of the defunct FTX cryptocurrency exchange, Sam Bankman-Fried, was accused by the SEC and CFTC in December of having for years mixed customer money at his trading business and used those assets to pay real estate acquisitions, political contributions, and venture capital investments. Bankman-Fried has asserted that he did not intentionally mix any monies and has entered a not guilty plea to the accusation of fraud

However, Reuters is quick to add that, despite these findings, there was no indication that Binance customer funds were anytime lost or stolen.

Silvergate Bank Connection

The Reuters investigation revealed that company earnings were transferred to Binance Holdings, the exchange’s Cayman Islands holding company. Customer funds poured into the Silvergate account of Key Vision Development, a Seychelles-based company that Changpeng Zhao owned.

The sources claim that Binance combined client funds and business profits in a third Silvergate account that belonged to a Zhao-controlled Cayman entity in February 2021. According to the source with knowledge of Binance’s group finances and corporate messaging, Binance transferred money from this third account into the dollar-linked cryptocurrency BUSD. Blockchain data reveals that between January 2020 and December 2021, Binance purchased at least $18 billion in BUSD.

Regulators claimed that Binance may have been able to hide funds from tax authorities in the nations where it does business by shifting money between accounts and into cryptocurrencies. The CFTC has filed civil accusations against Binance for allegedly willfully evading U.S. commodities rules by “intentionally structuring entities and transactions” to do so.

Last month, it has emailed its Canadian customers to announce its decision to withdraw from the Canadian market as well, due to new stringent government regulation that would make conducting its business there unfeasible.

Binance denies Reuters’ claims

Binance has denied most of the claims made against it. The corporation asserted that the research relied on anonymous sources and lacked concrete proof despite acknowledging certain prior regulatory failings.

The spokesman for Binance, Brad Jaffe, angrily refuted these claims, making it clear that the Silvergate Bank accounts were only ever used to make it easier for consumers to buy cryptocurrency, never as a place to deposit money.

Jaffe insisted,

There was no mixing at any point since these are 100% corporate funds.

Chief Strategy Officer Patrick Hillmann took to Twitter to discredit the report:

We’ve addressed this on multiple occasions. We keep our user and corporate funds on completely separate ledgers. There is declining ROI on responding to these types of tabloid stories. We know who their sources are and @Reuters will be embarrassed when it becomes public.

— Patrick Hillmann (@PRHillmann) May 23, 2023