Binance commingled customer cash, corporate revenue, Reuters says

Getting your Trinity Audio player ready...

Binance routinely commingled customer funds with operating capital, according to the latest report on alleged malfeasance at the world’s largest digital asset exchange.

On Tuesday, Reuters issued the latest in its series of investigative reports into Binance’s often questionable business practices. The report claims that Binance violated U.S. financial rules regarding the strict church-state separation of customer funds from company revenue in 2020 and 2021.

According to one of Reuters’ three sources, this commingling occurred “almost daily” at accounts Binance held at the since-collapsed crypto-friendly Silvergate Bank in California. The extent of the commingling allegedly “ran into billions of dollars.”

Reuters couldn’t verify those figures but did see a Silvergate record from February 2021 that showed Binance mixing $20 million from a corporate account with a separate account containing $15 million in customer funds.

Binance told Reuters that the accounts in the report “were not used to accept user deposits; they were used to facilitate user purchases” of BUSD, the Binance-branded stablecoin that was a partnership with Paxos Trust.

However, Reuters included a screenshot of a ‘Bank Deposit via Silvergate’ in which customers were told they could “deposit and withdraw funds (USD)” via their local bank accounts. Deposits would be “credited with BUSD at a 1:1 ratio.” (In February, New York regulators ordered Paxos to halt minting new BUSD due to concerns over Binance issuing its own version of BUSD that wasn’t backed 1:1 with U.S. dollars.)

Binance spokesperson Brad Jaffe told Reuters that “there was no commingling at any time because these are 100% corporate funds.” But in order to fulfill withdrawal requests, some of these BUSD would need to be converted back to U.S. dollars, which we guess under Binance terminology would make these ‘user sales’ rather than withdrawals.

Asked whether Binance had informed customers that their dollar deposits were actually purchases, the company said only that “the term ‘deposit’ is a communication term, it’s not an indication of the technical treatment of the funds.”

John Reed Stark, a former director of the U.S. Securities and Exchange Commission (SEC) Office of Internet Enforcement, told Reuters that U.S. regulations require financial entities such as Binance to make representations to customers that are “crystal clear at all times” regarding the safeguarding of customer funds. Stark added that Binance customers shouldn’t “need a forensic accountant to find where their money is.”

Reuters clarified that it had no evidence indicating any Binance customers suffered losses due to the exchange’s commingling activities.

Bank rubbery

Reuters detailed how Binance’s revenues went into a Silvergate account controlled by a Cayman Islands firm, Binance Holdings. Customer funds went into a Silvergate account belonging to the Seychelles-registered Key Vision Development. Binance founder Changpeng ‘CZ’ Zhao is a Key Vision director and CEO/founder of Binance Holdings.

Reuters states that a source with “direct knowledge” of the Key Vision account at Silvergate said its purpose was to “receive dollar deposits from non-U.S. customers.” Jaffe called this claim ‘inaccurate’ without offering specifics.

A third Silvergate account belonging to Merit Peak—yet another Zhao-controlled Cayman firm—contained both customer and corporate funds, which were used to purchase at least $18 billion in BUSD over a two-year span ending in December 2021.

The former regulators that Reuters spoke with claimed Binance may have transferred funds between these accounts and converted them to digital assets as a means of masking activity from tax authorities. CZ also previously stated his aversion to keeping cash in bank accounts where it could be seized or frozen by authorities. Reuters cited a source who claimed CZ instructed his underlings to keep Silvergate account balances as low as possible for this very reason.

In February, Reuters reported on Binance’s relationship with Silvergate, including the fact that Key Vision was the ultimate recipient of millions of dollars that were transferred out of Silvergate accounts ostensibly controlled by Binance.US, the U.S. facing entity that feigned independence from the internationally-focused Binance.com (which continued to deal with U.S. customers even after claiming to have left the market).

This independence was exposed as a lie via early-2021 emails in which Catherine Coley, the then-CEO of Binance.US, reached out to Binance.com execs expressing confusion over who’d authorized the transfers out of the Binance.US Silvergate account.

When Silvergate chose to shut Binance’s Key Vision account in mid-2021, Binance transferred those account operations to New York’s Signature Bank. Before following Silvergate into insolvency, Signature also choked off Key Vision’s flow of funds. Shortly thereafter, Binance halted U.S. dollar bank transfers.

Improper commingling of funds was among the accusations leveled against Binance in March by the U.S. Commodity Futures Trading Commission (CFTC). The CFTC singled out Binance Holdings as one of the firms involved in this alleged commingling.

Off to the races

Following the release of Reuters’ latest report, Binance’s chief strategy officer (aka head of PR) Patrick Hillmann took to Twitter to acknowledge (without offering specifics) that Binance “had regulatory shortcomings in the past.” But Hillman swiftly went on the attack by accusing Reuters of being “desperate … to publish a negative story.”

Hillmann claimed Reuters had “pinned 1000 words of conspiracy theories (which we explained were false) with zero evidence other than a ‘former insider.’” (Several insiders, actually, but who’s counting?) Hillmann went on to claim that Binance “know who their sources are and @Reuters will be embarrassed when it becomes public.”

Austin Federa, head of strategy at the troubled Solana blockchain project, challenged Hillmann on why his response “doesn’t actually say anywhere that ‘Binance does not commingle user and company funds.’” Hillmann offered a non-denial denial, saying Binance had “addressed this on multiple occasions” and that there was a “declining [return on investment] on responding to these types of tabloid stories.”

Hillmann also deployed Binance’s increasingly popular deflection strategy of trying to claim that “consistently mentioning” the fact that CZ was born in China was an example of the media’s “xenophobia” and “about as subtle as a hammer wrapped in a pillowcase.”

In truth, Tuesday’s report cites two Binance senior execs as being either “China-born” (head of fiat operations Helen Hai) or “Chinese-born” (head of back office Guangying Chen), but makes no mention whatsoever of CZ’s origins.

What’s more, over the past week or so Reuters has referred to Rolf Harris as “Australian-born,” filmmaker Jessica Hausner as “Vienna-born,” imprisoned Russian activist Mikhail Krieger as “Ukrainian-born” and Italy’s World Cup hopeful Dino Lamb as “English-born.” Typical Reuters, those racist German-born bastards!

Know your criminal

Meanwhile, Tuesday also saw Binance linked to several digital wallets belonging to Kim Sang Man, a North Korean national currently based in Vladivostok, Russia. The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) claims that Kim is involved in “obfuscated revenue generation and malicious cyber activities” that benefit the North Korean government.

OFAC says North Korea’s cyber criminals are engaged in “continued efforts to steal money from financial institutions, virtual currency exchanges, companies, and private individuals around the world.” The pilfered funds are used “to support the regime’s priorities, including its unlawful weapons of mass destruction (WMD) and ballistic missile programs.”

Kim is specifically accused of having “received cryptocurrency funds transfers from IT teams located in China and Russia that were valued at more than $2 million USD.” OFAC identified multiple digital wallets containing BTC, ETH and Tether’s USDT tokens believed to be under Kim’s control and hosted by Binance (though not under the exchange’s control).

The wallets don’t appear to have been used recently, suggesting that Kim’s digital trail has gone cold. Speaking at last month’s CoinDesk Consensus 2023 event, Binance’s head of financial crime compliance Tigran Gambaryan claimed that the exchange had “kicked [North Koreans’] ass enough that they’re actually able to recognize that Binance was not the place for them.”

Careful, Tigran. That could be interpreted as racist exclusionary rhetoric. Why not focus on kicking all criminals’ asses? Maybe start with your boss?

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.