The world’s largest cryptocurrency exchange, Binance, commingled customer funds with company revenue in 2020 and 2021, in breach of US financial rules that require customer money to be kept separate, three sources familiar with the matter told Angus Berwick and Tom Wilson of Reuters.
Photo Insert: Binance's commingling of these funds put client assets at risk by obscuring their whereabouts.
One of the sources, a person with direct knowledge of Binance’s group finances, said the sums ran into billions of dollars and commingling happened almost daily in accounts the exchange held at US lender Silvergate Bank.
Reuters reviewed a bank record showing that on Feb. 10, 2021, Binance mixed $20 million from a corporate account with $15 million from an account that received customer money.
The money flows at Binance described by Reuters indicate a lack of internal controls to ensure customer funds were clearly identifiable and segregated from company revenues, three former US regulators said.
The commingling of these funds put client assets at risk by obscuring their whereabouts.
Binance customers shouldn’t “need a forensic accountant to find where their money is,” said John Reed Stark, a former chief of the Office of Internet Enforcement at the Securities and Exchange Commission (SEC.) Current SEC chief Gary Gensler said crypto exchanges offering securities to US customers are not complying with laws requiring registered broker-dealers to safeguard client money by separating it from other assets.
“Their business models tend to be built on taking customer funds, commingling it,” he said in May.
The SEC has this year launched a crackdown on a string of crypto firms. Binance allowed US customers to trade on its platform from 2019 to this year despite publicly claiming to restrict access to Americans, the US Commodity Futures Trading Commission (CFTC) said in a complaint against Binance in March.
The former US regulators said Binance’s argument was shattered by representations to customers that the transfers were deposits. From late 2020 to 2021, Binance’s website told customers their dollar transfers were “deposits” that would be “credited” to their trading accounts in the form of BUSD.
Customers could withdraw their deposits as dollars. These created the belief that funds would be safeguarded like traditional cash deposits, the former regulators said. Reuters asked Binance if it ever told users that it considered their dollar deposits as constituting “purchases.”
Binance did not provide any evidence of this, and said “The term ‘deposit’ is a communication term, it’s not an indication of the technical treatment of the funds.”