According to a recent report by Reuters, Binance (the largest cryptocurrency exchange in the world) has allegedly mixed customer funds with company revenue, thereby violating the US financial rules that require customer money to be kept separate. The commingling of funds occurred almost daily in accounts held by the exchange at Silvergate Bank and the sum involved ran into billions of dollars. Though Reuters couldn’t confirm the figures or frequency, the news agency reviewed a bank record that showed Binance mixing $20 million from a corporate account with $15 million from an account that received customer money on Feb 10, 2021.
Doubts Over Binance’s Trustworthiness
Customers’ funds were mixed with company revenue, raising transparency concerns and highlighting a potential lack of internal controls. Commingling of these funds jeopardized customer assets by obscuring their whereabouts. Three former US regulators have expressed concerns over this situation, one of them being John Reed Stark, the former chief of the Securities and Exchange Commission’s Office of Internet Enforcement. In his words, Binance customers shouldn’t require a forensic accountant to find where their money is. It’s important to note that there is no evidence of Binance losing or taking client monies. Nonetheless, the commingling of funds could still create unease among customers concerned about the safety and security of their assets.
It’s worth noting that several crypto exchanges, including Binance, that offer securities to US customers aren’t complying with the law requiring registered broker-dealers to safeguard client money by separating it from corporate assets. Gary Gensler, SEC chair, has previously noted this compliance problem.
Binance has faced allegations of allowing U.S. customers to trade on its platform from 2019 to this year, despite publicly claiming to restrict access to US residents. In March, the Commodity Futures Trading Commission (CFTC) accused the exchange of allowing U.S. customers to trade in derivatives without registering with the agency. Binance responded that it bars US users from its platform.
Binance’s Response to the Allegations
Binance spokesperson Brad Jaffe denied the allegations, stating that the accounts in question were not used to accept user deposits, but rather to facilitate user purchases of the exchange’s bespoke dollar-linked crypto-token, BUSD. However, former US regulators have disputed this explanation, arguing that it contradicted Binance’s previous representations to customers regarding the transfers, which were labeled as deposits. From late 2020 to 2021, Binance’s website told customers that their dollar transfers were “deposits” that will be “credited” to their trading accounts in BUSD. Customers were also informed that they could “withdraw” their deposits as dollars. The former regulators believe that these representations created the expectation that clients’ funds would be safeguarded like traditional cash deposits.
It remains to be seen how Binance will respond to these allegations of commingling customer and company funds. According to Reuters, the former regulators argue that the exchange’s explanation is insufficient, and the representations made to customers created an expectation that their funds would be safeguarded, similar to traditional cash deposits.
Featured image from iStock, chart from TradingView.com
