The commingling of these funds put client assets at risk by obscuring their whereabouts.

(May 23): 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 Reuters.

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 couldn’t independently verify the figures or the frequency. But the news agency reviewed a bank record showing that on Feb. 10, 2021, Binance mixed US$20 million (RM91.4 billion) from a corporate account with US$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. They 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 Securities and Exchange Commission’s Office of Internet Enforcement.

Reuters found no evidence that Binance client monies were lost or taken.

SEC chair Gary Gensler has said that many crypto exchanges offering securities to US customers are not complying with laws requiring registered broker-dealers to safeguard client money by separating it from corporate assets. “Their business models tend to be built on taking customer funds, commingling it,” he told an event in May. The SEC has this year launched a crackdown on a string of crypto firms, but has not targeted Binance with any direct enforcement action.

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 alleged in a complaint against the exchange in March. Binance responded in a blog that it blocks US users.

In a statement to Reuters, Binance denied mixing customer deposits and company funds. “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.” When users sent money to the account, he said, they were not depositing funds but buying the exchange’s bespoke dollar-linked crypto-token, BUSD. This process was “exactly the same thing as buying a product from Amazon,” Jaffe said.

The former US regulators told Reuters that Binance’s explanation was undermined by the exchange’s own previous representations to customers that the transfers were deposits. From late 2020 and throughout 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 were told they could “withdraw” their deposits as dollars. These representations created the expectation that clients’ funds would be safeguarded in the same way as traditional cash deposits, the former regulators said.

“These representations have to be crystal clear at all times,” said Stark, the former SEC official.

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.”

The commingling of customer and corporate funds can be a precursor to heavy losses for clients of financial firms. In December, the SEC and CFTC alleged that the founder of the collapsed FTX crypto exchange, Sam Bankman-Fried, for years had commingled client funds at his trading firm and used the monies to finance venture capital investments, political donations and real estate purchases. Bankman-Fried has pleaded not guilty to fraud charges and said he did not knowingly commingle any funds.

Binance’s banker

Bank and company records for 2019-2021, seen by Reuters, and interviews with former insiders show that Binance used Silvergate Bank, the US lender that collapsed in March, as the lynchpin of its financial operations. Silvergate, which is in the process of winding down operations, did not comment for this article.

Company revenues entered the Silvergate account of the exchange’s Cayman Islands holding firm, Binance Holdings, according to the sources and bank records. Customer dollars flowed into the Silvergate account of a firm in the Seychelles called Key Vision Development that was controlled by Binance CEO Changpeng Zhao.

One of the sources and a fourth person with direct knowledge of this account said Binance told Silvergate the Key Vision account’s purpose was to receive dollar deposits from non-US customers. Jaffe, the Binance spokesperson, said this was inaccurate, without providing further details.

According to the sources and the February 2021 bank record seen by Reuters, Binance mixed customer money and company revenues in a third Silvergate account, belonging to a Zhao-controlled Cayman firm. Binance converted money from this third account into the dollar-linked token BUSD, according to the person with knowledge of Binance’s group finances and company messages. Blockchain records show Binance bought at least US$18 billion of BUSD between January 2020 and December 2021.

The former regulators told Reuters that moving money between accounts and into crypto could have enabled Binance to shield funds from tax authorities in countries where it operates. The person with group-level knowledge of Binance said there was also another motivation: Zhao distrusted banks, once telling an interviewer of his concern that they could freeze his company’s accounts. So Binance turned cash into crypto, commingling customer funds and revenues in the process.

The new insights into Binance’s financial operations come as the company is facing civil charges from the CFTC of willful evasion of US commodities laws by “intentionally structuring entities and transactions” to avoid US regulations. The CFTC also alleged, without elaborating, that some of Binance’s corporate entities, including the Cayman holding firm, “have commingled funds.” Zhao called the charges “disappointing” and an “incomplete recitation of facts.” Binance is also under investigation by the Justice Department for suspected money laundering and sanctions violations, according to people familiar with the probe.

The CFTC declined to comment for this article, citing pending litigation, as did the SEC. The DOJ had no comment.

Binance has grown into a juggernaut in recent years, accounting for as much as 70% of world trading in cryptocurrencies. The company initially did business solely in crypto, enabling it to avoid the global banking system. But as Binance attracted more customers and hired more employees, its need for conventional bank accounts grew — to deposit the dollars it received from clients, to pay wages and other expenses, and to finance investments.

Silvergate, which specialised in serving the crypto industry, made this possible — until early March of this year, when the bank announced its closure after customers pulled deposits amid a wave of turmoil. The same month, New York’s chief financial regulator took over another crypto-friendly bank, Signature Bank, where Binance was also a client.

As a US crackdown on the crypto sector gathers pace, it is unclear which bank will become the next lynchpin of Binance’s operations. Zhao has said on Twitter he was looking for new banking partners. “When one door closes, other ones open,” he wrote on March 27. Reuters couldn’t determine who now acts as Binance’s lead banker.

An intricate web

Five months after launching the exchange in Shanghai in July 2017, Zhao told news outlet Tech in Asia that Binance had no banking partners because customers were depositing funds solely in crypto. “The more you deal with fiat, the more (authorities) can control you,” Zhao said, in reference to traditional currencies. He used his personal credit card to settle company bills, former employees said.

But the situation changed in 2018 when Binance sought to launch several local exchanges where customers could buy crypto with traditional currencies. Zhao dispatched his deputies to find banks and payment firms willing to accept Binance as a client.