As the world’s largest cryptocurrency exchange, Binance has found itself at the center of a swirling controversy. Reports suggest that the company commingled customer funds with its own revenue in 2020 and 2021, putting it in breach of U.S. financial rules.
The allegations detail that Binance’s financial operations were deeply intertwined with Silvergate Bank, a U.S. lender that recently collapsed. The bank handled customer funds from a company called Key Vision Development, based in Seychelles and controlled by Binance CEO Changpeng Zhao (CZ). Furthermore, another account belonging to a Zhao-controlled Cayman firm reportedly saw a mix of customer money and company revenues, with funds from this account being converted into Binance’s dollar-linked token, BUSD.
However, Binance has staunchly denied these allegations, with spokesperson Brad Jaffe arguing that the accounts in question were not used to accept user deposits, but to facilitate user purchases of crypto. According to Jaffe, there was no commingling of funds because these accounts contained only corporate funds.
The company has countered that the process of users sending money to the account was akin to buying a product from Amazon, rather than depositing funds. They argue that customers were buying the exchange’s bespoke dollar-linked crypto-token, BUSD, a process they claim is “exactly the same thing as buying a product from Amazon”.
Nevertheless, former U.S. regulators dispute Binance’s explanation, suggesting that the company’s own previous statements to customers contradict this stance. Binance’s website had informed customers that their dollar transfers were “deposits” and would be “credited” to their trading accounts in BUSD form, leading customers to believe their funds would be safeguarded like traditional cash deposits.
The commingling of customer and corporate funds is a worrying trend in the financial industry, as it can lead to heavy losses for clients. This was demonstrated in the case of the collapsed FTX crypto exchange, where the founder was alleged to have commingled client funds to finance various investments, highlighting the possible risks associated with such practices.
In the wake of these allegations, CZ sought to reassure Binance’s customers about the exchange’s liquidity. He emphasized that all customer assets on the platform are backed one-to-one, either in hard or cold-storage wallets, and that people could withdraw 100% of their assets from Binance at any time.
However, the crypto world remains skeptical, especially after the collapse of FTX and its ensuing criminal probe. CZ’s statements on Twitter downplaying concerns of heavy outflows from Binance as “business as usual” did little to assuage these concerns.
The Binance case exposes the fragile and volatile nature of the crypto world. As former SEC official John Reed Stark said, “These representations have to be crystal clear at all times”. But as Binance’s tale unfolds, it’s becoming clear that the clarity the crypto industry needs might be harder to achieve than it seems.
