On May 23, Binance, the world’s largest cryptocurrency exchange, was accused by former employees of mixing customer funds with company revenues, in violation of US financial regulations.
According to a Reuters report, three sources familiar with the matter revealed that Binance had been mixing billions of dollars almost daily in accounts held at the US bank Silvergate, which declined to comment on the issue.
Reuters found no evidence that Binance had “lost or taken customer funds.” However, bank records accessed by the portal did show that Binance mixed $20 million from a corporate account with $15 million from an account used to receive customer money.
“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’s Fund Mixing Raises Concerns Among Regulators
The mixing of funds has raised concerns about the exchange’s lack of internal controls and the risk it poses to customer assets, according to former regulators and employees of the Securities and Exchange Commission (SEC).
For instance, John Reed Stark, former head of the SEC’s Internet Enforcement Office, said that Binance customers should not need a forensic accountant to know where their assets were located.
Meanwhile, Gary Gensler, chairman of the SEC, pointed out that many exchanges are not complying with US regulations to protect customer funds by keeping them separate from corporate assets. This was one of the issues that caused the downfall of FTX, one of the largest cryptocurrency exchanges, as its former CEO, Sam Bankman-Fried, allegedly manipulated customer funds at will.
As a result, US regulators have taken a strict stance against exchanges, causing some to be forced to leave the country.
Binance Denies Mixing Customer Funds with Company Funds
Binance denied mixing customer funds with company funds and stated that customer dollar deposits were considered purchases of a dollar-linked cryptocurrency, BUSD. However, this contradicts Binance’s previous claims that the transferred funds were deposits and could be withdrawn as dollars.
Brad Jaffe, a spokesperson for Binance, told Reuters that there was no mixing of customer funds at any time and that the money held in the company’s bank accounts was “100% corporate funds” used to “facilitate user purchases.”
Due to this, regulators have warned that mixing customer funds with company revenues can lead to significant losses for customers and make supervision and regulatory compliance of the exchange more challenging.
On the other hand, Changpeng Zhao, CEO of Binance, denied the accusations and expressed his disappointment with the regulators’ stance against him and the exchange. Binance is also under investigation for alleged money laundering and sanctions violations.