Binance accused of mixing customers’ funds with revenue; is all well at the world’s largest exchange?

Temitope Akintade
Binance CEO Changpeng Zhao (CZ) resigns, expected to plead guilty to criminal charge 

The founder and CEO of the largest crypto exchange in the world by trading volume, Binance, Changpeng Zhao, known as CZ, is always echoing, “Funds are safe with us (SAFU)”, but a series of recent developments might prove otherwise. 

After experiencing a difficult time with regulatory authorities in the United States and elsewhere, the latest phase of upheaval for Binance is an accusation that the crypto firm mixed customers’ funds it always claimed to be ‘safe with us’ with company revenue between 2020 and 2021.

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“We are open to collaborating with policymakers to foster crypto adoption in Nigeria” -Binance Government Affairs Lead, Tola Odeyemi 

According to Reuters on Tuesday, citing “three sources familiar with the matter”, The exchange mismanaged customers’ funds and commingled them with the company’s revenue. The legacy news outlet said the act violates the US financial laws that require both funds to be separated.

Commingling funds is when a company mixes customer funds with personal funds, preventing the proper tracking of client money in case of unexpected loss or other instances. 

Binance + FTX

This has recently been an issue with regulators, with one of the biggest instances being FTX co-founder Sam Bankman-Fried allegedly commingling customers’ funds with his hedge fund arm’s operations.

More details on the Reuters report 

Citing a former insider at Binance, Reuters reported that between 2020 and 2021, the crypto exchange commingled customer funds with company revenue.

A person with direct knowledge of the issue reportedly told the news outlet that the commingling occurred virtually daily, with the total figures running into billions of dollars. The funds were mixed in the crypto exchange accounts held at Silvergate, a U.S.-based bank.

Although Reuters wasn’t able to independently verify the figures or the frequency of commingling revealed by the former insiders, it reviewed a bank record from February 2021, which showed that the cryptocurrency exchange mixed $20 million from a corporate account with $15 million from an account that received customer funds. Furthermore, Reuters said it could not find evidence that customer funds were lost due to the commingling.

In this connection, Reuters accused the crypto firm of breaching United States banking laws by commingling funds and failing to control internal controls to ensure customer funds were clearly identifiable and segregated from company revenues.

Binance’s reaction to the report

Reacting to the report, Patrick Hillmann, the company’s Chief Communication Officer, on Twitter described the story as “weak,” noting that Reuters wrote “conspiracy theories” on what the exchange had previously clarified was false. 

Also, Hillmann said the news agency lacked zero evidence other than a former insider:

We’ve been very public about where the company had regulatory shortcomings in the past, there’s no reason for a respected news outlet like Reuters to continue making stuff up.”

According to Hillmann, the report by Reuters was based on the fact that when users purchased BUSD (Paxos) from the firm, they were taken to a transaction page with the term “deposit” on it. He further clarified that users were purchasing a stablecoin that was redeemable by Paxos, which was explicitly stated on the website.

The issues with Binance 

This Reuters article puts Binance in the spotlight again. Recall that centralized exchanges are now under journalists’ scrutiny, especially after the collapse of FTX. 

Read also:

CFTC vs Binance lawsuit; here are key points to note 

Less than two months ago, a US derivatives market regulator charged Binance with operating an illegal digital assets exchange in the country. 

CFTC sues Binance

Also, this latest Reuters report is coming amid a legal battle with the Commodity Futures Trading Commission (CFTC), alleging that: “for years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance.”

This Reuters article says that CZ commingled funds to avoid paying taxes and that Zhao feared banks freezing Binance’s account. Hence, he had to convert the business’s funds into crypto and co-mingle it with users’ crypto.

It is also important to state that in February, Forbes alleged that Binance was engaging in malpractices similar to FTX and co-mingling users’ funds. Additionally, the exchange has been suffering from incessant halts and withdrawal issues recently, which puts a question on the health and wellbeing of the firm.

Is Binance dying?

Being the largest crypto exchange by trading volume, Binance is often surrounded by Fear, Uncertainty, and Doubt (FUD), and since the fall of FTX, rumours have been rife regarding Binance. 

There is now unfounded speculation that Binance’s fall is imminent, and users better withdraw their funds. Among these reasons are the lack of reliable information, audits of evidence of potentially misleading reserves, recent CFTC accusations and blatant disregard of regulations, especially in the United States.

But the truth is the issue stems from Binance US, a separate entity from Binance International. Binance US closure would have minimal consequences because most of the company’s income comes from its international activities.

The worst case would be to leave the United States, just like Coinbase did. So, for now, your funds MIGHT be safe with Binance.

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