Crypto giant Binance commingled customer funds and company revenue, former insiders say (2023)

The world's largest cryptocurrency exchange, Binance, commingled customer funds with company revenue in 2020 and 2021, in breach of U.S. 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 U.S. 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 $20 million from a corporate account with $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 U.S. 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 U.S. 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 U.S. customers to trade on its platform from 2019 to this year despite publicly claiming to restrict access to Americans, the U.S. Commodity Futures Trading Commission alleged in a complaint against the exchange in March. Binance responded in a blog that it blocks U.S. 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 U.S. 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.

Bank and company records for 2019-2021, seen by Reuters, and interviews with former insiders show that Binance used Silvergate Bank, the U.S. 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 which 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-U.S. 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 $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 the 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 U.S. commodities laws by "intentionally structuring entities and transactions" to avoid U.S. 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 U.S. 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.

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. Chief among these deputies was Guangying Chen, the head of Binance's back office. Chinese-born Chen was one of the few employees Zhao trusted with Binance's finances, former executives said. Chen did not respond to questions about her role.

Binance had limited success obtaining bank accounts for its small local units, however. Most major banks turned the exchange down due to compliance concerns over crypto companies' source of funds, according to company messages and former executives.

Then Silvergate came to the rescue. In recent years, the small San Diego-based bank had shifted its focus from local real-estate lending to servicing crypto companies. It quickly became a leading provider of banking services to the crypto sector.

By 2019, Binance had opened a Silvergate account for its Cayman-based holding company, Binance Holdings Limited, to receive revenues earned by the exchange. The account was handled by Chen and a finance executive who reported to her, Susan Li, company records show. Li didn't comment for this article.

Binance then opened two further Silvergate accounts: for Seychelles firm Key Vision Development and Cayman Islands-based Merit Peak, both incorporated on Jan. 15, 2019, and controlled by Zhao, according to filings and bank records. Binance's online platform began instructing customers to "deposit" their dollars into the Key Vision account. After users transferred funds to Key Vision, they received an email from Binance telling them they had "successfully deposited" their dollars, according to screenshots posted online by traders. Users could also "withdraw" their deposits via Binance's platform, which said it would wire the dollars to their bank accounts.

Binance Holdings, Key Vision and Merit Peak formed the core of the global crypto exchange's financial network. But inside Binance, few employees had full visibility over their roles. Access to information about the Binance group's overall finances and its bank accounts was tightly managed by Chen, a half-dozen former executives said. Chen's team also had access to a Silvergate account belonging to Binance's purportedly independent U.S. partner, Binance.US, which Zhao in fact controls, as Reuters has previously reported. Binance.US told Reuters that only Binance.US executives have access to its bank accounts.

Binance's then-chief compliance officer, Samuel Lim, was concerned by the exchange's dependence on Silvergate due to requirements that U.S. banks closely monitor clients' transactions, company messages show. Lim told executives in a 2020 message seen by Reuters that "the long term fix is to reduce reliance on US bank." The CFTC complaint in March charged Lim with aiding and abetting Binance in violating U.S. laws "through intentional conduct that undermined Binance's compliance program." Lim has not publicly responded to the charge and did not comment for this article.

The person with direct knowledge of Binance's group finances said Zhao shared Lim's distrust of banks and instructed the finance team to keep dollar balances in the Silvergate accounts as low as possible. Dollars in the Binance Holdings account and Key Vision customer funds account that were surplus to immediate business needs were transferred to the Merit Peak account, where they were commingled, the source said. Money from the Merit Peak account was then used to purchase Binance's BUSD token, according to the source and company messages. BUSD and other "stablecoins" are backed by dollars and designed to hold a steady value.

Reuters couldn't determine the value of BUSD tokens purchased in this way. But blockchain data show that between January 2020 and December 2021, BUSD's issuer, New York-based Paxos Trust, transferred at least $18 billion of BUSD to Binance. Binance received the BUSD in at least two wallets that it has previously identified as its own, without saying whether they contain company or customer funds. A Paxos spokesperson said that between late 2019 and early 2023 Binance sent Paxos dollars in return for BUSD "for it and its customers."

The money flow between Binance and Paxos also could be reversed, according to the person with group-level knowledge and company messages. When Key Vision needed dollars to meet customer withdrawals, for instance, Binance would redeem BUSD at Paxos, which in return would send dollars to Merit Peak's Silvergate account. Merit Peak would then distribute the dollars to other accounts as needed.

The value of BUSD tokens in circulation peaked at over $23 billion last November, with Binance-controlled crypto wallets holding as much as 90% of the total, according to crypto data firm Nansen. But in February, New York regulators ordered Paxos to stop issuing BUSD, citing Paxos' failures in risk assessments and due diligence checks.

The Paxos spokesperson said the company "voluntarily announced its intention to end its relationship with Binance and has been successfully winding down all business relationships with Binance since."

Since Paxos stopped issuing BUSD, Binance has reduced its holdings of the coin to around $3 billion, according to Nansen. Reuters could not determine why Binance reduced these holdings or how it converted them.

Money from other sources also entered Merit Peak's account, including hundreds of millions of dollars from a Binance.US account, Reuters has previously reported. Bank records show the Binance.US account was operated by Chen. Binance.US told Reuters Merit Peak "was withdrawing funds from its own account." It didn't respond to follow up questions.

Silvergate informed Binance that it was closing Key Vision's account in mid-2021, according to two people with direct knowledge. Silvergate made the decision on the basis that Key Vision had made transactions that were improper for a custodial bank account, one of the people said, without elaborating. That June, Binance emailed users to tell them that "USD deposits" through Silvergate would be "discontinued." Binance then began using a Key Vision account at Signature Bank to receive customer funds, according to the sources and screenshots of users' transactions. Signature Bank didn't comment for this article.

The Binance spokesperson, Jaffe, said this reporting on the Key Vision accounts was inaccurate, but did not provide further details.

Binance's financial network also required a reliable euro bank account, former executives said. The exchange found a solution in Lithuania that provided a European Union base and a straightforward registration process. In May 2020, Binance set up the Lithuanian company, initially called Binance UAB, with Zhao as its sole shareholder and Chen as a board member. Binance later unveiled the firm, renamed as Bifinity, as its "official fiat-to-crypto payments provider." Zhao installed Helen Hai, Binance's China-born head of fiat operations, as president. Hai didn't comment for this article.

In 2021, Bifinity had revenue of 680 million euros, according to its financial report, and paid over 420 million euros to a single unnamed related party. The person with direct knowledge of Binance's group finances identified the unnamed party as Binance Holdings. Bifinity did not respond to questions from Reuters.

One consequence of Binance's financial maneuvering, four former Binance executives said, was to protect the exchange's profits from tax authorities. Binance has never disclosed where its Binance.com trading platform is based nor what corporate taxes it pays and where.

To assess how much tax Binance pays, Reuters reviewed the exchange's public filings since 2018 in countries where it has said it has significant operations. In France and Dubai, where Binance established hubs last year, local units have not detailed tax payments. France's finance ministry declined to comment and Dubai didn't comment. In Malta, where Binance said it was based for several years, its main local unit reported losses each year, so it paid no tax. Maltese authorities didn't comment. The only significant tax payments Reuters found were in Lithuania, where in 2022 Bifinity paid 42.5 million euros, data from Lithuania's tax authority show.

With the growth in Bifinity's business came a higher profile. In July 2021, Lithuania's central bank said it had warned Binance not to provide unlicensed investment services. Six months later the exchange appointed Saulius Galatiltis, who previously ran the central bank's investment management department, as chief executive of Bifinity.

When Lithuania's parliament debated a new bill to toughen rules for the country's crypto companies last year, Galatiltis urged a parliamentary committee to avoid stricter legislation. He emphasized Bifinity's tax payments, which last year made it one of Lithuania's largest corporate taxpayers. "This business is global, in many countries all over the world," Galatiltis told the committee, discussing Bifinity. "I think a business which acts globally and pays tax locally must be attractive to any country," he said. Galatiltis didn't respond to requests for comment for this article.

Parliament ultimately voted through a watered-down set of the rules. Lithuania's finance ministry told Reuters that Bifinity was involved in the formal process of "providing comments and suggestions" on the draft law along with other institutions and market participants. "We never base our regulatory policy decisions on any single entity."