Global cryptocurrency exchange Binance had secret access to a bank account belonging to its purportedly independent US partner and transferred large sums of money from the account to a trading firm managed by Binance chief executive Zhao Changpeng, banking records and company messages show.
Over the first three months of 2021, more than US$400
million (S$535 million) flowed from the Binance.US account at California-based
Silvergate Bank to trading firm Merit Peak, according to records for the
quarter, which were reviewed by Reuters.
The Binance.US account was registered under the name of BAM
Trading Services, the US exchange’s operating company, according to the
records. Company messages show the transfers to Merit Peak began in late 2020.
Reuters could not determine the reason for the transfers or
whether any of the money belonged to Binance.US customers. The exchange’s
public terms of use at the time said its customers’ dollar deposits were held
at Silvergate and a Nevada-based custodian firm called Prime Trust. Prime Trust
made US$650 million in wire transfer deposits into the Binance.US account
during the quarter, the bank records show.
A Binance.US spokesman, Ms Kimberly Soward, did not address
Reuters’ questions about the transfers detailed in the bank records. In a
statement, she said Reuters’ reporting used “outdated information”, without
elaborating further.
She added that Merit Peak was “neither trading nor providing
any kind of services on the Binance.US platform” and “only Binance.US employees
have access” to the bank accounts of the US company. Ms Soward did not specify
when Merit Peak’s activities ceased.
Binance, Mr Zhao and Prime Trust did not respond to detailed
questions about the transfers. A Silvergate spokesman said the bank does not
comment on individual customers.
Binance.US’ executives were concerned by the outflows
because the transfers were taking place without their knowledge, according to
messages reviewed by Reuters.
The CEO of Binance.US at the time, Ms Catherine Coley, wrote
to a Binance finance executive in late 2020 asking for an explanation for the
transfers, calling them “unexpected” and saying “no one mentioned them”.
“Where are those funds coming from?“ she wrote in one
message.
In a response to Ms Coley, seen by Reuters, the Binance
executive, Ms Susan Li, did not explain the transfers. Ms Li wrote that Merit
Peak was a “vendor that facilitated trading” on Binance.US and also provided
loans and capital injections to the American exchange.
Ms Coley, who left Binance.US later in 2021, did not respond
to questions sent via her legal representatives. Ms Li also did not respond.
Reuters was unable to trace what became of the US$400
million. An unspecified portion of the money was subsequently sent to the
Silvergate account of a Seychelles-incorporated firm called Key Vision
Development, according to a person with direct knowledge of the transfers.
A 2021 corporate filing by another Binance unit identified
Mr Zhao as a director of Key Vision. A former Silvergate executive confirmed
that Key Vision held an account at Silvergate at the time.
Key Vision’s local registered agent did not respond to
requests for comment.
The money transfers suggest that Binance, which is not
licensed to operate in the United States, controlled the finances of
Binance.US, despite maintaining that the American entity is entirely
independent and operates as its “US partner”.
The Department of Justice and the Securities and Exchange
Commission (SEC) have sought information from Binance and Binance.US about
their relationship as part of ongoing investigations into potential breaches of
financial rules, including whether Binance is using the American exchange as a
cover for doing business in the US.
The SEC and the Justice Department declined to comment for
this article.
Reuters reported last year that Binance created Binance.US
as a de facto subsidiary in 2019 to draw the scrutiny of US regulators away
from the global exchange.
California-based BAM Trading is registered with the US
Treasury as a money services business, a category that includes foreign
currency traders and money transmitters. BAM Trading’s beneficial owner is Mr
Zhao.
Binance.US chief financial officer Jasmine Lee told the Wall
Street Journal on Feb 8 that “the extent of our relationship” with Binance.com
is a shared name and a licensing agreement for technology.
“We do not transfer our funds back and forth,” Ms Lee said.
Under scrutiny
The role of trading firms at crypto exchanges has been under
scrutiny since rival FTX collapsed in November. Trading firms often play a
“market-making” role, typically buying and selling assets to deepen an
exchange’s trading volume and thus facilitate dealing. The market-maker profits
from the difference between the prices bid by buyers and asked by sellers.
The SEC has accused FTX founder Sam Bankman-Fried of
secretly diverting billions of dollars in customer funds to his trading firm,
Alameda Research, which functioned as a market-maker on the exchange. Alameda
received “undisclosed special treatment” on the FTX platform that concealed the
flows, the SEC alleged in its December complaint against Bankman-Fried, who has
pleaded not guilty.
The SEC’s subpoena, addressed to Ms Coley, requested
information on all of Binance.US’ market-makers, their owners and their trading
activity. The Wall Street Journal reported the subpoena last year. Reuters
could not establish how Binance.US responded to the SEC.
Binance.US and Binance did not respond to Reuters’ questions
about the SEC’s case, but Binance’s chief strategy officer, Mr Patrick
Hillmann, told the Wall Street Journal on Wednesday that the company was
working with regulators to figure out ways to resolve investigations. The
Justice Department is also investigating Binance for suspected money laundering
and sanctions violations, Reuters has previously reported.
Silvergate is also drawing scrutiny. It is under
investigation by the Justice Department’s fraud section, which is examining its
hosting of accounts tied to Bankman-Fried’s businesses. Silvergate did not
comment and the Justice Department declined to comment.
Silvergate’s shares extended losses after this report,
hitting a daily low of US$17.35, and were last down around 22 per cent. They
have fallen 86 per cent over the past year. REUTERS
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