Reuters, 16 February — According to banking documents and corporate messaging, the major cryptocurrency exchange Binance secretly gained access to a bank account belonging to its ostensibly independent U.S. partner and moved substantial quantities of money to a trading company run by Changpeng Zhao, the CEO of Binance.
According to records for the quarter examined by Reuters, more than $400 million was transferred from the Binance.US account at California’s Silvergate Bank to this trading company, Merit Peak Ltd, during the first three months of 2021. Records show that BAM Trading, the company responsible for running the U.S. exchange, was used to establish the Binance.US account. According to company messaging, the transfers to Merit Peak started in late 2020.
Neither the cause of the transactions nor the ownership of any of the funds by Binance.US users could be ascertained by Reuters. The exchange’s published terms of service at the time said that Silvergate and a Nevada-based custodial company called Prime Trust LLC maintained its customers’ dollar deposits. According to the bank records, Prime Trust wire sent $650 million into the Binance.US account during the quarter.
The transfers described in the bank records should have been addressed by Kimberly Soward, a spokesman for Binance. The US. She said that Reuters’ reporting utilized “outdated information” without going into greater detail. Merit Peak is neither trading nor offering any services on the Binance.US platform, and only Binance.US staff members have access to the bank accounts of the US business, she continued. Soward didn’t say precisely when Merit Peak stopped operating.
To specific inquiries concerning the transfers, the Binance global exchange, Binance CEO Zhao, and Prime Trust did not answer. A representative for Silvergate stated that the bank does not address specific clients.
According to messages seen by Reuters, Binance.executives US were worried about the outflows because the transfers were occurring without their knowledge. In late 2020, Catherine Coley, the CEO of Binance.US at the time, wrote to a finance officer of Binance seeking an explanation for the payments, calling them “unexpected” and asserting that “no one addressed them.”
She questioned in one communication, “Where is those cash coming from?
Reuters was able to see Susan Li, an executive at Binance, respond to Coley but she didn’t elaborate on the transfers. Merit Peak was a “vendor that facilitated trading,” according to Li, on Binance. The American exchange received loans and capital infusions from the US as well.
Coley, who departed Binance.US later in 2021, did not reply to inquiries made through her attorneys. I didn’t answer either.
Reuters failed to determine what happened to the $400 million. An individual with firsthand knowledge of the transfers claims that an unspecified sum of the money was afterwards transferred to the Silvergate account of Key Vision Development Limited, a company with Seychelles incorporation. CEO Zhao was listed as a director of Key Vision in a corporate file made in 2021 by another Binance division. An ex-executive from Silvergate acknowledged that Key Vision had an account there at the time.
Requests for a response from Key Vision’s local registered agent went unanswered.
Although claiming that Binance.US is entirely independent and functions as its “US partner,” the money transfers imply that the global Binance exchange, which lacks a license to do business in the US, was in charge of Binance. finances. US In connection with ongoing inquiries into possible violations of financial regulations, including whether Binance is using the American exchange as a front for conducting business in the United States, the Department of Justice and the Securities and Exchange Commission has requested information from Binance and Binance.US about their relationship. Justice Department and SEC representatives declined to comment on this report.
According to Reuters, Binance established Binance.US as a de facto subsidiary in 2019 to shield the global exchange from U.S. officials’ scrutiny. The company that runs Binance.US, BAM Trading Services of California, is listed with the U.S. Treasury as a money services business, which includes money transmitters and foreign exchange dealers. Zhao is the beneficial owner of BAM.
The Wall Street Journal quoted US’s chief financial officer, Jasmine Lee, as saying on February 8 that “the limit of our engagement” with Binance.com is a shared name and a technological licensing arrangement. Lee added, “We do not transfer our monies back and forth.
But, according to the texts and the person with firsthand knowledge of the transfers, Susan Li, the Binance finance officer, and several top Binance.US employees had access to the Binance.US Silvergate account. In one message, a finance manager for Binance.US requested that Li grant another employee of the company permission to authorize withdrawals from the account. Silvergate was a payment channel under the jurisdiction of Binance.com at the time, according to a 2021 Binance.US document that defined the technology architecture of the US exchange.
Each transaction between January and the end of March 2021 is detailed in US account documents examined by Reuters. Other periods’ account data have not been examined by Reuters.
On the bank’s exclusive Silvergate Exchange Network (SEN), which Binance.US joined in November 2020 to support its business clients, the transfers to Merit Peak were made. These clients can move money between their bank accounts because of SEN. SEN transfers are “push only,” according to Silvergate’s investor prospectus, which means the controller of the account must approve them.
According to the former Silvergate executive, it would be against bank compliance regulations to move money out of a corporate account without the management of that company’s agreement. “Several processes are necessary to create, authorize, and approve an SEN transfer,” according to Silvergate’s prospectus. The moves were not mentioned by the Silvergate spokeswoman in their answer to Reuters.
Together with the $650 million in wire transfer deposits from Prime Trust, the Binance.US account received $1.3 billion in SEN transfers from corporate clients trading on Binance.US during the January–March 2021 quarter.
BLACK BOX
After rival FTX’s demise in November, the role of trading companies at cryptocurrency exchanges like market leader Binance has come under question. Trading companies frequently take on a “market-making” function, buying and selling assets to increase the trading volume on an exchange and thereby make transactions easier. The spread — the gap between the prices buyers and sellers offer — is what the market maker capitalizes on.
The founder of FTX, Sam Bankman-Fried, has been charged by the SEC with secretly moving billions of dollars in client cash to his trading company, Alameda Research, which served as a market maker on the exchange. The SEC claimed in its December lawsuit against Bankman-Fried, who has pleaded not guilty, that Alameda enjoyed “undisclosed privileged treatment” on the FTX platform that masked the transactions.
Gary Gensler, the chair of the SEC, claimed on Bloomberg TV on February 10 that cryptocurrency exchanges in general were “co-mingling consumer funds with their companies” by acting as hedge funds and broker-dealers as well as trading against their customers. Although he didn’t specifically mention Binance or any other exchanges, he did say that businesses could anticipate additional agency enforcement measures.
“We forbid the New York Stock Exchange from operating a hedge fund and conducting trading there. Why do it here, then?” said Gensler.
According to business messaging, Merit Peak, the trading company run by CEO Zhao, was one of the dealers on Binance. The US.
Binance. The person with knowledge of the transfers claimed that while Binance was responsible for managing the software that matched users’ orders as part of the technology license deal between the two exchanges, US personnel had no understanding of how Merit Peak was carrying out trades. the report outlining Binance. Because of Binance, according to former personnel, US’s technology architecture categorized this program as a “BlackBox.” Its operation was unknown to US staff.
Former regulators, executives from Binance and Silvergate, and other former employees told Reuters that Merit Peak’s participation in Binance.US could have led to conflicts of interest between the exchange and its users because Binance.US made no disclosures regarding Merit Peak’s operations or its owner. When it requested information about the trading company as part of a subpoena sent to Binance.US in December 2020, the SEC identified Merit Peak as a Binance entity.
Howard Fischer, a former senior SEC trial attorney who is currently a partner at the American law firm Moses Singer, stated that when there is a lack of transparency, it is impossible to tell whether Binance customers are suffering.
In January 2019, Merit Peak was established in the British Virgin Islands. Zhao executed a purchase deal in December of that year for Merit Peak to contribute $1 million to Binance. in exchange for a number of the holding company’s preferred shares, American operator BAM Trading’s holding company. Zhao was listed as Merit Peak’s “Manager” in the agreement.
Merit Peak’s directors and stockholders are not included in the BVI corporate record; instead, only the company’s local registered agent is mentioned. Requests for comment regarding the ownership of Merit Peak went unanswered by the agent. Like Binance.US, Binance hasn’t disclosed any information on Merit Peak to the public and hasn’t referenced it in filings with authorities or corporate registers that Reuters has studied.
An unnamed “Market Maker” that was under Binance.com’s authority was mentioned in the 2021 paper that defined the technology architecture of Binance. The US. Zhao acknowledged being a shareholder in an unnamed market maker during a Twitter Spaces event in November of last year, but he emphasized that it was “simply providing liquidity in the market” and didn’t make any money.
Coley received a subpoena from the SEC requesting details on every market maker for Binance.US, their owners, and their trading behaviour. The subpoena was covered by The Wall Street Journal last year. Reuters was unable to determine Binance.response US’s to the SEC.
But, Binance’s chief strategy officer, Patrick Hillmann, told the Wall Street Journal on Wednesday that the business was “working with regulators to find out the remediations” to end investigations. US and Binance did not answer Reuters’ inquiries regarding the SEC’s case. According to prior reports from Reuters, the Justice Department is also looking into Binance for possible money laundering and sanctions violations.
The bank used by Binance and other cryptocurrency exchanges, Silvergate, is also coming under fire. The Justice Department’s fraud division is looking into it and looking at how many accounts hosted by Silvergate were connected to Bankman-companies. Fried’s The Justice Department and Silvergate both declined to comment.