LONDON – 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.
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In a statement, she said Reuters’ reporting used “outdated information”, without elaborating further.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 in 2022 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,” she said.
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