Former Insiders Claim Customer Funds Were “Mishandled”

According to a Reuters report, Binance, the world’s largest cryptocurrency exchange, has been accused of commingling customer funds with company revenue in breach of U.S. financial rules that require customer money to be kept separate.

Three sources familiar with the matter told Reuters that the commingling happened almost daily in accounts the exchange held at U.S. lender Silvergate Bank, with sums running into billions of dollars. While Reuters couldn’t independently verify the figures or frequency, 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.

Binance’s Trustworthiness Questioned?

The commingling of funds at Binance has raised concerns about a lack of internal controls to ensure that customer funds were identifiable and segregated from company revenues. Three former U.S. regulators have warned that the commingling of these funds put client assets at risk by obscuring their whereabouts. 

John Reed Stark, a former chief of the Securities and Exchange Commission’s Office of Internet Enforcement, said Binance customers shouldn’t “need a forensic accountant to find where their money is.”

It’s worth noting that Reuters found no evidence that Binance client monies were lost or taken. However, the commingling of funds could still cause concern for customers who want to ensure their assets are safe and secure.

SEC chair Gary Gensler has previously 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. 

Despite publicly claiming to restrict access to Americans, Binance has also faced allegations that it allowed U.S. customers to trade on its platform from 2019 to this year. In March, the U.S. Commodity Futures Trading Commission (CFTC) filed a complaint against the exchange, alleging that it allowed U.S. customers to trade derivatives without registering with the agency. Binance responded in a blog that it blocks U.S. users.

Binance Denies Wrongdoing

According to a statement made to Reuters by Binance spokesperson Brad Jaffe, the accounts in question were not used to accept user deposits but to facilitate user purchases of the exchange’s bespoke dollar-linked crypto-token, BUSD. However, former US regulators have disputed the explanation, saying that it is undermined by Binance’s previous representations to customers that the transfers were deposits. 

From late 2020 to 2021, Binance’s website told customers that their dollar transfers were “deposits” that would be “credited” to their trading accounts in BUSD. Customers were told they could “withdraw” their deposits as dollars. The former regulators argue that these representations created the expectation that clients’ funds would be safeguarded like traditional cash deposits.

How Binance will respond to the allegations of commingling of customer and company funds remains to be seen. However, according to Reuters, the former US regulators argue that the exchange’s explanation is insufficient and that the representations made to customers created the expectation that their funds would be safeguarded like traditional cash deposits. 

Featured image from iStock, chart from TradingView.com