Just Like FTX, Binance Too Shuffled Customers' Money Worth $1.8 Billion, Claims Forbes Report

If the Terra Luna crash last year wasn¡¯t enough, the FTX collapse later in the year surely rattled the already bleeding crypto market last year.

But now it seems that more damage is about to occur. At a time when the crypto market has been showing significant recovery this year, Forbes has claimed that Binance, which is the world¡¯s largest crypto exchange, shuffled $1.8 billion of its customers¡¯ funds, just like FTX did.

Binance Transferred $1.8 Billion Of Customer Funds

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Binance transferred $1.8 billion in stablecoin collateral to hedge funds, including Alameda and Cumberland/DRW, leaving its other investors exposed, as per the Forbes report.

Late last year, the world¡¯s biggest cryptocurrency exchange Binance quietly moved $1.8 billion of collateral meant to back its customers¡¯ stablecoins, putting the assets to other undisclosed uses. They did this without informing their customers.

According to blockchain data examined by Forbes, from August 17 to early December¡ªabout the same time FTX was imploding¡ªholders of more than $1 billion in crypto known as B-peg USDC tokens were left with no collateral for instruments that Binance claimed would be 100% backed by whichever token they were pegged to. B-peg USDC tokens are digital replicas of USDC, a dollar-pegged stablecoin issued by Boston-based Circle Financial, that exist on blockchains not supported by the firm, such as Binance¡¯s proprietary Binance Smart Chain.

Also Read: Binance Sees $12 Billion Crypto Withdrawals In Just 60 Days

Where Did The Money Go?

During the transfer activity between August 17 and 24, 2022, crypto traders, including Amber Group, Sam Bankman-Fried¡¯s Alameda Research, and Justin Sun¡¯s Tron, received hundreds of millions of dollars in shifted collateral from Binance, a Forbes study of blockchain data for Binance digital wallets shows.

Binance, which was founded in 2017 by Chinese Canadian billionaire Changpeng Zhao, is the latest in a long history of controversial practices, from its ongoing lack of physical headquarters and a corporate structure that appeared to be designed to evade regulators to reported federal investigations for money laundering and tax evasion. Last week, the Securities and Exchange Commission opposed Binance. US¡¯s plan to take over failed crypto lender Voyager¡¯s customer accounts cites inadequate disclosure about the safety of customer assets.

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As per the report, among the raided customer funds, which consisted of USD stablecoin (USDC) tokens, $1.1 billion was channeled to Cumberland/DRW, a Chicago-based high frequency trading firm, whose parent was founded in 1992 and began trading crypto in 2014. Cumberland may have assisted Binance in its efforts to transform the collateral into its own Binance USD (BUSD) stablecoin. Until a crackdown in mid February by the New York State Department of Financial Services on stablecoin issuance, Binance was aggressively seeking to gain market share for its dollar-backed token against rivals like Tether and Circle¡¯s USDC.

"Part Of Binance¡¯s Normal Business Conduct"

As per the report, Patrick Hillmann, Binance¡¯s chief strategy officer, suggests that the movement of billions of dollars of assets among wallets is part of the exchange¡¯s normal business conduct.

In an interview with Forbes, he downplayed concern about commingling different investors¡¯ funds while avoiding a question about the external transfer of assets from a digital wallet that had been used to hold collateral for Binance coins pegged to other cryptocurrencies. "There was no commingling," he says, because "there are wallets, and then there is a ledger," the latter of which tracked all funds owed to users and funds or tokens going to wallets, which are simply "containers."

The implication of Hillmann¡¯s comments is that despite what balances may show in Binance¡¯s publicly viewable exchange wallets, the firm has its own set of proprietary records to keep track of funds. This would seem to undermine Binance¡¯s recent efforts to demonstrate solvency through proof-of-reserves exercises. Having two sets of books means that the company is asking customers and regulators to trust its accounting while making it very difficult to independently verify the solvency it claims.

This current case of behind-the-scenes asset shuffling is reminiscent of FTX¡¯s manoeuvring prior to bankruptcy when its trading affiliate Alameda Research was alleged to have benefitted from FTX¡¯s disregard for pledges made to customers that their billions of assets would remain discrete from those of other exchange customers.

As per the Forbes report, while the temporary transfers to Cumberland, DRW, and others have not elicited any backlash or apparent investor harm, alleged manipulations by FTX have created trouble for its business partners. Class action lawsuits have been filed against crypto-focused banks Silvergate and Signature, over claims they aided Sam Bankman-Fried¡¯s efforts to misappropriate customer funds before his exchange blew up. Cumberland/DRW declined to comment on the specifics of its recent transactions with Binance.

Also Read: Binance Partners With Mastercard To Launch Crypto Card In Brazil

Who Raised The Concern Regarding Binance?

Crypto forensics firm ChainArgos was the first to raise concerns about Binance not following its own rules for how the pegged-token backing should work and about a persistent lack of collateral to secure billions of dollars in tokens that the exchange issues. In a January 17 report, it said, ¡°Someone received a loan of something like $1 billion for about 100 days. It is not clearly [sic] exactly what happened,¡± but ¡°this is very large, very obviously manual and very recent.¡±

When Binance Admitted An ¡®Error¡¯

On January 24th of this year, Bloomberg reportedly quoted an unnamed Binance spokesperson admitting that the exchange had commingled funds and underfunded certain B-tokens (Binance-tokens) "in error."

However, the spokesperson claimed that the cause for the underfunding appears to be intentional given that they were manually exported out of Binance, were sent to Circle and Coinbase, and the fact that the USDC assets in the wallet were completely drained.

Deja Vu FTX?

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It is difficult to ignore the similarities to the transactions that contributed to the crisis and collapse at FTX.

While FTX allegedly ran into trouble by misappropriating customer deposits to the benefit of its sister hedge fund, Alameda, in this circumstance, Binance seems to have taken funds that customers had reason to believe were dedicated collateral and used them for its own purposes. These actions may not have been illegal, simply because Binance is not regulated like a regular financial firm and purchasers of the b-peg tokens do not sign investment contracts with the exchange.

These revelations could encourage governments to require financial exchanges to be separated from asset custodians. In traditional finance, customer assets often need to be held at institutions considered qualified custodians, which are highly regulated and have specific rules regarding accounting and segregation of customer funds. In the U.S., SEC Chairman Gary Gensler is trying to port those rules over to crypto, which would require registered advisors and other regulated investment firms to keep customer assets at custodians better equipped to manage and secure funds rather than crypto exchanges.

Cryptocurrency exchanges, which behave similarly to brokerages in traditional finance, often assume the functions of trading, custody, clearing, and settlement, mostly done out of sight of regulatory authorities. While crypto-exchange¡¯s corner-cutting approach can make transactions faster and less costly, it reduces the oversight of each trade in a sector that is already lightly regulated in comparison to more mature markets, as per the Forbes report.

Also Read: 5 Crypto Firms That Filed For Bankruptcy Besides FTX

Binance CEO Denies Forbes' Allegations

Binance CEO Changpeng "CZ" Zhao described Forbes¡¯ article comparing his exchange with bankrupt FTX as "another FUD" and "baseless."

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While Binance chief strategy officer Patrick Hillman denied that the exchange exposed its users¡¯ funds, Binance CEO CZ said, "[Forbes] seem to not understand the basics of how an exchange works."

He added that the report explained Binance users¡¯ withdrawals as "millions of shifted collateral." According to CZ, Forbes ignored users¡¯ deposit transactions.

In comparison with FTX, Binance CEO CZ said the two exchanges are different. He pointed out that the firm had processed billions in withdrawals in December 2022, when he was "socially hanging out with crypto friends" in Dubai.

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