Report Claims Binance Commingled User Funds Similar to FTX
A new report claims Binance commingled different investors’ funds last year in a move "eerily" similar to actions by now-defunct cryptocurrency exchange FTX.
The world’s largest crypto exchange moved $1.8 billion of collateral set to back its customers’ stablecoins late last year, putting the assets to other undisclosed uses, Forbes reported Monday, noting that the practice was similar to maneuvers by FTX.
More specifically, holders of more than $1 billion of B-peg USDC tokens, which are digital replicas of USDC that exist on Binance’s proprietary Binance Smart Chain, were left with no collateral from August 17 to early December despite Binance claiming such instruments are 100% backed by whichever token they were pegged to.
According to the report, Binance sent $1.1 billion of that funds, which were collateral set to back the B-peg USDC stablecoins, to Chicago-based high frequency trading firm Cumberland/DRW. The report speculated that Binance could have used the funds to swell its own stablecoin BUSD.
"Cumberland may have assisted Binance in its efforts to transform the collateral into its own Binance USD (BUSD) stablecoin."
Furthermore, other hundreds of millions of shifted collateral from Binance was funneled to Amber Group, Sam Bankman-Fried’s Alameda Research, and Justin Sun’s Tron, Forbes said, citing blockchain data for Binance digital wallets.
Meanwhile, Binance’s chief strategy officer Patrick Hillmann claimed that the movement of funds is part of the exchange’s normal business conduct. He also refuted claims that there was a commingling of funds.
"Binance does not, and has never, invested or otherwise deployed user assets without consent under the terms of specific products. Binance holds all of its clients’ assets in segregated accounts which are identified separately from any accounts used to hold assets belonging to Binance," a Binance spokesperson said in a comment to CryptoNews.com.
The spokesperson claimed the on-chain transactions identified relate to internal wallet management. They added:
"While Binance has previously acknowledged that wallet management processes for Binance-pegged token collateral have not always been flawless, at no time was the collateralization of user assets affected. Processes for managing our collateral wallets have been fixed on a longer-term basis and this is verifiable on-chain."
Last month, Binance admitted that it kept collateral for its BNB Smart Chain and BNB Beacon Chain versions of 94 crypto assets in the same wallet as customer funds. The commingling makes it hard for customers and researchers to identify whether the exchange has enough assets to honor redemption requests 1:1.
Commingling in FTX Was a Key Factor Leading to its Collapse
A key factor contributing to the collapse of FTX was the commingling of funds between the now-bankrupt cryptocurrency exchange and its trading arm Alameda Research. Alameda was able to quietly use customer funds from FTX using a backdoor that allowed the loan to fly under the radar of investors, employees, and auditors.
John Ray III, the new CEO of collapsed crypto exchange FTX, has also claimed that FTX and Alameda Research commingled user funds, allowing the quant trading firm to use FTX customers' money and make risky financial bets.
As reported, New York’s chief financial regulator announced plans to release new guidance that will mandate companies to separate their own crypto assets from that of customers' earlier this year.