Binance.US transferred over $400 million to a trading firm managed by global Binance CEO Changpeng Zhao, according to a recent report.
Binance established Binance U.S. as a de facto subsidiary in 2019, operated by California-based BAM Trading Services, which is registered as a money services firm. Zhao is a beneficiary of BAM.
Meanwhile, Zhao's trading firm, Merit Peak, was incorporated in the British Virgin Islands in early 2019. The Binance CEO penned an agreement for Merit Peak to invest $1 million into BAM's holding company in exchange for a part of the company's preferred shares. The contract named Zhao Merit Peak's "manager."
There have been many attempts to draw parallels between https://t.co/AZwoBOgsqS and fraudulent exchanges that have gone bankrupt. The real facts speak for themselves: there is no comparison.— Binance.US 🇺🇸 (@BinanceUS) February 16, 2023
Our leadership team is staffed with former DOJ, SEC, FBI, and NYFed employees who are… https://t.co/5etl0z3ZUX
In a 2021 document describing the technology architecture of Binance.US, there was a mention of an unidentified "market maker" under the control of Binance.com. Last year, Zhao said he had a stake in a market maker that trades in Binance.US — unspecified at that time — but assured that the firm did not earn profits and was only "providing liquidity in the market."
The transfer to Merit Peak occurred on Silvergate's proprietary channel, Silvergate Exchange Network (SEN), in the first quarter of 2021. Binance.US joined SEN in late 2020 to service its corporate clients. SEN enables institutional clients to transfer fiat money between their accounts at the bank. SEN transfers are described as "push only," meaning that they require authorization from the account manager.
Reports said executives of Binance.US were concerned about the outflow of funds that took place without their knowledge. Catherine Coley, then Binance.US CEO, wrote to a finance executive at Binance.com to inquire about the "unexpected" transfers.
"Obviously, we bear the name of Binance, and then we also have a licensing agreement for their technology. So that's the extent of our relationship," Binance.US chief financial officer Jasmine Lee said during a CFO Network summit hosted by the Wall Street Journal earlier this month before the report came out.
"As far as the business activities go, we do not commingle customers' assets. We do not transfer our funds back and forth."
Despite the statement above, sources said Binance finance executive Susan Li held access to the Binance.US Silvergate account, along with some senior Binance.US employees.
Analysts said the transfers suggest that the global Binance, which is not licensed in the U.S., oversaw the finances of Binance.US even if Binance.US is marketed as an entirely independent organization and operates as a U.S. partner.
The U.S. Department of Justice and the Securities and Exchange Commission have inquired about Binance and Binance.US's relationship to determine whether there are potential breaches of financial regulations, including if Binance uses the American entity as a cover to do business in the country.
Market maker's role in crypto exchange
After crypto exchange FTX collapsed last year, other major exchanges like Binance have been under public scrutiny. The public especially questions the role of trading firms in these exchanges' activities. Trading firms often become market makers, buying and selling to deepen trading volume in exchanges, which will facilitate dealing. Market makers reap profits from the spread — the difference between the bid and asked prices.
FTX founder and former CEO Samuel Bankman-Fried allegedly funneled billions of dollars worth of customer money to his trading firm, Alameda Research, which was a market maker on the FTX. The U.S. Securities and Exchange Commission said Alameda received "undisclosed" preferential treatment when trading at FTX.
Merit Peak's participation in Binance.US's trading could create potential conflicts of interest between the exchange and its customers because Binance.US did not disclose the trading firm's activities or its owner, financial authorities said.
"When you have that lack of transparency, you don't know if Binance customers are being disadvantaged," Howard Fischer, a former senior SEC trial counsel, said.