Late last year, as crypto markets were struggling to regain their footing, the world’s biggest cryptocurrency exchange 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–about the same time FTX was imploding–holders of more than $1 billion of 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. Each stablecoin is worth one U.S. dollar.
Of 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.
Other crypto traders, including Amber Group, Sam Bankman-Fried’s Alameda Research and Justin Sun’s Tron, also received hundreds of millions of shifted collateral from Binance, a Forbes study of blockchain data for Binance digital wallets shows (see chart). For Binance, which was founded in 2017 by Chinese Canadian billionaire Changpeng Zhao, it 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 citing inadequate disclosure about the safety of customer assets.
Patrick Hillmann, Binance’s chief strategy officer, suggests that the movement of billions 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’s 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 maneuvering 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 their assets would remain discrete from those of other exchange customers. 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.
Burning For BUSD
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. It said in a January 17 report, “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.”
Last week, Fortune broke the news that Binance had liquidated the USDC collateral–burning it, in crypto parlance–and using the proceeds to pay its U.S. minting partner Paxos to create new BUSD. Fortune speculated the goal might have been to increase the exchange’s share of the dollar-based stablecoin market. With U.S. interest rates rising, yields on the currency held to collateralize the coins are becoming increasingly attractive.
Without any explanation, crypto exchange Binance said that it would suspend U.S. dollar transfers, but the company’s subsidiary, Binance US, stated in a tweet that it is unaffected by the ban.
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