LONDON, Feb. 17 (Reuters) – US affiliate of global cryptocurrency exchange Binance has confirmed that a trading firm led by Binance CEO Changpeng Zhao was operating as a market maker on its platform.
Reuters reported on Thursday, citing bank records and corporate communications, that Binance secretly accessed a bank account belonging to its supposedly independent US partner and transferred large sums of money from the account to trading firm Merit Peak Ltd.
“While there was a market making company called Merit Peak operating on the Binance.US platform, it ceased all activity on the platform in 2021,” Binance.US said in a tweet on Thursday after the Reuters story was published. It did not elaborate on when the activity will cease in 2021, or comment on Zhao’s role at the trading company.
The global Binance exchange is not licensed to operate in the United States, but the transfers to Merit Peak revealed by Reuters suggest that Binance controlled Binance.US’s finances, despite saying publicly that the US entity is “fully independent ” is and operates as its ” American partner.”
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Binance transferred more than $400 million from its account at California-based Silvergate Bank to Merit Peak between January and March 2021, Reuters reported Thursday.
Before that story was published, Binance.US had told Reuters that “Merit Peak does not trade or provide any kind of services on the Binance.US platform,” without providing further details.
Binance.US executives were concerned about the outflow from the Silvergate account to Merit Peak because the transfers happened without their knowledge, according to company reports reviewed by Reuters.
A spokesperson for the global Binance exchange, who did not respond to Reuters’ questions for the story on Thursday, told CoinDesk that the transfers were “a Binance.US matter.”
Zhao, Binance’s CEO, said on Friday that the global exchange has withdrawn potential investments in the United States, a move that has been increasingly criticized by US regulators on crypto companies so far this year.
In particular, the activities of crypto platform market makers — companies that typically buy and sell assets on exchanges to boost trading volumes — have drawn regulatory and political attention since the collapse of major exchange FTX in November.
Regulators are concerned that some market makers have received secret special treatment from crypto exchanges that could penalize customers.
The U.S. Securities and Exchange Commission in December accused FTX founder Sam Bankman-Fried of granting his trading firm Alameda Research “special privileges” that allowed him to siphon billions of dollars in FTX client money. Bankman-Fried pleaded not guilty.
“There’s something weird going on here that clearly doesn’t pass the smell test,” US Senator Roger Marshall told Reuters. “Congress needs answers, and Binance.US and Silvergate are obligated to provide them to us.”
‘GREAT LOAD’
Zhao did not address the report directly, but on Friday he tweeted “Remember 4.”, tagging an earlier post listing his “Do’s and Don’ts” for 2023. The fourth item on the list was “Ignore FUD, fake news, attacks,” using an acronym for “fear, uncertainty, and doubt,” commonly used in crypto in reference to news perceived as negative.
The day before the Reuters article, Patrick Hillmann, Binance’s chief strategy officer, told the Wall Street Journal and Bloomberg that Binance expected to pay fines to resolve US investigations into the company. Hillmann said Binance was built by software engineers unfamiliar with bribery and corruption, money laundering and economic sanctions laws and regulations, but that previous “gaps” in regulatory compliance have since been closed.
“It’s a huge burden,” Hillmann told Bloomberg. “We just want to put it behind us.”
Hillmann did not respond to detailed questions Reuters sent him for the article published Thursday.
The 2022 bankruptcy of a string of major crypto companies has also prompted calls from politicians for greater clarity on how regulators assess ties between the US banking industry and the cryptocurrency sector.
In December, US Senators Elizabeth Warren and Tina Smith wrote to major financial regulators, including US Federal Reserve Chairman Jerome Powell, asking for their assessment of the risks to banks and the banking system from crypto exposure. The letter named Silvergate Capital Corp as one of the banks that “relied heavily on their crypto clients.”
Shares in Silvergate Capital Corp (SI.N), the parent company of Silvergate Bank, closed 4.1% higher on Friday. They fell sharply on Reuters’ report on Thursday, losing more than 22%. They have lost about 90% of their value since reaching an all-time high in November 2021.
Reporting by Tom Wilson and Angus Berwick in London Edited by Susan Fenton and Matthew Lewis
Our Standards: The Thomson Reuters Principles of Trust.
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