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Is Binance.US a Fake Exchange?
Billions in customer funds transferred directly from Binance.US to offshore Binance exchange. Is this just a ploy to trick regulators?
In the final days of the FTX collapse, onlookers wondered about the solvency of FTX’s U.S.-based exchange, FTX.US. FTX.US was ostensibly held at arms length from the parent exchange. FTX leadership insisted that customers of the FTX.US division would be safe even if the parent company went under. However, when the end came for FTX, FTX.US met the same fate, freezing customer withdrawals and entering Chapter 11 with the rest of the FTX/Alameda network.
Despite being U.S.-regulated and theoretically walled off from FTX, FTX.US was in reality little more than an extension of its offshore owner. One might think that, perhaps, FTX.US was really just a ploy to trick U.S. regulators into focusing on the smaller American company instead of turning attention to the incoming financial hurricane in the Bahamas.
It turns out that FTX was not the only offshore exchange to create a U.S. based and regulated entity. Binance, the world’s largest exchange, created Binance.US in early 2019 in response to regulatory pressure. Binance.US was described as a separate entity from Binance that was merely licensing the name and certain features from the main company. Binance.US, based in Palo Alto, is licensed as a money services business in the United States. Note that it is not difficult to obtain these licenses, as we previously showed in our exposé of a network of fake crypto exchanges based in Colorado.
However, shortly after the creation of Binance.US, Forbes magazine published a report claiming that they had received a leaked document referred to as the “Tai Chi” document. According to this document, the Binance US exchange was a ploy to trick U.S. regulators into focusing on the compliant local exchange, while the parent exchange went free to do its own business. Binance responded by suing Forbes for defamation, only to drop the lawsuit a few months later. In February of this year Binance tried a different tack: they invested $200 million in Forbes’ parent company. If you can’t beat them, buy them!
However, this early reporting by Forbes was corroborated by a much more detailed report by Reuters in October 2022. With more sources and documents at their disposal, Reuters found essentially what the Forbes piece three years earlier suggested: Binance US was designed to trick regulators and U.S. customers:
It shows that in 2018, Zhao approved a plan by lieutenants to “insulate” Binance from scrutiny by U.S. authorities by setting up a new American exchange. The new exchange would draw regulators’ attention away from the main platform by serving as a “regulatory inquiry clearing house,” according to the proposal. Executives went on to set the plan in motion, company messages show.
In public, Zhao said the new U.S. exchange – called Binance.US – was a “fully independent entity.” In reality, Zhao controlled Binance.US, directing its management from abroad, according to regulatory filings from 2020, company messages and interviews with former team members. An adviser, in a message to Binance executives, described the U.S. exchange as a “de facto subsidiary.”
These problems, in addition to other legal issues at Binance, may explain Binance.US’s repeated trouble with their executive leadership. Binance.US’ first CEO, a young woman named Catherine Coley, led the firm from 2019 to June of 2021, when it was announced that the former Comptroller of the Currency Brian Brooks would be taking over as CEO.
Coley, a very public and vocal person during her time at Binance, seems to have disappeared after leaving Binance.US. While her social media accounts are still online, she does not appear to have made any posts since mid-2021. Her LinkedIn page has not been updated, with her last job listed as her role as Binance.US CEO. As far as we are aware, no one has ever publicly disclosed where Coley ended up after she left Binance.US.
Their second CEO, Mr. Brooks, lasted at the company for about four months before abruptly resigning.
These public issues have led many to wonder whether Binance and Binance.US are truly separate entities. We can now report that based on blockchain transfers, market data, and company disclosures, it appears that there is no meaningful separation between the two firms. In fact, we show that Binance.US both transfers customer deposits to Binance and pays customer withdrawals using transfers back from the offshore exchange’s wallets. Further, we demonstrate that trades allegedly happening on Binance.US’s exchange are likely being conducted directly on the main Binance exchange.
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Binance and Binance.US have transferred billions of dollars in crypto between each other
Yesterday, Binance US temporarily halted withdrawals of the Tether stablecoin (USDT). USDT, along with other stablecoins like USDC and Binance USD (BUSD), are dollar equivalent tokens on the blockchain backed by real dollar assets (in theory). It turned out that Binance US apparently didn’t have enough USDT in its wallets to pay back customers for several hours. The USDT balance in the main Binance US wallet dropped to its lowest level ever ($197,000) during this time period.
Twitter user @jconorgrogan was one of several people live-tracking the Binance.US withdrawal freeze. He noted that withdrawals restarted after Binance.US received a single transfer of $10 million USDT from an unidentified address. In turn, those funds had been pulled from two known Binance exchange wallets:
This did not gain as much attention as it should have. Remember, Binance and Binance.US are supposedly separate entities. However, Binance.US apparently had to pull money from the main Binance exchange to pay back customer withdrawals. In other words, Binance.US customers were paid back using funds transferred from the offshore Binance exchange! We must ask, why were U.S. customer assets held in Binance addresses?
We examined this intermediary transfer address in more detail. This address behaves like what some blockchain analysts call a “rail,” an address used to move funds between main wallets. In this case, this address appears to have only one function: transferring assets from the main Binance exchange wallets to Binance.US. Since the creation of this wallet in July of 2020, it has moved over $1.4 BILLION in Ether, USDT, USDC, and MATIC tokens from Binance exchange wallets to Binance.US:
After a little more digging, we identified a second address that does the opposite job: It exclusively handles transfers from Binance.US addresses to Binance exchange wallets. While this address has only been active since August 2021, it has handled over $1.9 BILLION in transfers from Binance.US to Binance. Notably, over $1.4 billion of this was in stablecoins ($1.2 billion USDT, $236 million USDC):
We performed some additional analyses showing that Binance exchange wallets received the largest amount of Binance.US transfers over these timeframes. In other words, Binance.US is sending customer funds to Binance. We conclude that a significant portion of Binance.US customer deposits are commingled with other deposits on Binance’s main exchange.
This revelation may explains the disconnect between Binance.US wallet holdings and the reported daily trading volumes on this exchange. Binance.US’s known wallets hold a total of ~$70 million in assets today (12/17). According to market aggregator CoinGecko, total 24 hour trading volume was $146 million, or roughly twice the exchange balance. Compare this with the main Binance exchange. Over the last 24 hours, Binance had some $7.3 billion in total volume, while having a total exchange balance of somewhere around $57 billion dollars. This means the much larger and more popular Binance exchange had volumes that were roughly 13% of their exchange balance.
In other words, the reported ratio of (volume:exchange balance) on Binance.US was 15 times higher than that ratio on the main Binance exchange. We hypothesize this discrepancy is due to Binance.US holding large amounts of customer deposits on Binance and executing most, or all, customer trades directly on Binance’s exchange.
This hypothesis is supported by Binance.US’s terms of service, where the company admits that:
BAM appoints market makers, including Related Parties and market makers that are incorporated or otherwise operating outside of the United States, to promote liquidity and facilitate trading on the Platform…
And in a recent Twitter Spaces meeting, CZ publicly admitted that he is a major shareholder in a “market making” firm that does business on Binance. Incredibly, he followed this admission with the claim that his market making service “does not make profits” and simply operates to “provide liquidity” to the markets (fast forward to ~14 minute in):
Our data suggest that Binance.US’s “market maker” is a single pair of addresses that exclusively transfer funds between Binance and Binance.US. These addresses move customer assets from the U.S.-based exchange to the much larger offshore entity to perform trades. This means that for all practical purposes, there is no real difference between having your money with Binance.US or directly with Binance. Given that Binance was barred from doing business in the United States, it certainly appears that Binance.US is little more than a convenient fiction to evade regulators.
We believe that these simple analyses demonstrate that Binance.US customer funds are being sent to Binance and commingled with Binance customer assets. Our data also suggest that Binance.US is using Binance to perform customer trades while pretending to be an independent entity. In reality, Binance.US appears to be little more than a facade to obfuscate the fact that an unregulated offshore crypto business currently under investigation for money laundering and sanctions violations is doing business in the United States despite being banned from the country.
These findings neatly dovetail with the previous reports by Forbes and Reuters indicating that Binance.US was a clever trick designed to fool regulators and customers. However, with the collapse of FTX everyone is taking a closer look at the crypto industry. We doubt that Binance’s regulatory Tai Chi will allow them to evade the long arm of the law for much longer…
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