Zhao-controlled Binance trading firms: According to the SEC’s civil complaint and prior reporting by Reuters, British Virgin Islands-based Merit Peak used client funds totaling billions of dollars to purchase Binance’s own dollar-linked “BUSD” crypto token. Together, the two entities permitted Binance to mix corporate funds with client assets and use the funds “as they wished,” according to the SEC.
Two offshore trading firms controlled by Binance founder and CEO Changpeng Zhao are at the centre of a complaint filed by the Securities and Exchange Commission (SEC) against the world’s largest cryptocurrency exchange, highlighting concerns over client funds.
Monday, the U.S. regulator alleged in a complaint that Swiss-based Sigma Chain received customer funds from Binance and then engaged in “manipulative trading” to artificially exaggerate the exchange’s trading volumes. According to the SEC’s civil complaint and prior reporting by Reuters, British Virgin Islands-based Merit Peak used client funds totaling billions of dollars to purchase Binance’s own dollar-linked “BUSD” crypto token.
Together, the two entities permitted Binance to mix corporate funds with client assets and use the funds “as they wished,” according to the SEC. The SEC added that this placed customers’ assets at risk while Binance sought to “maximise” its profits. Binance stated that it will “vigorously defend” itself against the SEC’s allegations and that all user assets are “safe and secure.” The company did not respond to this article’s email queries regarding the two trading firms. A Binance representative could not be reached via telephone.
Zhao-controlled Binance trading firms at heart of SEC lawsuit
Reuters was unable to obtain comment from Zhao, whose address was listed in a corporate filing as an apartment in a low-cost area of Dubai called Silicon Oasis. Tuesday, a Reuters correspondent visited the flat, but building security informed him that it had been vacant for several months and that no one answered the door.
After the failure of the cryptocurrency exchange FTX a year ago, regulators are examining whether Binance has adequately safeguarded billions of dollars in user funds. John Reed Stark, a former head of the SEC’s Office of Internet Enforcement, stated that the SEC’s complaint underscored the risks customers faced by holding their funds on the exchange due to the lack of “any regulatory oversight of any of the parties involved.”
“Your assets may be repositioned in whichever shell game Binance prefers. And in the end, if everything falls apart, you’ll be the last person standing,” Stark told Reuters. The Commodity Futures Trading Commission filed its own allegations against Binance in March, and the U.S. Justice Department is also investigating the company for money laundering and sanctions violations.
“FUNDS IN DANGER” Merit Peak was founded in early 2019, according to the SEC, and has characterised itself as trading with the “self-made wealth” of its owner Zhao, who has always guarded the size of his fortune.
According to the SEC, Merit Peak traded on both the Binance.com and Binance.US platforms, and its U.S. bank account received more than $20 billion in customer funds from both platforms.
Merit Peak then used the funds for “transfers that appear to be related to the purchase of BUSD,” according to the SEC, adding that the transfers put the funds at risk, including loss or larceny, and were made without the customers’ knowledge.
So What Next?
Following the receipt of $145 million from Binance.US’s operator by 2021, Sigma Chain spent $11 million on a yacht, according to the SEC complaint, which did not provide further details. According to the SEC complaint, it is uncertain how much money Zhao is alleged to have received from Merit Peak and Sigma Chain. However, according to the SEC, he “personally” received $62.5 million between October 2022 and January 2023 from a Binance bank account.
The SEC also alleged that Zhao used Merit Peak to finance Binance’s purportedly independent U.S. affiliate Binance with more than $16 million. Former executives claim that BUSD and Binance’s native crypto token BNB has been crucial to financing Zhao’s business empire. Reuters reported in May that Binance used its BUSD holdings to meet customer withdrawals by selling them for dollars as required.
The SEC complaint also named Binance Labs, Binance’s venture capital branch, as part of the exchange’s strategy to increase demand for BNB. The majority of Binance Labs’ investments have been financed with either BUSD or BNB, according to two individuals with direct knowledge of the company’s activities. Last year, Binance Labs reported managing total assets of $7.5 billion.
Since 2018, Binance has made 212 venture capital investments through Binance Labs, according to data from PitchBook, with nearly 180 of these projects still active.