The Breakdown - Reuters Says Binance Commingled Funds, But Is It Just More FUD?

Episode Date: May 23, 2023

After FTX, the industry's guard is up when it comes to exchanges behaving badly. Reuters today published a piece saying that Binance had commingled user funds in 2020 and 2021. Binance strenuously denied the claims and called it just more FUD. Who has the right of it? The show also covers an update in the DCG case.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, May 23rd, and today we are catching up on a report that Binance was co-mingling customer funds. Before we get into that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends. Well, this morning as I was prepping the show, news broke from Reuters. Walter Bloomberg on Twitter said, The world's largest cryptocurrency exchange, Binance,

co-mingled customer funds with company revenue in 2020 and 2021. In breach of U.S. financial rules that require customer money to be keep separate, three sources familiar with the matter told Reuters. So let's go through this. Let's try to get a sense of how serious this is. is let's see if there is another Sam-type situation on our hands. First, let's talk the accusation. Well, it's pretty much right there in the headline,

Binance commingling customer funds with company revenue in 2020 and 2021. The sourcing, three sources familiar with the matter and Reuters. But let's try to get a few more details. From the Reuters piece, quote, one of the sources, a person with direct knowledge of Binance Group's finances, said the sums ran into billions of dollars and commingling happened almost daily in accounts the exchange held at U.S. lender Silvergate Bank. Reuters couldn't independently verify the figures or the frequency, but the news agency reviewed

a bank record showing that on February 10th, 2021, Binance mixed $20 million from a corporate account with $15 million from an account that received customer money. Reuters found no evidence that Binance client monies were lost or taken. So there's a bunch that's important here. One is that Reuters couldn't verify the figures in total, and that they really only had this one particular bank record showing a mixing. Now, what did Binance say? a statement to Reuters, they obviously denied this. Spokesperson Brad Jaff said,

These accounts were not used to accept user deposits. They were used to facilitate user purchases. There was no commingling at any time because these are 100% corporate accounts. End quote. Reuters goes on, when users sent money to the account, they were not depositing funds but buying the exchanges bespoke dollar-linked crypto token BUSD. This process was, quote, exactly the same thing as buying a product from Amazon. Basically what Binance is saying is that in this particular instance that Reuters has this account for, it's not customer funds being deposited so that then Binance can go buy Bitcoin or Ethereum on their behalf. Binance is saying that these were customers who were buying BUSD, the proprietary stable coin, which if that's the case, as soon as they

buy that stable coin, those $15 billion or whatever it is become Binances. At least that's the argument. Now, let's hold aside that one particular instance because Reuters is obviously trying to paint a much larger picture. I think the real sum-up comes from the sentence, The money flows at Binance indicate a lack of internal controls to ensure customer funds were clearly identifiable and segregated from company revenues. Now, there are also two other points that the piece makes. A big part of the article is about Silvergate Bank. Now, this is a little complicated because on the one hand, journalists should be trying to suss out this complicated web of relationships between accounts,

and the more transparent there is and the less need for corporate forensics there is, I think in general, the better. At the same time, this story continues the tone, which is a presumption of guiltiness on the part of Silvergate, which has by and large so far been guilt by association. Silvergate was for a long time one of the only banks to try to actually service the industry at all. And so, of course, they're going to be caught up in the industry's dealings. Now, I think the most relevant thing for this piece is that there's not substantively new information that Reuters has uncovered about Silvergate. It's just showing how complicated and messy the web of accounts that Binance had actually was. The other part of the Reuters story has to do with tax evasion.

Discussing Binance's European operations, Reuters writes, One consequence of Binance's financial maneuvering, four former Binance executives said, was to protect the exchange's profits from tax authorities. Binance has never disclosed where its Binance.com trading platform is based, nor what corporate taxes it pays and where. To assess how much tax finance pays, Reuters reviewed the exchange's public filing since 2018 in countries where it has said it has significant operations. In France and Dubai, where finance established hubs last year, local units have not detailed tax payments. France's finance ministry declined a comment, and Dubai didn't comment. In Malta, where Binance said it was based

for several years, its main local unit reported losses each year, so it paid no tax. Malti's authorities didn't comment. The only significant tax payments Reuters found were in Lithuania, where in 2022, Biffinity paid 42.5 million euros data from Lithuania's tax authorities show. Binance chief strategy officer Patrick Hillman went in on them. He wrote, let me explain just how desperate Reuters is to publish a negative story. The whole base of their story this morning is that when users purchased BUSD, Paxos from Binance, they were taken to a transaction page that had the term deposit on it. Users were making a purchase of a stable coin that was redeemable by the Paxos, which was explicitly stated on the page. The story is so weak that they had to put up front,

Reuters found no evidence that Binance client monies were lost or taken in a transparent attempt to protect themselves from a libel suit. Underneath that, they then pinned a thousand words of conspiracy theories, which we explained were false, with zero evidence other than a, quote, former insider. We've been very public about where the company had regulatory shortcomings in the past. There's no reason for a respected news outlet like Reuters to continue making stuff up. Also, the xenophobia behind consistently mentioning CZ's ethnicity, without noting that he's been Canadian since the age of 12, is about as subtle as a hammer wrapped in a pillowcase. So what about the reactions from the crypto crowd?

Obviously, this is a community that is very sensitive to this type of issue following FTX last year. Scott Melker tweeted, New Binance Fudd just dropped. Seems like a nothing burger from years ago. Rob Payone called out the potentially dubious sources of information, saying, I love how the Reuters article has multiple quotes from John Reed Stark, whose main occupation is currently crying about the crypto industry on LinkedIn. Also, when he gets referred to as a former chief at the SEC,

no one says that he was last employed there in 2009. The Blocks Frank Chaparro says story feels kind of weak, in my opinion. Back to work. So what's my take on this? On the one hand, co-mingling is absolutely deadly serious. To the extent that was something that Binance was doing, even if it was just out of bad internal controls or growing too fast or any other reason.

The crypto community should 100% absolutely expect that it is no longer the case. The second thing, however, that I will say, is that when we compare this to FTX, we have to remember that SBF's commingling wasn't casual crappy control commingling. It appears to have been intentionally fraudulent shipping it to Alameda to try to lever the crap out of it commingling. These things are obviously massively different. To be clear, they are both bad, but only one has the intention. to use customer funds for nefarious purposes. I think in some ways these sort of stories which have a

serious point but which really don't back it up are a little bit mainstream media cries wolf. They anesthetize the crypto community and others, frankly, to the seriousness of the charges underneath. We absolutely need our leading institutions and companies like Binance, Coinbase, and everyone else to be held accountable. And I think in a post-SAM world, every company has to expect that they are going to be under a microscope like never before, even if it's not fair. But let's make the point that the evidence makes, not try to score journalistic points by expanding it to something bigger than it is. Now, I hope Reuter stays on this beat. I want there to be accountability. It just has to be actually based on facts. Next up, let's stay on the theme of 2022. According to Gemini's latest

update on the Genesis bankruptcy, Digital Currency Group has failed to make $630 million in loan repayments to Genesis. The payment came due last week and was a result of intercompany loans between DCG and its subsidiary Genesis, which were taken on sometime last year to backstop losses incurred from the Three Arrow's Capital Default. The Genesis bankruptcy has been ongoing since January and looked close to being resolved in February, with the deal on the table awaiting approval, which would have seen an estimated 80% recovery rate for creditors. Last month, however, the unsecured creditors committee, which does not include Gemini, asked for a court-appointed mediator, to assist in renegotiating the deal, in particular regarding DCG's contribution to the resolution.

The committee had been conducting an investigation into Genesis and apparently came up with some details that made them feel the deal was unsuitable in some way. Mediation was granted for a 30-day term, which runs through to late May. Now that the loan repayment has been missed, Gemini wrote in their weekly update on Friday that the various creditor groups, quote, are considering whether to provide a forbearance to DCG to avoid a DCG default. Consideration will be based in part, on whether the parties believe DCG will engage in good faith negotiations on a consensual deal. End quote. A forbearance would allow DCG to either delay or vary its repayment schedule on the loan. Now, Gemini is by far the largest creditor in the bankruptcy with $1.1 billion claim to be owed

on behalf of over 230,000 Gemini earned customers. Early on in the process, Gemini had been vocal about bad faith negotiation tactics from DCG and their CEO, Barry Silbert, but those complaints died down after a deal was proposed in February. It appears that the mediation process will continue to run its course, although the attitude of creditors towards reaching a resolution via mediation appears to have soured. Again, from their update, Gemini wrote that, quote, In the event a deal cannot be reached, Gemini, along with other parties, is working with Genesis to suggest terms for an amended plan of reorganization that could be advanced without DCG's consensual participation. On Friday, Genesis filed a motion with the bankruptcy court to extend the time

allowed to exclusively put forward resolution plans before the creditor group is able to put forward their own plans. If the court approves this motion, Genesis will have until late August to file a reorganization plan. Gemini have stated that they will at least have input into a Genesis plan and likely support the move. A DCG spokesperson said, DCG continues to be engaged with the various stakeholders in the Genesis Capital restructuring process pursuant to the 30-day mediation period entered into by all parties on May 1st. Frankly, it is very, very hard to tell from the outside what is going on here. It seemed in February like everyone was perfectly satisfied or at least satisfied enough to move forward with the plan. It hasn't been clear

why the UCC decided to push forward for a different resolution, but at the end of the day, it's one big mess. Jeff Dorman from Arka writes, DCG owes Genesis money. They won't be able to get this money faster by putting DCG into bankruptcy. Genesis owes Gemini money. They won't get this faster by putting DCG into bankruptcy. Gemini has no leg to stand on, can only wait. There ain't no money. It's a non-story until that changes. Staying on the bankruptcy theme in a letter published on Friday, BlockFi instructed that public statements about a bankruptcy reorganization plan should be disregarded via a court-mandated communication. BlockFi's statements had been published on May 13th and discussed a proposed plan. The bankruptcy court overseeing the process ordered the comments be retracted, stating that the

crypto lender had, quote, prematurely posted certain statements prior to the plan being authorized for circulation by the court. The letter which was drafted by the court highlighted discontent among creditors, noting that the plan was opposed by the creditors committee. The letter stated that, quote, the committee also believes that it is not appropriate for BlockFi via its current management and professionals to control the liquidation of BlockFi and distribution to creditors. The committee has requested changes to the plan. A hearing on the reorganization plan is currently scheduled for June, but the TLDR on that one is that the court told BlockFi to shut the hell up. Now finally, two more little regulatory-slash-legal skirmishes for exchanges in Asia.

The Securities Commission of Malaysia has ordered Huobi Global to halt operations in the country amid allegations that it's operating a crypto exchange without the proper registration. The regulator demanded that Huobi's website be disabled and that mobile applications be withdrawn from app stores. The exchange was also required to cease publishing advertisements directed at Malaysian investors, according to an announcement made on Monday. Whoobi CEO, Leon Lee, was specifically ordered to immediately carry out the directives. Malaysian investors that used Huopi were advised to, quote, immediately ceased trading through its platform, withdraw all their investments, and close their

accounts. The Securities Commission noted that unregistered exchanges are not protected by Malaysian law, so the regulator will not provide protection to investors. Gemini is also in hot water, this time with Filipino regulators following the launch of their global derivatives platform last month. The Philippines Securities and Exchange Commission warned investors that the exchange was operating without the appropriate registration in an announcement published late last week. The Philippines SEC said, quote, Gemini trust companies LLC's lack of prior registration with the commission makes their activities of offering and or selling securities in the form of derivatives illegal in violation of the provisions of the SRC, the SRC referring to its

local securities regulation code. The penalty for breaches of securities regulations in the Philippines can carry a maximum 21-year prison sentence or a fine of approximately $90,000 U.S. dollars. Gemini's derivatives exchange was offered across 30 international jurisdictions and appeared to have been careful to avoid jurisdictions where offering derivatives to retail customers was prohibited, apparently overlooking the Philippines. In reprimanding Gemini for launching without registration, the Philippines regulators announcement channeled U.S. SEC chair Gary Gensler, referencing the SEC lawsuit against Gemini and quoting Gensler as saying, today's charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries

need to comply with our time-tested securities laws. Doing so best protects investors. It promotes trust in markets. It's not optional. It's the law. So guys, there we are. Still lots of cleanup from last year. Hopefully things continue to move and get resolution soon. But for now, as that dirty laundry gets aired, you know we will be here to look at it all. Until next time, be safe and take care of each other. Peace.