Binance and CZ under pressure

Following Forbes and Reuters, The Wall Street Journal has drawn a parallel between FTX and Binance. The spectre of SBF remains strong…

When Binance imitates FTX

One thing FTX and Binance have in common is the fact that they have a US entity which is supposed to be independent.

Everyone remembers how Sam Bankman-Fried repeatedly stated that FTX.US was safe no matter what.

In the end, FTX, FTX.US, the Alameda Research investment fund and 130 other affiliated companies were declared bankrupt simultaneously.

As a reminder, the SEC accused SBF of “lending” FTX’s customers’ money to its personal investment fund, Alameda Research. As a result, $8.9 billion are still missing…

In other words, although regulated in the United States and theoretically insulated from FTX, U.S. client funds were drained anyway.

The Financial Times has just released a documentary on this scandal (which, however, fails to mention some grey areas such as money laundering from Ukraine…).

It took just a few days last November for FTX to come crashing down. Big institutional investors and retail traders lost millions. There is an alleged $8bn of customer deposits missing pic.twitter.com/FPD04gx1sR

— Daniel Garrahan (@DanGarrahan) March 6, 2023

FTX.US was a ploy to divert the attention of U.S. regulators from the wrongdoings taking place in the Bahamas. New FTX CEO John Ray confirmed in December:

Questions have been raised as to why all FTX Group companies were included in the bankruptcy proceedings, particularly FTX.US. The answer is that FTX US was not independent of FTX.com.

Hence the concern about Binance.US. Is the US exchange, which was created in 2019 in Palo Alto (California), really a separate entity from Binance?

The Wall Street Journal gets involved

The WSJ reports this Monday, March 6, on a private 2019 discussion among Binance executives who were concerned about a “coming crackdown by U.S. regulators on unregulated offshore exchanges.”

One executive stated that “any prosecution by U.S. regulators would have the effect of a nuclear bomb for the exchange and its executives.”

According to messages and documents from 2018 to 2020 reviewed by the WSJ, as well as interviews with former employees, the exchange then began looking for a way out.

“The strategy centered on creating a U.S. exchange, Binance.US,” the WSJ says. “Binance.US was to use Binance’s technology and brand via licenses, while appearing completely independent.”

The WSJ argues that the purpose of the maneuver, as with FTX, was to prevent U.S. regulators from regulating the parent company Binance.

This intrigue could explain the desertion of CEO Catherine Coley in June 2021. Since then, it has been nothing but radio silence on the Twitter page of the one who declared in 2019: “We are a very separate entity”. “We only have licenses to use Binance software”.

His successor, former Comptroller of the Currency Brian Brooks, will leave after only four months. As a result, Forbes, Reuters and now the WSJ suggest that Binance.US is not an independent entity.

If that were the case, the WSJ believes that the SEC could then “claim authority to oversee all of Binance’s activities.” “Billionaire Changpeng Zhao (CZ) and his finances could fall under closer scrutiny.”

The companies behind Binance.US are owned by CZ

According to the WSJ, it was Harry Zhou who proposed setting up a U.S. company in late 2018 to prevent the SEC from looking into Binance’s entire business.

In February 2019, Mr. Zhou incorporated BAM Trading Services Inc (in Delaware), which will become “the operator of Binance.US.”

In June of the same year, “Binance announces the creation of Binance.US in partnership with BAM Trading, the company that brings the licenses for the Binance technology and brand,” writes the WSJ.

The newspaper goes on to reveal that CZ, Binance’s founder and CEO, controls BAM through a series of entities incorporated in the Cayman Islands and the British Virgin Islands…

Binance’s spokeswoman did not respond to requests for an interview with CZ. Harry Zhou and Wei Zhou also declined to comment on the WSJ’s findings.

Finally, it is also reported that the SEC is investigating the relationship between Binance.US and two trading firms (market makers) with ties to CZ: Merit Peak Ltd. and Sigma Chain AG.

Reuters saw similarities with Alameda Research, which was strongly denied by Binance.US. The exchange said that, unlike FTX, “Binance.US has never used or loaned its clients’ funds.”

The exchange added that Merit Peak had no relationship with Binance.US since 2021. But no comment was made on Sigma Chain.

To sum up, the SEC is taking the lead to avoid being confronted with another FTX scandal. These suspicions are all the more legitimate since Binance has just been caught red-handed with its BUSD stablecoin…

In retaliation, the SEC chairman is now suggesting that asset managers should no longer be able to use exchanges to hold bitcoins. Hard blow for the exchanges.