What exactly is commingling? In the broadest sense, it’s when money from different sources is pooled together, which may be perfectly legal. But in some cases, it’s illegal, for example when assets held on behalf of a client are mixed up with a company’s own funds.
Binance commingled customer funds with the company’s own revenue in 2020 and 2021, three sources familiar with the matter told Reuters. This was a breach of U.S. financial rules that require customer money to be kept separate.
One of the sources, who had direct knowledge of Binance’s finances, said that the commingling happened almost daily, in accounts held with Silvergate Bank, and ran into the billions of dollars.
To be sure, Reuters found no evidence that Binance client money was lost or taken during this period, and Binance denied mixing customer deposits and company funds.
The Reuters report was the latest in a series of investigations into Binance, the giant exchange behind as much as 70% of the world’s cryptocurrency trading. (To read other reports in this series, click here.)
The issue of commingling funds is at the heart of regulators’ concerns about crypto exchanges.
Back in March, when the CFTC sued Binance, it said that some of Binance’s corporate entities “have commingled funds” (Binance has said the CFTC’s complaint is an “incomplete recitation of facts”) and the SEC’s chair, Gary Gensler, said in May that crypto exchanges’ business models “tend to be built on taking customer funds, commingling it.”
The collapse of FTX last year came in the wake of reports that it had commingled assets with Alameda Research – although Sam Bankman-Fried said he did not knowingly commingle customer funds. The SEC and CFTC said that Bankman-Fried used commingled FTX funds to finance his own venture capital investments, political donations and real estate purchases.
FTX’s alleged commingling of client and company funds was noted by IOSCO, the global securities regulator which on Tuesday unveiled its proposed rules for the crypto asset sector. It recommended eighteen measures, covering areas including: conflicts of interest, market manipulation, cross-border regulatory cooperation, custody of crypto assets, operational risks and treatment of retail customers. IOSCO said what happened at FTX underscores the importance of these recommendations.
IOSCO plans to finalise these standards by the end of the year and expects its 130 members, which includes most global securities regulators, to use them to plug gaps in their rulebooks.
