[Opinion] Is this Binance's FTX moment?

Binance has just been accused of commingling customer funds and business revenue within it bank accounts.

In a special report, Reuters stated that three sources told them that Binance had, in 2020 and 2021, commingled customer funds with company revenue.

The report claimed that such commingling happened almost daily in accounts that the exchange held at the now-defunct Silvergate Bank.

That being said, the report also clarified that ‘Reuters found no evidence that Binance client monies were lost or taken.’

Following the reports’ publication, Binance’s chief communications officer derided the report as ‘desperate’, and argued that Binance had addressed the issue on multiple occasions, and that user and corporate funds were kept on completely separate ledgers.

Hillmann accused Reuters of xenophobia for mentioning CZ’s Chinese ethnicity, and also stated that he knew who the sources were, and that Reuters would be embarrassed when it became public.

He did not, however, directly deny the allegations that Reuters put forth.

And this is far from the only challenge facing Binance.

Late last month, the US Commodity Futures Trading Commission (CFTC) sued Binance for failing to register as a futures commission merchant, and for offering unregistered crypto derivatives options to US customers.

Binance was alleged to also have instructed clients on how to evade legal restrictions, and to have notified clients when authorities requested information about their accounts.

Celsius, FTX, and now Binance?

Accusations of improper internal controls and a lack of compliance with established principles of traditional finance are not exactly rare in crypto. After all, much of crypto evolved from a disdain for such regulation.

But the specific charges of failing to keep customer funds and company revenues separate is alarming- these were the accusations that many community members also levelled at Celsius and FTX days before the companies declared bankruptcy.

The risk, of course, is that Binance has used customer funds for their own business expenses and that Binance might actually be insolvent.

As of now, however, Binance does not seem to be seeing large scale withdrawal requests from their platform- at least indicating that customers seem to still believe in Binance’s solvency.

This speaks volumes about CZ and Binances’ reputation and trustworthiness, especially if the accusations are true. It shows that the community believes that CZ has been true to his word that Binance keeps track of customer deposits and company funds, and that Binance does not misappropriate customer deposits.

After all, the danger of commingling customer deposits and company funds is that the company can easily misappropriate funds from customers without arousing suspicion.

Of course, if CZ and Binance are found to have indeed misappropriated funds, then the story would be extremely different- and no doubt regulators like SEC chairman Gary Gensler will have plenty to say about it.

CZ’s dream: a compliant and regulated Binance?

That being said, the accusations are not likely to do any favours for CZ when it comes to Binance’s reputation with regulators.

Despite the accusations that have been hurled at Binance and their actions, Binance has generally refrained from direct criticism of regulators and regulations.

When the CFTC filed its lawsuit, Binance responded that the lawsuit was ‘unexpected and disappointing’, and reiterated Binance's efforts to cooperate with regulators over the past few years.

On Binance’s blog, CZ has also stated that “there are many reasons that we at Binance want regulations”, before going on to expound on the benefits that regulation could bring, including better integration with banks and the greater potential for mass adoption.

Yet, CZ has also been careful to caveat his statements. What he wants is not just any kind of regulation, but good and clear regulation. In CZ’s own words, “Good regulations will be good for crypto. Bad regulations will be bad for crypto. Having good regulations that protect consumers while encouraging innovation is important for growth of the industry.”

But this is where CZ may have potentially shot himself in the foot- the laws that prohibit commingling of customer deposits and company funds are designed to ensure that companies and executives cannot abscond with customer funds.

This is why the CFTC report and the Reuters report are significant- not because Binance may actually be another FTX in the making, but because these lapses challenge the core of Binance’s and CZ’s PR strategy, which relies on them being compliant and cooperative with regulators.

Binance’s new strategy?

Moving forward, Binance may be in need of a new strategy when it comes to dealing with regulators. Given that regulators are not really buying Binance’s narrative that it is compliant with regulations, Binance may need to prove their credibility in other ways.

Certainly, the wide support and customer base that it has attracted thus far is something to play with, but how well will regulators take to negotiating with a disadvantageous hand is another thing. Given how vociferously the anti-crypto faction has been voicing their opinions, this would likely be a political non-starter.

Instead, anti-crypto hardliners will most likely double down on unfriendly regulation in a bid to regain the initiative.

Binance may have to ditch their strategy of getting cosy with regulators, and instead allow the court of public opinion to act as their shield when they receive criticism from regulators. After all, actions speak louder than words, and if Binance can prove their trustworthiness over time, it will count for far more than simply complying with regulations.

It will likely be a staring contest between regulators and Binance, where Binance demands recognition that it has acted honourably and is capable of self-regulation, even though their definition of good regulation may differ from regulators.

Who eventually comes out on top will depend not only on Binance’s own actions, but on how well crypto companies in general regulate themselves as well. The more collapses there are, the more scams there are, and the more unruly the industry appears, the worse Binance’s case will be.

In some ways, the CFTC case and the allegations of commingling of funds is nothing new- Do Kwon has been subpoenaed several times, and many other companies have been accused of lax internal controls. But for perhaps one of the strongest proponents of regulation in the crypto world to be accused of the same is a different story. And for their reputation to be sufficient to assure investors that their funds were safe is something new.

This may represent a turning point in history- Binance is under serious regulatory pressure and scrutiny, and how they handle it will have consequences for the entire industry.