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Internal Telegram messages among Binance executives have revealed how the exchange planned to dodge US regulatory scrutiny.
A report by the Wall Street Journal detailed the messages and documents from 2018 to 2010, as well as interviews with former employees.
Its conclusion is that Binance and Binance.US are "much more intertwined than the companies have disclosed."
The findings are critical as US regulators could claim power over Binance's entire business if they also reach the same conclusion.
Messages from a Binance Telegram group show that in September 2019 trading for Binance's US platform was prematurely activated:
Ninj0r [a Binance software developer]: Why did trading start???? It’s not time yet!!! Who started trading? We had the trading timers set? Who started trading?
Ninj0r: someone started TRADING EARLY. Who did it? At 8:56:09.822 someone manually started trading. Who? Why?
CEO Changpeng Zhao eventually responded: a guy here in Shanghai, mistake operation.
A spokesperson for Binance and Binance.US said the relationship between the two companies are governed by licensing agreements, adding that US customer data is stored in the US and Binance did not mix user data.
However, the Wall Street Journal claims Shanghai developers maintained key software functions at Binance.US until the summer of 2021. Last week, Zhao slammed the publication's claim that "Binance transferred $1.8 billion in stablecoin collateral to hedge funds, including Alameda and Cumberland/DRW, leaving its other investors exposed."
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Binance has been under the SEC's microscope as of recent. The crypto exchange made headlines this week for moving over US$400 million to a trading firm managed by co-founder and CEO Changpeng Zhao.
Records show that between January and March 2021, $400 million was moved from Binance.US to Merit Peak Ltd. The Binance.US account was registered under the name of BAM Trading. Company messages show transfers to Merit Peak started in 2020.
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The Binance.US spokeswoman said that in contrast to FTX, “Binance.US has never—and will never—trade nor lend out customer funds” and that Merit Peak stopped all activity on Binance.US in 2021.
Binance.US differentiates from Binance.com
According to the Wall Street Journal, Binance executives feared the firm could be exposed to lawsuits from US regulators if no precautions were taken.
Harry Zhou, an employee of a Binance-financed bitcoin trading company, reportedly circulated a proposal to Binance executives in 2018 that would address these concerns.
Zhou proposed that Binance could set up an American business to attract US regulatory inquiries, which would protect Binance from their attention.
A section titled “Insulate Binance from US Enforcement” called for Binance to develop a “purely contractual” relationship with its American company. The US entity would operate separately with its own management and employees.
“Regulator Engagement Plans” suggested that Binance could launch “major PR efforts demonstrating US operation’s willingness to exceed SEC expectations and serve as an industry resource for the SEC.”
Zhou incorporated BAM Trading Services which then became the operator of Binance.US in February 2019. In June, Binance announced the creation of Binance.US in partnership with BAM trading, which would license Binance's brand. Binance.US registered as a money-services business with the U.S. Treasury’s Financial Crimes Enforcement Network.
However, Binance did not disclose that Zhao controls the BAM firms through entities incorporated in the Cayman Islands and the British Virgin Islands.
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Binance.US offered different services to Binance due to US regulations. Only basic cryptocurrency trading was offered on Binance.US, not complex derivatives that were traded on Binance. Derivative trading in the US must be registered with the Commodity Futures Trading Commission or the SEC.
Although Binance announced it would no longer accept US customers, internal discussions reveal how Binance could keep American customers on Binance.com.
An employee on the Binance Telegram chat highlighted how 18% of Binance.com's views were US users. Binance's compliance chief at the time Samuel Lim suggested how Binance could retain its large US clients to prevent a "nuclear fall out" from a US regulatory lawsuit.
“Have them be creative and VPN,” he said in a Telegram chat in June 2019. Lim also reportedly discussed if US customers had offshore entities, they would also be able to access Binance.com.
Binance.US’s first chief executive, Catherine Coley claimed in a podcast after trading began that Binance.US is a "very separate entity” from Binance, which operates as "simply licensing software."
In a Binance.US Telegram chat three months later, Coley asked for progress updates that she could forward to Binance’s then-CFO Wei Zhou and CEO Zhao.
“Everyone please post your weeklies before tonight 7 pm est/4 pm pst so we can be in the good graces of Wei. Saturday is for the Weekly Updates! Send me 2-5 bullet points of what we think CZ/Wei should know about your work this past week,” Coley wrote.
One employee also allegedly tried creating a Google Form for new Binance.US customers but had difficulty changing the creator of the form from Binance.com to Binance.US.
That “will surely be seized upon by media and can be cited as direct evidence for corporate veil piercing in an adversarial judiciary proceeding,” Harry Zhou wrote on the Binance Telegram chat.
“It is particularly concerning here because this form has to do with opening client accounts,” he wrote. “If I were an AG, I would cite this as evidence that it is in fact Binance, an ‘unregistered foreign-based [money services business],’ onboarding the US clients.”
Wei Zhaou advised employees to retain a different Binance.US tone. Great feedback! Sit in ‘Binance.US’ shoes when drafting,” responded Binance’s then-CFO, Wei Zhou.
