By Angus Berwick and Tom Wilson
LONDON (Reuters) - Two offshore trading firms controlled by Binance founder and CEO Changpeng Zhao lie at the centre of the Securities and Exchange Commission (SEC) lawsuit launched against the world's largest crypto exchange, which highlights concerns over client funds.
Swiss-registered Sigma Chain received customer funds from Binance, the U.S. regulator said in its complaint on Monday, and then engaged in "manipulative trading" to artificially inflate the exchange's trading volumes.
British Virgin Islands-based Merit Peak, meanwhile, used billions of dollars in client money to buy Binance's own dollar-linked "BUSD" crypto token, according to the SEC's civil complaint and previous reporting by Reuters.
Together, the two companies allowed Binance to commingle corporate funds with client assets and use the monies "as they please," the SEC wrote. This put customers' assets at risk while Binance sought to "maximize" its profits, the SEC added.
Binance said it would "vigorously defend" itself against the SEC charges and that all user assets were "safe and secure". The company did not respond to emailed questions about the two trading firms for this article. A Binance spokesperson could not be reached by phone.
Zhao, who could not be contacted by Reuters for comment, had an address listed in a corporate filing last year at an apartment in a low-cost area of Dubai called Silicon Oasis.
A Reuters reporter visited the apartment on Tuesday, but was told by the building's security that it had been empty for several months and nobody answered at its front door.
After the collapse last year of crypto exchange FTX, regulators are focused on whether Binance has adequately protected billions of dollars in user funds.
John Reed Stark, a former chief of the SEC's Office of Internet Enforcement, said the SEC's complaint highlighted the risks that customers were running by holding their funds on the exchange due to the absence of "any regulatory oversight of any of the parties involved".
"Your assets can be moved around in whatever shell game Binance prefers. And in the end, whenever everything crashes you're last in line," Stark told Reuters.
The SEC action came after the Commodity Futures Trading Commission filed its own charges in March against Binance, which has also been under investigation by the U.S. Justice Department for money laundering and sanctions violations.
'FUNDS AT RISK'
The SEC said Merit Peak, set up in early 2019, has described itself as trading with the "self-made wealth" of its owner Zhao, who has always closely guarded the extent of his fortune.
Merit Peak traded on both the Binance.com and Binance.US platforms, the SEC said, with its U.S. bank account receiving more than $20 billion, including customer funds from both.
A Reuters report in May identified this bank account as being held at now-defunct U.S. lender Silvergate Bank.
Merit Peak then used the funds in "transfers that appear to relate to the purchase of BUSD", the SEC said, adding that the transfers placed those funds at risk, including of loss or theft, and were done without notice to customers.
While it did not detail where all the funds received by Merit Peak and Sigma Chain ended up, the SEC cited several examples of the firms transferring money outside of Binance.
After receiving $145 million from Binance.US's operator by 2021, Sigma Chain spent $11 million on buying a yacht, the SEC complaint said, without elaborating.
It is unclear from the SEC complaint how much money Zhao is alleged to have drawn from Merit Peak and Sigma Chain. However, the SEC said he "personally" received $62.5 million from a Binance bank account between October 2022 and January 2023.
The SEC also said Zhao used Merit Peak to direct more than $16 million to fund Binance's purportedly independent U.S. affiliate Binance.US.
BUSD, along with Binance's own crypto token BNB, have been key to financing Zhao's business empire, former executives say. Binance used its BUSD holdings to meet customer withdrawals by selling them for dollars as needed, Reuters reported in May.
The SEC complaint also identified Binance Labs, a venture capital arm of Binance, as part of the exchange's plan to increase demand for BNB.
Binance Labs, which last year said it managed total assets of $7.5 billion, has financed most of its investments with either BUSD or BNB, two people with direct knowledge of its activities said.
Binance has made some 212 venture capital investments through Binance Labs since 2018, according to PitchBook data, with almost 180 of the projects remaining active.