In the United States, Securities and Exchange Commission (SEC) accuses Binance of engaging in sham operations. Investigation Forbes shows that FTX may have played a significant role in this matter.
Article by Javier Paz for Forbes USA – translated by Flora Lucas
What you need to know
From November 2019 to November 2022, Binance sent $4.6 billion worth of BNB to FTX, of which 87% was sent almost instantly to Binance.US
Transaction flows identified by American Forbes and Gray Wolf Analytics appear designed to hide their origins due to the high frequency, relatively low value, and lack of randomness one would expect from transactions of a purely economic nature.
In a June 2023 lawsuit against Binance, the SEC accuses Sigma Chain (a company owned by Binance founder Changpeng Zhao) of engaging in sham trading on the US Binance platform once it was launched in 2019.
Some of the tokens sent by FTX to Sigma Chain may have been part of larger market making, trading and investment activities.
In June 2023, the SEC sued Binance for operating as an unregistered stock exchange in the United States, amid a number of other allegations, including fraud. According to one of those indictments, from at least September 2019 to June 2022, Sigma Chain, a trading company owned and controlled by former Binance CEO Changpeng Zhao, who just pleaded guilty to money laundering at the federal level, charges money laundering and sanctions violations, participating with fictitious transactions. that it “artificially inflated the trading volume of cryptocurrency asset securities on the Binance.US platform.” Furthermore, according to the same allegation, Sigma Chain, which is based in Switzerland, has actively facilitated fictitious operations involving dozens of cryptoassets since the creation of Binance’s US franchise in 2019.
Survey results Forbes Trading on Binance reveals that FTX, the bankrupt company of convicted criminal Sam Bankman-Fried, was likely a key player in facilitating fictitious trades in at least one asset, Binance’s BNB token.
Currently valued at $39.6 billion, BNB has long been an important part of Binance’s operating model. Tokens are primarily used to reward customers by offering discounts on transactions or recruiting new account holders. Like stocks, they can also serve as corporate currency. However, these tokens are not subject to any regulatory oversight.
How did Binance work?
Among the dozens of wallets used in Binance.US, two wallets, Sigma Chain 1 (SC1) and Sigma Chain 2 (SC2), are global escrow wallets used for BNB and dozens of other tokens. “These wallets have interacted with more than 1.5 million addresses on Binance.US since their inception in April 2019, and the SEC’s lawsuit against Binance indicates that Sigma Chain used these wallets to conduct fictitious trades and trades on the platform,” explains Chedi Mbaga, head of the Forensic Department at Gray Wolf.
Specifically, it is likely that SC1 and SC2 were the primary market makers for BNB on Binance.US on behalf of Sigma Chain, as the MEMO fields in these transactions refer to US accounts. The Binance.US website retrieved by WayBackMachine states that “MEMO is an identification code required in addition to the receiving address when sending certain cryptocurrencies,” such as BNB Beacon tokens (BEP2 standard). “Each MEMO code is associated with a unique wallet and helps ensure that the transaction is sent to the correct recipient (…) and allows Binance.US to identify the deposit and credit the appropriate account. »
The SC2 wallet was a particularly critical link to Binance’s BNB operations, considering that between April 2019 and December 2022, more than 130 million BNB tokens passed through the wallet. In comparison, only two other Binance wallets, the Genesis wallet (which was used to create the entire supply of 200 million BNB in 2017) and Binance Hot Wallet 5 (the main token custodian) saw more transits of BNB tokens during this period. The SC1 wallet received a significantly smaller flow of 8.6 million BNB.
A look back at the original token offering
To fully understand what happened, it is important to understand how Binance was able to send so many tokens to these wallets. A key piece of the puzzle was solved when Forbes and Gray Wolf revealed that Binance’s troubled initial token offering left the exchange with an unclaimed and free-to-use pot of 65 million BNB tokens. Data analyzed Forbes show that these tokens were routed to another Binance wallet which Forbes identified as Hot Wallet 5 (HW5) with at least 39.2 million BNB tokens.
In total, Binance sent 49.8 million BNB tokens to SC1 and SC2 wallets, as well as smaller Binance wallets on HW5, plus another 6.5 million BNB tokens to a wallet on FTX.
Note: FTX and Binance have never publicly acknowledged that FTX owns this wallet, and neither company responded to requests for comment. However, Forbes believes this wallet belongs to FTX, as identified on FTX.com, and its trades started pouring in when FTX went live with Binance as the first investor in late 2019. These trades stopped in the winter of 2022, when the company declared bankruptcy. It is also a large holder of the FTX token, FTT, which probably would not have accumulated if it was not tied to the company.
In total, FTX received 16.5 million BNB tokens worth $4.68 billion over the two-year period starting in September 2021, from multiple Binance wallets, notably the Binance Decentralized Exchange Wallet (Binance DEX) and the previously mentioned HW5 wallet.
Token flows between different exchanges are common in the cryptocurrency industry. Many professional companies and even individual traders have accounts on multiple exchanges so they can take advantage of unique pricing opportunities when they arise. However, the flows of BNB to and from the FTX wallet show suspicious patterns, especially since these flows do not appear to be random, which would probably be obvious if it were market-related economic activity. Binance powered these wallets from HW5, then through some of their other wallets, and finally from their decentralized exchange wallet. Additionally, nearly 87% of the tokens received by FTX were sent directly to SC1 and SC2 within hours or days of their arrival, meaning that FTX simply acted as an intermediary for this transaction.
FTX is unlikely to use these tokens for BNB market making on its platform, which was an option Forbes considered. According to a leading cryptocurrency market maker, who spoke on condition of anonymity, “a wallet in the market maker role typically shows larger variances between token inflows and outflows because the firm and its larger clients selectively hold proprietary positions in the token.” In this case, the flows to and from the FTX wallet are almost identical, making its role more likely than that of a true market maker. Additionally, a market maker would typically have many counterparties receiving tokens, but in this case, 80.9% of the tokens in the FTX wallet went to a single wallet controlled by Binance (SC2) and another 7.1% went to three other wallets controlled by Binance, including SC1.
What to remember?
Transaction flows identified by Forbes and Gray Wolf could indicate an effort to hide token flows from regulators and market participants and put them in the hands of Binance.US and Sigma Chain, who could then use those assets for whatever purposes they wish. Based on evidence presented in the SEC’s June lawsuit against Binance suggesting that Sigma Chain engaged in shell trading, Forbes believes that FTX was an active participant in this transaction.
“We can interpret the volume of BNB flows between Binance.US and the FTX wallet to mean that FTX was probably the second largest participant in the BNB markets accessible to US customers prior to December 2022,” says Gray Wolf. “And that Sigma Chain, as an institutional client depositing into US Binance wallets, probably enabled a significant number of transfers between the two exchanges. »
However, key questions still remain unanswered. It remains unclear to what extent FTX was aware of the use of BNB tokens that passed through its platform to Sigma Chain. The relationship between the two companies is complicated because while Binance was an early investor in FTX, the two companies were also rivals. In fact, FTX launched its own American competitor, Binance, in May 2020. In addition, there is still much to learn about the activities of Sigma Chain, whose diagram shows that it received significantly more tokens directly from Binance than through which it did not receive any. FTX, although the amount was quite large. This suggests that not all tokens sent by FTX were used to execute dummy trades, but may have been part of broader market-making, trading and investment activities.
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