Binance admits to mixing its token collateral into customer fund accounts

Binance reportedly acknowledged its error in storing customer funds and said it will work law enforcement to address the situation.

Video transcript

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- Crypto platform Binance acknowledging a storage mistake that found some of its collateral coins mixed in with customer funds. Yahoo Finance reporter David Hollerith is here with more on this. David, obviously something that investors clearly don't want to hear. What happened?

DAVID HOLLERITH: Yeah, since FTX collapsed, a legitimate fear, probably one of the biggest fears for a crypto investor, is that the money they're keeping with an exchange is being used for something they didn't intend for it. So today, Binance admitted this mistake, where they mixed collateral for their own tokens that they issue with customer funds. So effectively, they put collateral for tokens into a wallet meant for customer funds.

And that doesn't mean, necessarily, they did anything specifically with customer funds they were not supposed to. Binance has repeatedly stated, and continues to do so, that they back customer funds one for one. But obviously, commingling of these two different kinds of sources of funds is not a good practice. And effectively, it enables the kind of thing that allowed FTX to allegedly spend billions of dollars in customer funds on things like political donations, Bahamas real estate, and risky crypto trades for their hedge fund, Alameda Research.

So evidence of this was traced using blockchain data. Several analytics companies were on this, and it was first reported by Bloomberg. And Binance has since said that it's addressing the issue and that, over the coming weeks and months, customers will see updated crypto wallet addresses for this collateral, meaning it will not be in the same crypto wallet as it keeps customer funds.

But FTX has obviously sparked an increased scrutiny on how exchanges are keeping their funds. Binance has taken a lot of heat since then. It published a proof of reserves report, which was meant to show its asset balances to sort of shore up confidence to customers, but the report only showed its Bitcoin holdings.

And that sort of just sparked widespread scrutiny because a lot of people were asking, you know, why couldn't Binance show any of its other assets. And obviously, this report fell fall short of-- it fell very short of any kind of full audit. So, you know, they're still sort of on the ropes, in terms of offering the transparency that, widely, investors are seeking.

- All right, David, more from the not great news file, a Reuters report found that Binance did business with Bitzlato. That's a small crypto exchange involved in a big money laundering lawsuit. What do you know?

DAVID HOLLERITH: Yeah, so the Justice Department charged Bitzlato last week. And specifically, they charged the executive of Bitzlato, who was in Miami, Florida. And Bitzlato is said-- it allegedly facilitated the flow of more than $700 million in illicit crypto. And as part of that initial complaint, the DOJ also named Binance as one of its three major trading counterparties.

Now, blockchain data from Chainalysis seen by Reuters today revealed that Binance moved a total of $346 million in bitcoin for Bitzlato between May 2018 and last week. And the thing to note here is that Binance is the world's largest crypto exchange. It doesn't operate in the US, but smaller exchanges do use it to facilitate trades. But obviously, this is an oversight on their part. And it might beg the question about whether or not US or other authorities will be putting on more penalties to the exchange.

- All right. David Hollerith, thanks so much for the latest on that.