FTX Flashback? Binance Trades Against Its Users, Says CFTC

Binance has been trading against its users via market makers owned by Changpeng Zhao, says the CFTC — sound familiar?


Morocko/Shutterstock modified by Blockworks


FTX crumbled less than six months ago under the weight of sprawling corporate malfeasance, which amounted to billions of user dollars lost and waves of criminal charges against its executives.

The FTX dumpster fire — fanned by a series of tweets from Binance CEO Changpeng Zhao himself — burned particularly fiercely due to its cozy relationship with co-founder Sam Bankman-Fried’s market-making, venture investing sister firm Alameda Research. 

Binance’s situation may be slightly different. FTX allegedly gave Alameda practically infinite credit to trade on the platform, funds which came from FTX users themselves. 

The CFTC, in its recent indictment, hasn’t said Binance funneled funds to Zhao’s market makers in the same way.

Still, the apparent setup reeks of a familiar funk: Control the markets, own the market makers, then offer enough special privileges to render profiteering from users a sure thing.

So what did Binance do?

Binance has allegedly traded on its own exchange — against its own users — via around 300 so-called “house accounts,” which are directly or indirectly owned by CEO Changpeng Zhao.

Most of the CFTC’s charges relate to knowingly offering crypto derivatives (like perpetual swaps and futures) to US residents through Binance’s flagship international exchange.

But the agency also zeroed in on two of Zhao’s trading companies, Merit Peak and Sigma Chain, which serve as Binance market makers (supposedly neutral counterparties providing liquidity to keep order books running smoothly, earning profit from the spread).

The existence of these firms and their connections to Zhao were already known: Wall Street Journal reported in Feb. 2022 that the SEC was probing the two over Binance’s potential failure to disclose their relationship with the exchange and its founder to customers.

The CFTC’s lawsuit gives further insight into how Zhao’s market makers allegedly operate on Binance.

Starting no later than July 2019 and until today, Merit Peak (registered to the Cayman Islands alongside Binance’s flagship platform) entered into and settled over-the-counter trades with Binance customers. 

Swiss-registered Sigma Chain, on the other hand, handled proprietary trading on various Binance markets, including derivatives (the CFTC also said Zhao traded on Binance with two other individual accounts).

Sigma Chain’s prop trading activity was directed by Binance’s “quant desk,” the CFTC said. Quantitative trading desks rely heavily on mathematical models, often automated, to make market decisions.

Zhao accounts allegedly outside of insider trading policy

The agency noted Binance does not disclose to users that Binance trades on its own markets. Binance’s US platform currently states that the firm relies on third party market makers, some potentially related to the company, although it’s unclear when that wording was originally posted.

The CFTC said: “Consistent with its apparent attempt to keep its proprietary trading activity on its own markets top secret, Binance has refused to respond to Commission-issued investigative subpoenas seeking information concerning its proprietary trading activity on Binance, including transaction data and communications among the members of the Binance ‘quant desk.’” 

The regulator claims that Binance does not include the trading activity of Merit Peak and Sigma Chain, its 300 house accounts nor Zhao’s individual accounts, in its anti-fraud or anti-manipulation surveillance. 

Those accounts aren’t forced to abide by Binance’s insider trading policy debuted in January, either, with its house accounts allegedly completely exempt.

Welcome to crypto, where the money is made up and the conflicts of interest don’t matter — until the indictments roll in.

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