Did FTX Secretly Help Binance Send Tokens To Binance.US For Wash Trading?

API Publisher December 22, 2023
featured image

The SEC’s case accuses Binance of wash trading. A Forbes investigation reveals that FTX may have been an important middleman.

Key Points

  • From November 2019 to November 2022, Binance sent $4.6 billion worth of BNB to FTX, 87% of which was almost immediately forwarded to Binance.US.
  • Transaction flows identified by Forbes and Gray Wolf Analytics appear designed to conceal their origin. These transactions have a high frequency and are relatively low value. They also lack the randomness that is characteristic of most market related trading.
  • In a June 2023 lawsuit against Binance, the Securities and Exchange Commission alleges that Sigma Chain (owned by Binance founder Changpeng Zhao) engaged in wash trading on Binance’s American platform after it launched in 2019.
  • Some of the tokens sent through FTX to Sigma Chain could have been part of larger market making, trading, and investment activities.

Background

In June 2023, the Securities and Exchange Commission sued Binance for acting as an unregistered securities exchange in the U.S. amid a host of other charges including fraud. One such allegation claims that “from at least September 2019 until June 2022, Sigma Chain, a trading firm owned and controlled by former Binance CEO Changpeng Zhao, who just pled guilty to federal money-laundering and sanctions violations charges, engaged in so called wash trading that “artificially inflated the trading volume of crypto asset securities on the Binance.US Platform.” The suit goes on to state that Sigma Chain, which is based in Switzerland, actively facilitated wash trading of dozens of crypto assets from the very inception of Binance’s U.S. franchise, Binance.US in 2019.

Results from a Forbes investigation into Binance operations reveal that FTX, the bankrupt exchange of convicted felon Sam Bankman-Fried, was likely a key player in facilitating wash trading activities for at least one asset, Binance’s exchange token BNB.

BNB, currently valued at $39.6 billion, has long been an important part of Binance’s operating model. Exchange tokens are mostly used to reward customers with discounts for trading or recruiting new account holders. Like stocks, however, they can also serve as a form of corporate currency. However, these tokens have virtually no regulatory oversight.

How It Happened

Among the dozens of wallets used across Binance.US, two wallets, which we are calling Sigma Chain 1 (SC1) and Sigma Chain 2 (SC2), are omnibus deposit wallets used on Binance.US for BNB and dozens of other tokens. “These wallets have interacted with more than 1.5 million addresses on Binance.US since their creation in April 2019, and the SEC suit against Binance claims that Sigma Chain used these wallets to wash trade and market make on the platform,” says Chedi Mbaga, Head of Forensics at Gray Wolf.

Specifically, we believe that SC1 and SC2 were primary market makers for BNB on Binance.US for Sigma Chain because the memo fields in these transactions tie back to U.S. accounts. A Binance.US web page retrieved through the WayBackMachine service reads that a “MEMO is an identifier code required in addition to a receive address when sending certain cryptocurrencies” such as BNB Beacon (BEP2 standard) tokens. “Each MEMO code is tied to a unique wallet and helps ensure that the transaction is sent to the correct recipient…and allows Binance.US to identify a deposit and credit the appropriate account.”

SC2 was a particularly critical link to Binance’s BNB operations, considering that more than 130 million BNB tokens passed through the wallet from the April 2019 to December 2022 period. As a reference, 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 (a major depository of tokens), had more BNB tokens flow through them during this time. The SC1 wallet had a significantly-smaller 8.6 million BNB flow.

Binance’s ICO Revisited

In order to fully understand these secretive token flows, it is important to understand how Binance was able to send so much BNB to these wallets. In early October, Forbes and Gray Wolf revealed that Binance’s 2017 initial coin offering (ICO) left the exchange with an unclaimed trove of 65 million BNB tokens. Data analyzed by Forbes show that those tokens funneled at least 39.2 million BNB tokens to another Binance wallet, which we have identified as Hot Wallet 5 (HW5).

In total, Binance sent 49.8 million BNB tokens to SC1 and SC2 as well as some smaller Binance wallets from HW5, plus an additional 6.5 million BNB tokens to a wallet that FTX.

Note: FTX and Binance have never publicly acknowledged that this wallet (bnb1jzdy3vy3h0ux0j7qqcutfnsjm2xnsa5mru7gtj) is owned by FTX, and neither firm responded to requests for comment. However, we believe that this wallet is owned by FTX because it was identified on the FTX.com website and its transactions started flowing when FTX launched with Binance as its first investor in late 2019. These transactions ceased in the winter of 2022, when the exchange declared bankruptcy. It is also a large holder of FTX’s exchange token, FTT, which it would have been unlikely to accumulate were it not tied to the exchange.

FTX received 16.5 million BNB tokens worth $4.68 billion during a two-year period starting September 2019 from multiple Binance hot wallets, particularly from a Binance decentralized exchange (Binance DEX) wallet and the previously mentioned HW5 wallet. The specific wallets feeding BNB into FTX wallet were as follows in order of highest amount by sender.

BNB DEPOSITS TO FTX

Token flows between various exchanges are common in crypto. Many professional firms and even individual traders have accounts at multiple exchanges so that they can take advantage of unique price opportunities when they emerge. However, BNB flows into and out of the FTX wallet show suspicious patterns that lack of randomness you would typically find in market related economic activity . The chart below shows how Binance cycled funding of these wallets from HW5, subsequently through some of its other hot wallets, and then finally from its decentralized exchange wallet.

Another red flag is the preponderance of small transfers from HW5 to FTX. In fact, almost 75% of the 33,148 transfers of BNB from HW5 to FTX had a median value below 1 BNB and a collective notional value of merely $29 million, which is only 4% of the $728 million this one wallet transferred. One former crypto exchange executive who reviewed these transactions said that the discrete patterns (lack of randomness) of these flows were suspicious and that he could not see the economic value in paying transaction fees to the BNB network for these low value transfers unless they were being used for purposes other than trading.

BNB Transfers From Binance Hot Wallet 5 to FTX Wallet by Transaction Size

Moreover, fully 87% of the tokens received by FTX were sent directly to SC1 and SC2 within hours or days of arrival. It is likely that FTX was simply acting as a conduit for this operation.

Could FTX have used these tokens simply for market-making BNB on its platform? According to one prominent crypto market maker who spoke on the condition of anonymity, “a wallet in a market making role generally shows larger differences between token inflows and outflows because the firm and its larger clients selectively hold proprietary positions on a token.” In this case the inflows and outflows of FTX wallet ~ru7gtj are nearly identical, making its role more likely that of a conduit than that of a genuine market maker. Moreover, a market maker would generally have many counterparties getting tokens but in this case 80.9% of FTX wallet tokens went to a single Binance-controlled wallet – Sigma Chain 2 – and an additional 7.1% to three other Binance-controlled wallets including Sigma Chain 1.

Below is an overview of the entire transaction flow. The green arrows represent BNB flowing into FTX and the the yellow arrows represent the majority of those same tokens flowing into Sigma Chain wallets.

Key Takeaways

The transactions identified by Forbes and Gray Wolf could indicate an effort to conceal token flows from the eyes of regulators and market participants and get them into the hands of Binance.US and Sigma Chain. Based on evidence presented in the SEC suit against Binance in June, which alleges that Sigma Chain engaged in rampant wash trading on Binance.US, and the new information uncovered, Forbes believes that FTX could have participated in facilitating this activity.

“We can interpret the volume of BNB flows between Binance US and FTX’s bnb1jz-ru7gtj address – nearly twice that of comparable services – to mean that FTX was likely the second biggest participant in BNB markets accessible to US customers prior to December 2022,” says Mbaga from Gray Wolf. “And that Sigma Chain, as an institutional client depositing into the Binance US wallets, likely facilitated a significant amount of transfers between the two exchanges.”

Key questions remain:

Did FTX know anything about how Binance would ultimately use the BNB that traveled through its platform to Sigma Chain? .The relationship between the two companies is complex. Binance was FTX’s first investor, but the two companies were also rivals. In fact, FTX launched its own US competitor to Binance in May 2020. Additionally, more needs to be learned about Sigma Chain’s trading activity. It received many more tokens directly from Binance than it got through FTX. This may suggest that not all tokens sent through FTX were used for alleged wash trading, but could have been part of larger market making, trading, and investment activities.

API Publisher

Posted by API Publisher