Brisbane-based crypto exchange Swyftx is heavily exposed to the world’s biggest crypto exchange Binance, whose top executives could face prosecution in the US for money laundering and sanction busting.
Swyftx buys the vast majority of its cryptocurrency on behalf of its 600,000 Australian customers through an API – a software tool that integrates different computer programs – that that pulls assets from Binance, which charges Swyftx for the access.
Swyftx founders Alex Harper and Angus Goldman are key partners of Binance in Australia. Flavio Brancaleone
Questions around the outsized exposure Swyftx has to Binance were magnified this week as US prosecutors debated whether they had enough evidence to file criminal charges against Binance founder Changpeng “CZ” Zhao and the exchange he founded in 2017.
A criminal case examining the structure of Binance has been ongoing since 2018.
Investors were spooked on Tuesday night, pulling more than $US1.9 billion in assets from the Binance platform in a 24-hour period, prompting a sharp slump in cryptocurrency prices.
Swyftx has defended its broker-based model and pushed back against claims it is an Australian-facing “marketing arm” for Binance.
“We are a broker and Binance is the largest liquidity provider we use,” a spokesperson wrote in an email.
“We route trades across exchange partners to provide customers with the best prices and most liquid execution.”
Binance Australia refused to comment on its relationship with Swyftx, nor did it respond to detailed questions regarding whether the digital assets Swyftx buys are stored with Binance.
Regarding the US-based criminal investigations, Binance Australia pointed to a statement on Twitter that said: “We don’t have any insight into the inner workings of the US Justice Department, nor would it be appropriate for us to comment if we did.”
Swyftx customers have expressed concern that their crypto assets may be stored in Binance, putting them at risk should the global exchange collapse like Bahamas-based FTX did recently, eviscerating billions of dollars of customer money.
Swyftx, which was founded by Alex Harper and Angus Goldman in 2018, has insisted it stores customer assets with a third-party custody provider called Fireblocks, as well as on the Binance exchange to provide liquidity.
“We undertake a daily reconciliation of the balance of customer assets held in our wallets, liquidity partners, and bank accounts against the balance of assets owed to our customers via our internal ledger (a process also verified and tested by independent auditors),” the Swyftx spokesperson said.
“It goes without saying that we segregate our operating business activities from our customer trading activities,” the spokesperson said.
But one former company insider said Swyftx’s internal finances are not as clearly demarcated as the company suggests. Swyftx customer withdrawals, which are visible due to the public nature of the blockchain, have shown that Swyftx customer cryptocurrencies have been transferred directly out of Binance wallets.
This raises questions around how many customer assets – visible through the Swyftx app and in Swyftx-branded accounts – are stored in Australia or within the Binance business.
Whether customer crypto assets are used elsewhere in the operations of crypto exchanges is top of mind for investors, following revelations that FTX founder Sam Bankman-Fried had overseen around $US8 billion ($11.7 billion) worth of customer money transferred out of the exchange.
Mr Bankman-Fried was arrested in the Bahamas on Tuesday and faces charges of wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering in the United States.
He was denied bail on grounds he remains a flight risk and will be held at a correctional facility until February.
Mr Bankman-Fried’s lawyers have indicated he will fight extradition to the United States.
Binance founder and chief executive Mr Zhao was instrumental in the FTX collapse; his announcement to the market he intended to sell more than $US500 million in the FTX token sparked a “bank run” on the exchange in early November.
FTX was unable to stem $US6 billion in outflows as customers rushed to get their money out of the exchange.
Swyftx has sought to distance itself from the FTX fiasco, though the threat of US prosecutors moving aggressively against its main-partner Binance has darkened the company’s outlook further.
A weaker crypto environment has already forced Swyftx to fire 35 per cent of its workforce – around 90 people in mostly marketing and sales roles.
Despite booking a $36.7 million profit last year, The Australian Financial Review understands that Swyftx margins are under pressure as volumes fall.
Swyftx generates revenue through charging trading fees, which have been historically high by Australian standards because it needs to pay for access to Binance’s cryptocurrencies. Swyftx is currently undergoing a capital raise.
Earlier this year, Swyftx released a “Swyftx Earn” product that generated returns through on-chain staking for blockchain rewards as well as lending to third parties for interest paid.
The Swyftx spokesperson said the company no longer lent out client assets as part of its Earn program.
Binance made a name for itself as a crypto exchange that would allow a fast-growing variety of crypto tokens onto the platform.
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