The Securities and Exchange Commission is continuing its target against the world of crypto, suing the world’s largest crypto exchange Binance and its billionaire founder, Changpeng Zhao on Monday by alleging the company commingled billions of user funds and diverted those assets to an entity “owned and controlled” by Zhao.
The U.S. regulator filed 13 charges accusing Binance of running an unregistered trading platform in the U.S., misleading investors about Binance’s “non-existent trading controls over the Binance.US platform,” running an unregistered trading platform in the U.S. that allows customers to trade crypto on an exchange intended to be off-limits, and misusing customers’ funds.
“Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law. As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied,” SEC Chair Gary Gensler said in a statement announcing SEC filing its charges against Binance.
“They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms,” Gensler added.
The SEC’s 13 charges against Binance and Zhao, better known in the crypto world as C.Z. is seeking restitution from the crypto exchange and wants to bar Binance owner from serving as an officer or director for any registered entity in the United States that issues securities.
“We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk,” SEC’s enforcement division director Gurbir S. Grewal also said in the statement.
According to the SEC 136-page complaint filed in Federal District Court in Washington, it alleges that Binance created Binance.US as a shield for the main company and Zhao, to “reveal, retard, and resolve” law enforcement targets and insulate Binance “from legacy and future liabilities.” Citing “Binance Consultant,” the person suggested that Zhao adopted this approach dubbed the “Tai Chi Plan.” The approach recommended that Binance takes steps to “reduce the attractiveness of enforcement by U.S. regulators concerning the Binance.com platform.”
“We are operating as a fking unlicensed securities exchange in the USA bro,” a former Binance executive told another in December 2018, according to the SEC’s complaint.
The SEC alleged Binance created “three essential securities market functions—exchange, broker-dealer, and clearing agency—on the Binance Platforms without registering with the SEC” as a means to “evade the critical regulatory oversight designed to protect investors and markets.” The scheme began in 2018 and until June 2022, a trading firm owned and controlled by Zhao, Sigma Chain, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform.
The SEC also alleged that billions of dollars in Binance customer funds were commingled, or mixed with corporate funds, in breach of U.S. laws, in a bank account of an entity controlled by Zhao, then transferred to a trading firm, Merit Peak, also controlled by Zhao.
“Sending Binance customer funds to Merit Peak placed those funds at risk, including of loss or theft, and was done without notice to customers,” the complaint said.
Merit Peak and Sigma Chain allegedly acted as “market makers” for Binance’s two platforms, meaning they were always available to fill a customer order to buy or sell a crypto asset, according to the complaint. However, the SEC in its complaint highlighted multiple issues with the two companies’ roles: They were both beneficially owned by Zhao while collecting “tens of billions of dollars” of customer money. The two firms also allegedly mixed customer funds with Binance’s money, with Sigma Chain collecting $190 million for its beneficial owner Zhao and allegedly spent $11 million of those assets to “purchase a yacht.”
Gensler’s actions are the latest in a barrage of actions taken by the SEC against crypto companies following the collapse of Binance’s rival, FTX, last November. The SEC’s failure to see the ongoing fraud occurring in FTX before its implosion has drawn scrutiny by Congress, leading Gensler to ramp up his enforcement campaign against the crypto industry.
Following the demise of FTX, Binance’s market share has grown dramatically and has in recent months become a target among regulators in the U.S. and around the world. Binance dominated crypto trading last year processing trades worth about $65 billion a day.
Between June 2018 and July 2021, Binance earned $11.6 billion in revenue, most of which came from transaction fees, according to the complaint.
The SEC’s lawsuit is the second time this year that federal regulators have accused Binance of evading laws designed to protect investors in the United States. In March, the Commodity Futures Trading Commission filed a civil enforcement action against Binance, accusing the crypto firm of violating the Commodity Exchange Act and operating an “illegal” exchange and a “sham” compliance program. Similar to the SEC filing, the CFTC is also seeking to bar Zhao from doing business for life and wants to permanently banish Binance from operating its business in the United States.
Beyond the SEC, three other top financial regulators, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) sent a joint letter in early January to banking organizations warning them to exercise caution in their dealings with cryptocurrencies.
In recent months following FTX filing bankruptcy, Gensler has levied fines and other penalties against other crypto lending firms.
The enforcement by financial regulators across the spectrum has caused outrage and uneasiness in the crypto industry, with crypto advocates relabeling “Crypto Winter” to “Operation Choke Point 2.0,” a reference to a 2010s law enforcement campaign to prevent banks from working with certain kind of businesses.
In a blog post on Monday, Binance said its leaders had been trying to negotiate a settlement with regulators and were “disappointed” and “disheartened” by the SEC’s decision to bring a lawsuit. Binance also slammed SEC for its rush to file the suit, noting that regulators had served “a new set of 26 document requests” in the eleventh hour and its actions appeared to “claim jurisdictional ground from other regulators.”
“We intend to defend our platform vigorously,” adding that “because Binance is not a U.S. exchange, the SEC’s actions are limited in reach, the blog post said. “All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure.”
Binance.US in a tweet called the SEC lawsuit “baseless.”
Bitcoin, the world’s largest cryptocurrency, fell nearly 6% on the news, falling to its lowest level in almost three months. Meanwhile, Binance’s own cryptocurrency BNB, the world’s fourth-largest by market size, dropped more than 5% following news of the SEC lawsuit.BinanceBinance.USBNBCFTCChangpeng ZhaoCryptoCrypto ExchangeCrypto ReportCryptocurrencyGary GenslerMerit PeakSECSecurities and Exchange CommissionSigma Chain