The widespread global call by the fintech and digital asset sector for the U.S. Securities and Exchange Commission (SEC) and regulators to get their shit together in helping identify and define the appropriate criteria for what qualifies as a “security” when cryptocurrency and NFTs are involved, was met with shocking news on Monday when the SEC brought 13 charges against Binance and its founder, Changpeng Zhao (CZ) for alleged securities violations and the wrongful handling of customer funds.
Today we charged Binance Holdings Ltd. (Binance); U.S.-based affiliate, BAM Trading Services Inc., which, together with Binance, operates https://t.co/swcxioZKVP; and their founder, Changpeng Zhao, with a variety of securities law violations.https://t.co/H1wgGgR5ir pic.twitter.com/IWTb7Et86H
— U.S. Securities and Exchange Commission (@SECGov) June 5, 2023
Binance, the world’s largest crypto exchange, was named in a lawsuit, where over the course of the 136-page Complaint, accused of allegedly mishandling customer funds and lying to U.S. regulators and investors about its operations.
“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,” said SEC Chair Gary Gensler.
For the industry, it was surprising to also see the SEC specifically identify and allege that the following list of tokens most likely qualify as “securities” –
Solana’s SOL
Cardano’s ADA
Polygon’s MATIC
Coti’s COTI
Algorand blockchains (ALGO)
Filecoin Network (FIL)
Cosmos hub (ATOM)
Sandbox platform (AXS); and
Axie infinity game and Decentraland (MANA)
Gensler continued that both Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively hiding who was actually operating the platform…attempting to evade U.S. securities laws by announcing “sham controls” that were designed to keep U.S. customers active on the platforms.
“Wash Trading” and Commingling of Customer Funds
At the heart of the lawsuit is the allegation that Binance specifically created Binance.US as a shield for its parent company and CZ, while allegedly engaging in “wash trading” where they would trade with themselves to artificially increase the price of its own crypto assets.
Perhaps the most damaging to investors is the SEC’s allegation that Binance allegedly (and secretly) sent out “mixed billions of dollars” in customer funds to a private market-making company, Merit Peak Limited, which is controlled by Zhao.
Sigma Chain, another entity that Zhao owns and controls, was also accused of housing commingled customer assets that had also been potentially diverted at-will.
The SEC also stated that BAM Trading and BAM Management US Holdings, Inc. (“BAM Management”) misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain allegedly engaged in manipulative trading that was designed to artificially inflate the platform’s trading volume.
According to the SEC, Sigma Chain collected $190 million USD for Zhao, while subsequently spending $11 million USD to purchase a “yacht.”
Binance: "We're disheartened..."
In a blog post on Monday, Binance expressed its disappointment by the SEC’s decision to file its complaint today, stating that from the start, it had “actively cooperated” with the SEC’s investigations and “have worked hard to answer their questions and address their concerns.”
Binance also said that it was engaged in “extensive good-faith discussions” to reach a negotiated settlement in efforts to resolve the SEC’s investigations.
“...but despite our efforts, with its complaint today, the SEC abandoned that process and instead chose to act unilaterally and litigate. We are disheartened by that choice,” the blog post read in part.
Later on Monday, CZ took to Twitter and expressed his concern over Gensler’s alleged failure to read comments under his post when announcing the SEC charges:
Wonder if he ever reads the comments under his post, from the consumers he is suppose to protect. https://t.co/xQjC872GsD
— CZ ? Binance (@cz_binance) June 5, 2023
What This All Means...
The SEC’s allegations against Binance marks a major step forward in regulatory enforcement that will undoubtedly cause just as many waves, if not more, than the ongoing investigation into the collapse of FTX and the many, many accusations against its founder, Sam Bankman-Fried.
For the first time in what seems like forever, we just saw the SEC publicly come out and point fingers with a heavily-backed volume of allegations that will undeniably set the stages for identifying the specific criteria for what constitutes a “security” when dealing with cryptocurrency.
Monday’s filed complaint against Binance also serves as the second time this year that federal regulators have accused the crypto exchange of wrongdoing when it comes to protecting consumer interests.
Binance’s “compliance” in 2019, according to the complaint, was nothing more than a “public show.”
In March, the CFTC filed its own civil enforcement action against Binance and CZ, while reportedly seeking to bar Zhao for life from conducting business that falls under its jurisdiction. The New York Times also reported that the CFTC is also looking to permanently ban Binance from the United States.
The U.S. Department of Justice (DOJ) continues its ongoing investigations into the crypto exchange for potential money-laundering violations.
From June 2018 through July 2021, Binance earned $11.6 billion USD in revenue, most of which came from its transaction fees, according to the complaint.
To that effect, the SEC says that:
With respect to Binance.com, Binance SHOULD HAVE REGISTERED as an “exchange”, “broker-dealer”, and clearing agency;
With respect to Binance.US, Binance and BAM Trading SHOULD HAVE REGISTERED as an “exchange” and as clearing agencies;
BAM Trading SHOULD HAVE REGISTERED as a “broker-dealer”; and
BNB, BUSD, and crypto-lending products known as “Simple Earn” and “BNB Vault” were “unregistered offers and sales.”
“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 – all in an effort to maximize their own profits,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
Grewal continued by stating that with Binance and Zhao "engaging in multiple unregistered offerings while also failing to register while at the same time combining the functions of exchanges, brokers, dealers, and clearing agencies, the Binance platforms under Zhao’s control imposed outsized risks and conflicts of interest on investors."
"Despite their years-long efforts to not ‘be held accountable,’ today’s complaint begins the process of doing so.”
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