The Securities and Exchange Commission charged Binance Holdings Inc. and its founder Changpeng Zhao with 13 securities law violations, the regulator announced Monday.
The SEC alleges that Binance, the world’s largest cryptocurrency exchange, “secretly allow[ed] high-value U.S. customers” to trade on the platform in violation of U.S. securities laws which bar unregistered exchanges from servicing U.S. customers.
The complaint also alleges that Zhao, known in the crypto world as “CZ”, exercised control over customer assets and commingled them with personal and company holdings.
“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,” SEC Chairman Gary Gensler said in a Monday statement.
“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,” he added.
Binance responded to the enforcement action in a blog post in which it chided the regulator for bringing the complaint after Binance “engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigations.”
In addition, Binance says that “any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong” and that “all user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure, and we will vigorously defend against any allegations to the contrary.”
Accusations of self-dealing
As an unregistered exchange, the SEC has limited ability to oversee Binance’s operations, and the agency alleges that this enabled CZ to do what he wished with customer assets that were stored on the platform.
The complaint says that CZ was “free to and did transfer investors’ crypto and fiat assets as [he] pleased, at times commingling them and diverting them in ways that properly registered brokers, dealer and exchanges” are barred from doing.
CZ allegedly commingled billions in customer funds with those of Merit Peak Limited, a trading company he used to trade directly with customers through a program called “Binance OTC.”
The complaint says that customer funds were not segregated into individual accounts and when customers want to withdraw funds, “Binance transfers the requested amount of crypto assets from its omnibus wallet.”
Furthermore, the lack of proper regulation of Binance enabled Sigma Chain AG, a trading firm owned by CZ, to engage in wash-trading, or the practice of buying and selling the same cryptocurrencies in order to create the impression of high trading volume.
Soliciting U.S. customers
The SEC alleges that Binance actively sought U.S. customers even though as an unregistered exchange, it is illegal to do so.
From 2017 through 2019, the company made little effort to dissuade U.S. customers from using the platform, according to the complaint, and it says that an internal 2019 document boasted of 1.47 million customers in the United States.
Binance executives were well aware that this was illegal, and according to the complaint, Binance’s chief compliance officer admitted to a colleague in December 2018 “we are operating as a fking unlicensed securities exchange in the USA, bro.”
As Binance executives became more aware of the risks, they devised a strategy to create a separate U.S. entity that would bear the regulatory cost for past behavior and seek a collaborative approach with the SEC that could delay enforcement actions.
To avoid losing lucrative U.S. customers, CZ directed his employees to “implement a plan to encourage customers to circumvent Binance’s geographical blocking of U.S.-based IP addresses using a VPN service to conceal their U.S. location,” the complaint reads.
Market Manipulation
Binance launched a U.S.-only platform in 2019 to insulate itself from regulatory scrutiny, the SEC alleges.
The platform, owned by BAM Trading, but controlled by CZ, was a site for widespread market manipulation, according to the complaint.
CZ-owned Sigma Chain allegedly had dozens of user accounts that engaged in wash trading at critical moments for the U.S. exchange, including the day after the platform opened for trading and in the months leading up to a BAM attempt to raise capital from venture investors.
Despite these actions, Binance publicly claimed to monitor and prevent market manipulation on its websites and during public appearances by executives, the SEC said.
Selling unregistered securities
The SEC also charged Binance with selling unregistered securities, a violation that the agency has been focused on of late. As the regulator does not issue opinions on whether the many thousands of extant cryptocurrencies are securities under its jurisdiction, enforcement actions like the one against Binance can offer a window into the SEC’s thinking on which digital assets are securities, and therefore subject to heightened regulation.
The SEC alleges that Binance’s native token BNB and its stablecoin BUSD were unregistered securities illegally sold to Americans.
It also alleged that several other assets on the Binance platforms are unregistered securities, including Solona
SOLUSD,
Cardano
ADAUSD,
Polygon
MATICUSD,
Filecoin
FILUSD,
Algorand
ALGOUSD,
Axie Infinity, and COTI
COTIUSD,
Many of these tokens are listed on other U.S. exchanges, including Coinbase Global Inc.
COIN,
and Kraken, potentially placing those institutions in the SEC’s crosshairs.
Major cryptocurrencies bitcoin
BTCUSD,
and ether
ETHUSD,
were trading lower Monday. Binance’s native token, BNB was down more than 8% on the day.
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