Binance, the world’s largest crypto exchange, was a thinly-veiled shell game that allowed its Svengali-like founder to secretly use customer accounts as his own and do business in the U.S., the Securities and Exchange Commission has alleged in a civil suit filed in Washington D.C.’s federal court.
The crypto firm, and its co-founder Changpeng Zhao — who is widely known simply as CZ — say the suit represents broad overreach over issues the company says it had long been working to resolve with the agency. It argues the SEC’s actions only serve to “undermine America’s role as a global hub for financial innovation and leadership.”
The SEC’s allegations are broad-ranging but largely revolve around efforts by Binance to create a separate U.S. trading operation strictly for American customers that would work with certain restrictions bringing it in line with U.S. regulations. But regulators say it was all window dressing that continued to allow U.S. customers to trade on the much more loosely regulated overseas exchanges and sidestep American regulatory oversight.
The suit also paints a picture of a trillion-dollar exchange operated entirely around the whims of its peripatetic founder, with the sole aim of avoiding any kind of regulatory scrutiny.
Here are the six wildest claims the SEC is making about Binance in its lawsuit:
1. No regulations ever
The suit alleges that Binance created U.S.-only trading arms, BAM Trading and BAM Management US Holdings, Inc., to avoid having its main exchanges, which were outside the U.S., fall under U.S. regulatory scrutiny. Binance even went so far as to hire a separate CEO for the U.S. operation. But the SEC suit says Binance never operated the two businesses separately, with CZ secretly calling the shots at the U.S. companies, while allowing certain, high-net worth U.S. customers to continue trading on its overseas platforms. The suit also alleges that Binance and BAM Trading engaged in unregistered offerings of crypto assets that were securities. By operating in this misleading way, the SEC claims, that BAM Trading and BAM Management US Holdings were “operated as a fraud or deceit.”
Binance’s chief compliance officer was blunt, according to the SEC complaint, saying, “we are operating as a fking unlicensed securities exchange in the USA bro.”
That is not the only thing Binance’s chief compliance officer said. According to the SEC suit, to avoid U.S. securities laws, CZ and Binance designed and implemented a multi-step plan and Binance’s chief compliance officer eventually admitted, ‘we do not want [Binance].com to be regulated ever.’”
2. Puppet show
To the point of who actually ran Binance’s U.S. trading businesses, the SEC says the people hired to run it were quickly disavowed of any belief that they were really in charge.
“BAM Trading employees referred to Zhao’s and Binance’s control of BAM Trading’s operations as ‘shackles’ that often prevented BAM Trading employees from understanding and freely conducting the business of running and operating the Binance.US Platform—so much so that, by November 2020, BAM Trading’s then-CEO told Binance’s CFO that her ‘entire team feels like [it had] been duped into being a puppet,’” the suit alleged.
3. Tapping customer funds
The SEC argues that given the lack of any regulatory oversight, CZ did whatever he pleased with Binance customer deposits, including commingling them and steering them into entities he controlled. He then allegedly used the cash — which amounted to billions of dollars (the company booked $9.58 trillion in trading volume in 2021) — to help manipulate crypto prices through huge block purchases.
“Lacking regulatory oversight, defendants were free to and did transfer investors’ crypto and fiat assets as defendants pleased, at times commingling and diverting them in ways that properly registered brokers, dealers, exchanges, and clearing agencies would not have been able to do. For example, through accounts owned and controlled by Zhao and Binance, billions of U.S. dollars of customer funds from both Binance Platforms were commingled in an account held by a Zhao-controlled entity (called Merit Peak Limited), which funds were subsequently transferred to a third party apparently in connection with the purchase and sale of crypto assets,” the suit read.
In a statement, Binance insisted that it had never put any customer money at risk. The SEC does not allege that any money had gone missing.
4. Controls in name only
Binance talked a big game about the importance of surveillance and control over its trading platform, but it was just lip service, the SEC suit alleged. While the company said it had mechanisms to halt manipulate trading, it didn’t implement them and even violated those controls themselves.
“Zhao himself stated in 2019 that ‘CREDIBILITY is the most important asset for any exchange! If an exchange fakes their volumes, would you trust them with your funds?’” the suit read. “The supposed controls were virtually non-existent, and those that did exist did not monitor for or protect against ‘wash trading’ or self-dealing, which was occurring on the Binance U.S. platform. Most notably, from at least September 2019 until June 2022, Sigma Chain Case, a trading firm owned and controlled by Zhao, engaged in wash trading that artificially inflated the trading volume of crypto asset securities on the Binance U.S. platform.”
5. A company without a home
In furtherance of Binance’s efforts to avoid regulatory scrutiny, the company has refused to say where it is headquartered or based. CZ himself “has refused to identify the headquarters of Binance, claiming, ‘Wherever I sit is the Binance office. Wherever I meet somebody is going to be the Binance office,’” the suit read.
“According to Zhao, the concept of a formal corporate entity with a headquarters and its own bank account is unnecessary: ‘All of those things doesn’t have to exist for blockchain companies.’ Notably, however, billions of dollars from the platforms flowed through dozens of Binance and Zhao-owned U.S.-based bank accounts. Neither Binance nor any of its subsidiaries or affiliated entities have ever been registered with the SEC in any capacity,” the suit continued.
6. Making billions a fraction of a penny at a time
Given its trading volume, Binance was a very lucrative business — very lucrative. Even though it charged as little as 0.015 cents as a fee per transaction, that quickly piled up to the tune of billions, the suit said.
“By 2021, its trading volume spiked to $9.58 trillion, making it the largest crypto-asset trading platform in the world. Between June 2018 and July 2021, Binance earned at least $11.6 billion in revenue, most of which derived from transaction fees,” the suit said.
Read the full article here
