The Securities and Exchange Commission charged crypto firm Binance, its founder Changpeng Zhao, and its U.S. affiliate on Monday with 13 violations of U.S. securities laws.

The regulator alleged that while both Binance and Zhao said U.S. customers were restricted from transacting on Binance.com, the platform secretly allowed high-value U.S. customers to continue trading on it. 

The SEC also alleged that Zhao and Binance secretly controlled the operations of the Binance.US platform despite claims that it was separate and independent.

Further, the SEC alleged Binance allowed customer assets to commingle and be diverted, including to Sigma Chain and Merit Peak Limited, entities both owned by Zhao.

Binance entities also misled investors and customers into believing market surveillance and controls existed and were adequate to detect and prevent manipulative trading on the Binance.US platform, the SEC alleged. However, Sigma Chain manipulated trading to artificially inflate volume on the platform, the SEC alleged.

The complaint also charged Binance and its affiliate BAM Trading with operating unregistered securities exchanges, broker-dealers and clearing agencies — and with illegally selling Binance’s crypto assets, including the exchange token BNB and the stablecoin Binance USD, crypto-lending products Simple Earn and BNB Vault, and a staking-as-a-service program.

“Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law,” SEC Chair Gary Gensler said in a statement Monday. “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. 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.”

Zhao tweeted Monday that Binance would “issue a response once we see the complaint.” Meanwhile, the “team is all standing by, ensuring systems are stable, including withdrawals, and deposits.” 

At issue, the SEC said, is the $11.6 billion or more Binance and its affiliates have earned in revenue from U.S. customers since 2017.

“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,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement Monday. “By engaging in multiple unregistered offerings and 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.”

The SEC is hardly the first U.S. regulator to take Binance on in legal action. The Commodity Futures Trading Commission sued the company and Zhao in March, alleging they operated an “intentionally opaque” and illegal enterprise that violated the Commodity Exchange Act while engaging in “a calculated strategy of regulatory arbitrage to their commercial benefit.”

Nor is Binance the first crypto firm the SEC has charged with violations. But it is the largest. 

In its complaint, the SEC highlighted that a high-ranking member of Binance’s C-suite was aware of violations.

“We are operating as a fking unlicensed securities exchange in the USA bro,” Binance's chief compliance officer told a colleague in a message, according to the regulator.

Binance’s “risks and conflicts are only heightened by the … platforms’ lack of transparency, reliance on related-party transactions, and lies about controls to prevent manipulative trading,” Grewal said in his statement Monday. “Despite their years-long efforts to not ‘be held accountable,’ today’s complaint begins the process of doing so.”

By Dan Ennis on June 5, 2023
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