Binance, the world’s largest cryptocurrency exchange, and its chief executive are being sued by the US’s top financial watchdog, which has accused them of making billions of dollars while “placing investors’ assets at significant risk”.
In a court filing, the Securities and Exchange Commission (SEC) accused Binance of mixing “billions of dollars” in customer funds and secretly sending them to a separate company controlled by its founder and chief executive, Changpeng Zhao.
“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,” said Gurbir Grewal, director of the SEC’s enforcement division.
In its
complaint filed on Monday at a federal district court in Washington, the SEC added: “Defendants have enriched themselves by billions of US dollars while placing investors’ assets at significant risk.” The complaint alleges that between June 2018 and July 2021, Binance earned at least $11.6bn (£9.3bn) in revenue, mostly from transaction fees.
Among other charges, the SEC alleges that, while Zhao and Binance publicly claimed that US customers were restricted from transacting on Binance.com, “Zhao and Binance in reality subverted their own controls to secretly allow high-value US customers to continue trading on the Binance.com platform”.
The 13 civil charges have been placed against Zhao, Binance Holdings and two further Binance-linked entities, BAM Trading Services and BAM Management US Holdings. The SEC said Binance and BAM operated the Binance.US platform, which had been created for US customers after the main Binance platform said in 2019 it was quitting the US market.
The SEC alleges that, while Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for US investors, “Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes”.
The SEC alleges that Zhao and Binance were able to commingle or divert customers assets “as they please” including to a Zhao-controlled entity called Sigma Chain. The regulator claims that Sigma also engaged in “manipulative trading” that artificially inflated trading volume on Binance.US.
The SEC also charged Binance and BAM Trading with operating unregistered securities exchanges, broker-dealers and clearing agencies, as well as the unregistered offering and sale of crypto assets including the Binance USD stablecoin, a digital token whose value is pegged to the American dollar. It alleged that Zhao was a “control person” for the unregistered exchange operation.
The SEC complaint alleges that Zhao directed Binance to conceal the access of high-spending US customers to Binance.com. In one piece of evidence included in the lawsuit, the Binance chief compliance officer messaged a colleague saying: “We are operating as a fking unlicensed securities exchange in the USA bro.” Elsewhere in the lawsuit Binance’s CCO is quoted as saying: “We do not want [Binance].com to be regulated ever.”
A Binance spokesperson said: “We want to be clear that while we take the allegations in the SEC’s complaint seriously, they should not be the subject of an SEC enforcement action, let alone on an expedited basis. They are unjustified.”
John Stark, a former senior SEC official and senior lecturing fellow at Duke University’s school of law, said the SEC has been “incredibly aggressive” towards the crypto industry recently, having announced more than 30 cryptocurrency-related enforcement actions since 2022. Stark added that the complaint contained “scathing allegations” including evidence that Binance’s actions were “designed to avoid regulatory scrutiny”.
In March the US Commodity Futures Trading Commission sued Binance and Zhao in a complaint that claimed the defendants committed “wilful evasion of US law”. Allegations in the complaint included claims that Binance helped US customers trade on the platform despite not having regulatory clearance to do so.
Bitcoin, the world’s biggest cryptocurrency, fell as much as 6% on the news to its lowest in almost three months. Binance’s own cryptocurrency BNB, the world’s fourth-largest by market size, dropped more than 5%.
Market players said the SEC’s allegations could hobble Binance, with the lawsuit likely to reverberate through the crypto industry. Binance dominates crypto trading, processing trades worth about $65bn a day last year.
Reuters contributed to this report
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Cryptocurrency is a growing asset class, but is still immature. If you’re thinking of investing in crypto, make sure you understand the risks. SD Law is a firm of experienced attorneys based in Cape Town, with offices in Johannesburg and Durban. If you want more information about this new world, call Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za.
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