On June 5, 2023, the SEC accused Binance of mishandling funds, deceiving regulators, evading investor protections, mixing customer funds, sending them to a separate company controlled by its founder, allowing U.S. customers to trade despite restrictions, maintaining control over Binance without disclosure, manipulating trading volume, and engaging in unregistered securities activities. U.S. regulators aim to enforce compliance and protect investors, reshaping the crypto industry.
On June 5, 2023, the Securities and Exchange Commission (SEC) accused Binance, the world’s largest cryptocurrency exchange, of mishandling customer funds and lying to American regulators and investors about its operations, in a sweeping case that has the potential to remake the landscape of power and wealth within crypto.
The S.E.C.’s lawsuit was the second time this year that federal regulators have accused Binance of evading laws designed to protect investors in the United States. Regulators have long seen the exchange, which has said it does $65 billion in average daily trading volume, as a significant target in their quest to bring to heel a crypto industry that has been built around an explicitly anti-government ethos.
In the 136-page complaint (see attachment below), the SEC said Binance had mixed billions of dollars in customer funds and secretly sent them to a separate company, Merit Peak Limited, which is controlled by Binance’s founder, Changpeng Zhao.
In all, the SEC filed 13 charges against Binance and Mr. Zhao, better known in the crypto world as C.Z. It is seeking restitution from Binance and wants to bar Mr. Zhao from serving as an officer or director for any registered entity in the United States that issues securities.
The charges could be summarized as follows:
• Zhao and Binance secretly allowed high-value U.S. customers to continue trading on Binance.com despite publicly claiming restrictions on U.S. customers.
• Zhao and Binance maintained control over the operations of Binance.US, a platform supposedly independent from Binance, without disclosing it.
• Zhao and Binance exercised control over customer assets, including blending and diverting them, including to Zhao's entity called Sigma Chain.
• BAM Trading and BAM Management misled investors about trading controls on Binance.US, while Sigma Chain engaged in manipulative trading to inflate trading volume.
• The defendants concealed the commingling of billions of dollars of investor assets and sent them to a third party, Merit Peak Limited, owned by Zhao.
• Binance and BAM Trading operated as unregistered national securities exchanges, broker-dealers, and clearing agencies.
• Binance and BAM Trading engaged in the unregistered offer and sale of Binance's own crypto assets, including BNB and BUSD, crypto-lending products, and a staking-as-a-service program.
• Zhao is charged as a control person for the operation of unregistered national securities exchanges, broker-dealers, and clearing agencies by Binance and BAM Trading.
The charges are the latest actions by U.S. regulators and prosecutors to rein in the risky activities of crypto trading and force major players in the space to come into compliance with U.S. laws.
These regulatory actions against Binance and other cryptocurrency companies reflect the U.S. regulators' efforts to subject the industry to more rigorous scrutiny and enforce regulations to safeguard investors. The outcomes of these actions have the potential to reshape the cryptocurrency landscape and address concerns related to investor protection, anti-money laundering measures, and compliance with securities laws.
See the Securities and Exchange Commission - Press Release - June 5, 2023
Download the Securities and Exchange Commission - Complaint - Case 1:23-cv-01599 - Filed: June 5, 2023