SEC Says Binance Misused Customer Funds, Ran Illegal Crypto Exchange in U.S.

Binance founder Changpeng Zhao was named as a defendant in the SEC lawsuit.
Binance founder Changpeng Zhao was named as a defendant in the SEC lawsuit.

Summary

  • Regulator’s complaint asks federal judge to freeze company’s assets

The Securities and Exchange Commission on Monday sued Binance, the world’s largest cryptocurrency exchange, alleging the overseas company operated an illegal trading platform in the U.S. and misused customers’ funds.

The SEC lawsuit also named Changpeng Zhao, Binance’s founder and controlling shareholder, as a defendant. The SEC said that Binance and Zhao misused customers’ funds and even diverted them to a trading entity that Zhao controlled. That trading firm, Sigma Chain, engaged in fraudulent trading that made Binance’s volume appear larger than it actually was, the SEC said.

Binance also concealed that it commingled billions of dollars in customer assets and sent them to a third-party, Merit Peak, which was owned by Zhao, the SEC alleged. The Wall Street Journal reported last year that the SEC was examining the relationship between Binance.US—the U.S. arm created in 2019—and Sigma Chain and Merit Peak.

The SEC filed the case in federal court in the District of Columbia. Binance engaged in “blatant disregard of the federal securities laws and the investor and market protections these laws provide," the agency wrote in its court complaint.

U.S. regulators have been circling Binance for years, with the SEC and the Justice Department sending subpoenas to its U.S. arm in late 2020, according to documents viewed by the Journal. Officials have ramped up enforcement efforts over the past year, after the collapse of numerous crypto companies including one of Binance’s biggest rivals, FTX.

The lawsuit adds to Binance’s challenges with U.S. regulators and law enforcement. The Commodity Futures Trading Commission alleged in March that Binance and Zhao evaded that agency’s rules, which cover platforms that offer derivatives to American traders. Binance also faces a Justice Department investigation over its program to detect money laundering, according to people familiar with the matter.

The SEC’s court complaint asks a federal judge to freeze Binance’s assets and for the appointment of a receiver, typically an outside lawyer who is given the authority to track and preserve users’ assets.

“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 written statement.

In a tweet, Zhao said Binance hadn’t seen the complaint and would respond once it did. “Our team is all standing by, ensuring systems are stable, including withdrawals and deposits," he added, referring to the possibility of customers pulling funds.

Binance said in a written statement that it intends to defend its platform and denied allegations that user assets on the Binance.US platform were ever at risk. “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," the company said. Binance.US also said it would defend itself against the litigation.

The SEC also alleged that Binance sold cryptocurrencies, including BNB and BUSD, that should have complied with investor-protection rules. The value of BNB fell more than 7% from the prior 24 hours, according to CoinDesk data. Before the announcement, it was down 2.5%.

Bitcoin, the largest cryptocurrency, fell 4.5% from its level 24 hours earlier to trade near $26,000 apiece. It is seen as a bellwether for digital assets.

Executives for two major market makers, which facilitate buying and selling between crypto firms, said they were looking for ways to reduce exposure to Binance after the lawsuit. Both said such a task was difficult because of Binance’s hold over so much crypto trading.

Founded in 2017, Binance quickly grew to be a behemoth in the world of cryptocurrency. As of last month, more than 40% of all crypto trading took place through the exchange, according to data provider CCData. In the past, it has at times controlled more than two-thirds of crypto trading.

Binance’s founder, Zhao, is one of the biggest figures in crypto. He is the majority owner of Binance and Binance.US. While Zhao and executives portrayed Binance.US as fully independent, both exchanges were deeply intertwined mixing staff and finances and sharing an affiliated entity that bought and sold cryptocurrencies, the Journal has reported.

“Until at least the end of 2022, Binance, at Zhao’s direction, maintained custody and control of the crypto assets deposited, held, traded, and/or accrued by customers on the Binance.US platform," the SEC said.

Almost all of the employees working on clearing and trade settlement on the Binance.US exchange were based outside the U.S., primarily in Shanghai, the SEC added. The Journal previously reported former Binance.US executives raised concerns about the set-up.

The SEC also said that as early as 2018, Zhao and his company sought to evade the SEC’s rules while still allowing important American traders to use the overseas platform, the SEC said.

Binance assisted big traders with methods for circumventing technology designed to stop American users from accessing Binance.com, the SEC said. Zhao also set up Binance.US, which was supposed to be an independent entity created for U.S. users. Instead, Zhao and Binance controlled the U.S. platform, the SEC said.

The lawsuit presents new insight into how Binance has operated and its profitability—parts of the exchange’s business that it has been reluctant to share, citing its status as a private company. Between June 2018 and July 2021, Binance earned at least $11.6 billion in revenue, mostly from transaction fees, the complaint said.

For the SEC, the lawsuit is another significant bet that U.S. courts will agree it has jurisdiction over the crypto industry, which often disputes that digital assets are securities. The SEC has also sued crypto exchange Bittrex and has told Coinbase, the largest U.S. crypto exchange, that it plans to take enforcement action against it.

The lawsuit against Binance alleges that its platforms traded 10 tokens that are securities, and thus were sold and traded illegally in the U.S. The SEC’s list includes digital assets known as Solana, Cardano and Polygon. All three rank in the top 10 cryptocurrencies by market value, according to CoinMarketCap.

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