What Is Happening With Binance?

The SEC’s suit grabbed headlines because Binance is the largest global crypto exchange. The world of cryptocurrencies such as bitcoin has been under scrutiny since Binance’s onetime rival, FTX, collapsed last November. Prosecutors say FTX defrauded its users.

Why does the SEC suit against Binance matter?

The main risk to Binance is having a court decide it is an unlicensed exchange. The remedy could be an injunction that would forbid Binance from offering its trading services in the U.S., which regulators say is one of the firm’s main markets.

An injunction would make it difficult for Binance to do any business in the U.S. unless it registered with the SEC and followed securities rules—something the firm and generally speaking the broader crypto world have resisted. Such an outcome would likely rattle crypto markets around the globe, though the litigation could take years to play out.

The SEC also is asking the court to impose significant though unspecified fines.

What does Binance say?

Binance accused the SEC of suing to generate headlines and said it plans to fight in court. The firm said it tried to negotiate a settlement that would have avoided a lawsuit. Binance said it would continue operating; much of its business is overseas.

What is at stake, beyond Binance’s business?

The SEC’s lawsuit is another effort—perhaps the SEC’s biggest yet—to prove that many crypto assets are securities. Forcing crypto developers and exchanges to register with the SEC would mean adopting much of the costly regulation, including investor disclosures and bans on certain conflicts of interest, that Wall Street has to follow.

Crypto firms such as Binance have resisted that step, saying SEC rules are a bad fit for digital assets. But they could be required to fall in line—or move offshore entirely—if U.S. courts order them to comply.

Is this the first regulatory action against Binance and Zhao?

No, the Commodity Futures Trading Commission in March became the first federal regulator to sue Binance and Zhao. That civil lawsuit is playing out in Chicago federal court.

The CFTC’s lawsuit is similar to the SEC’s but focuses on the sale of crypto derivatives. U.S. law largely forbids the practice of offering derivatives unless an exchange is registered with the CFTC. Binance also failed to have an effective program for detecting terrorist financing and money laundering, according to the CFTC.

Does Binance face other legal challenges?

The Justice Department has been investigating whether Binance should face criminal charges for failing to implement an anti-money-laundering program, according to people familiar with the matter. It couldn’t be learned whether prosecutors plan to charge Zhao, but the CFTC’s complaint said he oversaw “all major strategic decisions," including dealing with U.S. anti-money-laundering rules.

Does that mean Zhao could face criminal charges as well?

Possibly. Sam Bankman-Fried, the former head of failed crypto exchange FTX, faces criminal charges in the U.S. for what prosecutors allege was a massive fraud at his firm, after agreeing to be extradited here from the Bahamas.

The CFTC said Zhao lives in the United Arab Emirates, which doesn’t have a mutual extradition treaty with the U.S.

What does the Binance lawsuit mean for crypto?

Market prices on Monday appear to reflect some pessimism about the future of the cryptocurrency market, in which Binance is perhaps the most prominent player.

Binance’s own token, BNB, was down almost 10%, according to CoinMarketCap. Bitcoin fell over 6% and shares in Coinbase, the biggest U.S.-based crypto exchange, fell more than 10%.

But regulatory litigation can take years to resolve and crypto prices are moved by countless factors including investor risk appetite, macroeconomics and global politics, so it’s early yet on that one.

Write to Dave Michaels at dave.michaels@wsj.com