The US securities market watchdog has sued Binance, the world’s largest crypto exchange, accusing it of violations including mixing billions of dollars of customer cash with a separate trading firm owned by its chief executive.
The 13 civil charges filed on Monday by the Securities and Exchange Commission are the latest regulatory blow to Binance and its chief, Changpeng Zhao after another US financial agency sued it in March.
The allegations include operating unregistered exchanges, broker-dealers and clearing agencies as well as misrepresenting trading controls and oversight on Binance’s US platform. Between mid-2018 and mid-2021, the group earned at least $11.6bn in revenue, the SEC’s complaint said.
The SEC alleged Binance and Zhao had control of clients’ assets which allowed funds to be merged or rerouted, with billions of dollars sent to a crypto asset trading firm incorporated in the British Virgin Islands owned by Zhao called Merit Peak Limited.
Assets were also allegedly diverted to a separate entity owned and controlled by Zhao, Sigma Chain, which the SEC said engaged in “manipulative trading” that inflated the Binance US platform’s trading volume.
“Through 13 charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said Gary Gensler, SEC chair.
Binance.com, Binance’s offshore trading platform, said it was disappointed and disheartened by the SEC’s action, and added that while it took the regulator’s allegations seriously, they “should not be the subject of an SEC enforcement action”. Binance US called the lawsuit “baseless”.
The SEC alleged that although Binance and Zhao “publicly claimed” US customers were barred from Binance.com, they “subverted their own controls to secretly allow” top US clients to trade on the platform.
“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 — all in an effort to maximise their own profits,” said Gurbir Grewal, director of the SEC’s division of enforcement.
According to the SEC complaint, Binance’s unnamed chief compliance officer in 2018 told a colleague: “We are operating as a fking unlicensed securities exchange in the USA bro.”
The SEC’s action comes weeks after the US Commodity Futures Trading Commission, a derivatives markets regulator, in March filed a lawsuit against Binance claiming it illegally served US customers, and that much of its reported trading volume and profitability have come from “extensive solicitation of and access to” US customers.
“Battling two powerful regulators at the same time will take precious time and resources, and Binance will no doubt feel the impact,” said Charley Cooper, a former CFTC chief of staff.
Binance said “the SEC’s actions here appear to be part of a rushed effort to claim jurisdictional ground from other regulators — and investors do not appear to be the SEC’s priority”.
Also in March, the Financial Times revealed Binance — which has long claimed to have no formal headquarters — hid extensive links to China for several years.
One month earlier, New York regulators shut down further issuance of a Binance-branded stablecoin, a kind of digital token which allowed crypto traders to move quickly in and out of the market. Before the shutdown of the coin, named BUSD, it represented roughly 40 per cent of Binance’s trading volume.
