The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance on June 5, alleging that the exchange was involved in the sale of unregistered securities. In its 136-page complaint, the SEC accuses Binance and its founder, Changpeng “CZ” Zhao, of participating in a complex conspiracy that involved fraud, conflicts of interest, a lack of disclosure and willful disregard for the law.
The claims, according to SEC Chair Gary Gensler, center on deceiving investors about risk controls, tampering with trade volumes, hiding crucial operational data, and flouting U.S. securities laws. In order to avoid regulatory scrutiny, Binance allegedly created weak controls while secretly disobeying them to keep its highly valuable U.S. customers.
Today we charged Binance Holdings Ltd. (Binance); U.S.-based affiliate, BAM Trading Services Inc., which, together with Binance, operates https://t.co/swcxioZKVP; and their founder, Changpeng Zhao, with a variety of securities law violations.https://t.co/H1wgGgR5ir pic.twitter.com/IWTb7Et86H
— U.S. Securities and Exchange Commission (@SECGov) June 5, 2023
Here are the key highlights from the SEC’s complaint:
Unregistered securities offering
According to the SEC, Changpeng Zhao has been operating Binance.com and Binance.US as exchanges, brokers, dealers and clearing agencies since at least July 2017. The complaint claims that these companies have earned at least $11.6 billion through a variety of methods, including transaction fees collected from American clients.
According to the SEC’s complaint, Binance.com should have registered as a clearing agency, broker-dealer and exchange, while Binance.US and BAM Trading should have registered as clearing agencies and exchanges, respectively. BAM Trading also needed to register as a broker-dealer, and it was charged with the unregistered offer and sale of Binance.US’ staking-as-a-service program.
Controversial practice of allowing US customers to use Binance.com
Zhao launched Binance in Shanghai in 2017, but the exchange has been elusive about where its main office is located ever since. Binance’s parent company is situated in the Cayman Islands, which makes its organizational structure more complicated. The SEC alleges that, despite publicly claiming that Binance prohibited U.S. customers from trading, the exchange surreptitiously permitted them to keep using the platform, demonstrating a deliberate disregard for U.S. securities laws.
Binance created a sizable number of user accounts for people who provided Know Your Customer identity verification information that indicated their location within the United States from the initial launch of the Binance.com platform until at least September 2019. There were also users who appeared to be physically located in the United States based on their internet protocol addresses used to access the platform.
CZ as a control person
In order to develop Binance.US, a platform serving American clients in accordance with U.S. laws, Binance and BAM Trading announced cooperation in 2019. The SEC, in contrast to Binance.US’s assertion of independence, asserts that Zhao continued to be in charge of the company.
Notably, Zhao — according to the SEC — gave Binance.US the order to onboard Sigma Chain and Merit Peak as market makers, both of which were operated by Binance employees. Since the commencement of the Binance.com platform, the Zhao-owned Merit Peak has provided over-the-counter trading services on behalf of Binance. On the Binance.com platform, Merit Peak served as the counterparty for users, and on the Binance.US platform, it offered market-making services.
Related: SEC charges against Binance and Coinbase are terrible for DeFi
Starting at least in 2021, Binance entities that were under Zhao’s beneficial control transferred billion-dollar customer assets to American bank accounts held by Merit Peak. These funds were then subsequently transferred to Trust Company A (a New York limited purpose trust company), and it appears that this transaction was related to the issuance of Binance’s stablecoin known as Binance USD (BUSD). Investors were exposed to undisclosed counterparty risk as a result of using Merit Peak as an intermediary to move client funds to buy BUSD because this relationship was not publicly disclosed.
Moreover, many of Binance.US’s bank accounts, including one that had money from American customers, had the head of the back office as the primary operator, raising questions regarding Binance’s operational openness and fund segregation.
Wash trading on Binance.US platform
According to the SEC’s lawsuit, BAM Trading and BAM Management, who are connected to Binance.US, misled both clients and equity investors about the effectiveness of market oversight and measures to identify and stop manipulative trading on the platform. However, wash trading on the Binance.US platform was a common practice. This practice artificially inflates trading volumes, providing a fictitious…
cointelegraph.com