The SEC says Binance and its CEO secretly control clients’ assets, allowing them to mix and siphon client funds.
The Securities and Exchange Commission (SEC) has sued Binance, the world’s largest cryptocurrency exchange, and its CEO and founder, Changpeng Zhao, for allegedly violating U.S. securities laws. The SEC alleges that Binance failed to register as a stock exchange, allowed U.S. clients to trade on its platform, and misled investors about its market surveillance controls. The SEC also alleges that Binance engaged in laundering trading, a practice of artificially inflating trading volume, and secretly controlled clients’ assets.
The SEC lawsuit is a major setback for Binance, which has been criticized for its lack of transparency and regulation. The lawsuit could have a chilling effect on the cryptocurrency industry as it raises questions about the legality of cryptocurrency exchanges.
The SEC is seeking injunctive relief, return of profits, and civil penalties. Binance has denied the allegations and has said it will fight the lawsuit.
Here are some additional details about the SEC’s allegations:
- Binance allegedly allowed U.S. customers to trade on its platform even though it knew U.S. citizens were prohibited from doing so.
- Binance allegedly misled investors about its market surveillance controls by claiming it had a system in place to detect and prevent market manipulation, when in fact it did not.
- Binance allegedly engaged in laundering trading by creating fake trades to artificially inflate the trading volume of certain cryptocurrencies.
- Binance allegedly secretly controlled clients’ assets by allowing its employees to access and move clients’ funds without their permission.
The SEC lawsuit is a significant development in the cryptocurrency industry. It remains to be seen how the lawsuit will be resolved, but it is clear that the SEC is taking a more aggressive approach to regulating the cryptocurrency industry.
In a blog post, Binance said: “We intend to defend our platform vigorously,” adding that “because Binance is not a US exchange, the SEC’s actions are limited in reach.”
“Any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong,” the blog post said.
Binance.US, which is ultimately controlled by Zhao, said in a tweet that the lawsuit was “unjustified by the facts, by the law, or by the Commission’s own precedent.”
Bitcoin, the world’s biggest cryptocurrency, fell as much as 6 percent on the news to its lowest in almost three months. Binance’s own cryptocurrency BNB, the world’s fourth-largest by market size, dropped more than 5 percent.
The move is the latest in a series of legal troubles for Binance, which was also sued by the U.S. Commodity Futures Trading Commission in March for operating what the regulator alleged was an “illegal” exchange and a “fake” compliance program. Zhao called those charges “disappointing” and an “incomplete recitation of the facts.”
Binance is also under investigation by the US Department of Justice for suspected money laundering and sanctions violations, according to people familiar with the probe.
Market players said the SEC’s allegations could hobble Binance, with the lawsuit likely to reverberate through the crypto industry. Binance dominates crypto trading, last year processing trades worth about $65bn a day with up to 70 percent of the market.
“I think that there’s a big risk here that this could be crippling to Binance,” said Ed Moya, senior market analyst at Oanda.
Binance was founded in Shanghai in 2017 by Zhao, a Canadian citizen born and raised at the age of 12 in China.
While its holding company is based in the Cayman Islands, Binance says it does not have a headquarters and has declined to state the location of its main Binance.com exchange.
The firm has processed at least $10bn in payments for criminals and companies seeking to evade US sanctions, the Reuters news agency has previously reported.
Reuters also reported on May 23 that Binance commingled its customers’ funds with its corporate revenues in a Silvergate Bank account belonging to trading firm Merit Peak in breach of US financial rules that require client money to be kept separate.
Binance denied mixing customer deposits and company funds, saying that users who sent money to the account were not making deposits but rather buying Binance’s bespoke dollar-linked crypto token.