The Securities and Exchange Commission (SEC) has charged crypto-trading giant Binance Holdings Ltd, its affiliate BAM Trading Services, and founder Changpeng Zhao, with 13 regulatory breaches.
The SEC has alleged Mr Zhao and Binance “secretly” allowed high-value US customers to continue trading on the Binance.com platform, despite previously stating US investors would be restricted.
The regulator has also alleged that Mr Zhao and Binance “secretly controlled” the Binance.US platform’s operations, despite previously claiming it was established as a separate, independent platform for US investors.
Mr Zhao and Binance allegedly controlled the assets of the platform’s customers, enabling them to “commingle” or divert assets at their discretion, including to a separate entity owned by Mr Zhao — Sigma Chain.
Meanwhile, BAM Trading and BAM Management US Holdings has been accused of misleading investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in “manipulative trading”, which artificially inflated the platform’s trading volume.
Additionally, the defendants reportedly commingled “billions of dollars”, transferring funds to another entity owned by Mr Zhao — Merit Peak Limited.
Specific breaches of US regulation noted by the SEC include:
- operating unregistered national securities exchanges, broker-dealers, and clearing agencies;
- trading with the unregistered offer and sale of Binance’s own crypto assets; and
- Mr Zhao’s personal operation of unregistered national securities exchanges, broker-dealers, and clearing agencies.
“Through 13 charges, we allege that Mr 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.
“As alleged, Mr Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied.
“They attempted to evade US securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value US customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
According to Gurbir S. Grewal, director of the SEC’s division of enforcement, Mr Zhao and the Binance entities “consciously chose to evade” US regulations.
“By engaging in multiple unregistered offerings and also failing to register while at the same time combining the functions of exchanges, brokers, dealers, and clearing agencies, the Binance platforms under Mr Zhao’s control imposed outsized risks and conflicts of interest on investors,” he said.
“Those risks and conflicts are only heightened by the Binance platforms’ lack of transparency, reliance on related-party transactions, and lies about controls to prevent manipulative trading.
“Despite their years-long efforts to not ‘be held accountable,’ today’s complaint begins the process of doing so.”
Binance has issued a statement in response to the SEC charges, stating it is “disappointed” with the regulator’s decision after “extensive cooperation and recent good-faith negotiations”.
“…We now join a number of other crypto projects facing similarly misguided actions from the SEC and we will vigorously defend our business and the industry,” the crypto trading company stated.
“We want to be clear that while we take the allegations in the SEC’s complaint seriously, they should not be the subject of an SEC enforcement action, let alone on an expedited basis.
“They are unjustified.”
Binance claimed the SEC has “abandoned and denied” the firm “due process”.
The SEC has reportedly issued 26 different document requests as part of its investigation, which Binance has claimed are “merely pretextual”.
“Despite our willingness to take whatever reasonable steps we could to assuage the SEC’s purported concerns, and our requests that the SEC share with us any evidence it might have regarding its purported concerns about the safety of client assets, the SEC rejected our attempts at engagement and has, as we found today, gone straight to court,” the company claimed.
“It is now clear to us that the SEC’s goal here was never to protect investors, as the SEC has claimed — if that were indeed the case, the SEC would have thoughtfully engaged with us on the facts and in our efforts to demonstrate the safety and security of the Binance.US platform.
“The SEC’s real intent here, instead, appears to be to make headlines.”
Binance concluded: “The SEC’s choice is disheartening for Binance, its users, and the industry as a whole.
“However, this action will not stop us from continued robust collaboration with other regulators and policymakers across the globe, and we will continue to vigorously defend our business and this technology.”
The SEC action comes just months after the Australian Securities and Investments Commission (ASIC) cancelled the Australian financial services licence of Binance upon the request of the firm.
This was after ASIC found Binance had incorrectly classified retail customers as wholesale investors during a targeted review of its financial services business in Australia.
