SEC Sues Binance and Changpeng Zhao Alleging Securities Laws Violation
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SEC Sues Binance and Changpeng Zhao Alleging Securities Laws Violation

On June 5th, Binance and its CEO Changpeng Zhao, were sued by the SEC for allegedly offering unregistered securities, misleading investors, and engaging in wash trading.
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On Monday, June 5th, the Securities and Exchange Commission filed a lawsuit against Binance, the world’s largest cryptocurrency exchange, as well as its CEO Changpeng Zhao. The company is charged with multiple wrongdoings including the offering of unregistered securities, comingling of users’ assets, and a failure to prevent US-based customers from trading on Binance’s international platform.

SEC Alleges Binance Offered Unregistered Securities

This Monday, the SEC filed a lawsuit against the cryptocurrency exchange Binance. According to the complaint, the company offered unregistered securities in the form of several cryptocurrencies including BNB and the stablecoin BUSD. The company’s CEO, Changpeng Zhao, was also sued by the SEC.

The Commission also alleges that Binance’s yield-bearing products—Simple Earn and BNB Vault—also constitute the offering of unregistered securities. SEC Chair Gary Gensler, has, in the aftermath of shutting down Kraken’s staking service, stated that most yield-breaking products offered by cryptocurrency exchanges are essentially the same.

The complaint caused a significant price drop among different digital assets. One of the hardest hit was Binance’s BNB which fell by more than 8% by the time of writing. The shares of the cryptocurrency exchange Coinbase—which has been warned of likely enforcement action earlier this year—also saw a decline and were down more than 10% by the time of writing.

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SEC Accuses Binance of Misleading Investors

In its complaint, the SEC also alleges that Binance undermined its own compliance program and allowed US-based customers to access the exchange’s international platform. Allegedly, the company’s chief compliance officer seemingly internally admitted to the wrongdoing by writing to a colleague that they are “operating as a ******* unlicensed securities exchange in the USA”.

Additionally, Binance is accused of being set up in such a way that it was able to “commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain”. Comingling of assets became a sensitive topic in the crypto community after the scale of FTX’s wrongdoings became known following the exchange’s collapse in November 2022.

Furthermore, the SEC states that Binance engaged in market manipulation and wash trading through its market-making entity—Sigma Chain. According to the Commission, the exchange mislead investors, and its behavior showcases “the falsity of statements BAM Trading made about its market surveillance and controls.” BAM Trading is another entity included in the lawsuit.

Binance Sued by the CFTC in Late March

Binance has been under regulatory scrutiny in the US for several months. Already in early 2022, its US affiliate—Binance.US—stated that it fully expecting to pay a fine in order to settle its issues with American watchdogs.

Additionally, the company was already sued earlier this year by another US regulator—CFTC. In late March, the watchdog alleged that Binance “chose to knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit. “

Reportedly, one of the effects the scrutiny had on Binance.US was its effort to reduce Changpeng Zhao’s stake in the company. Over the years, there have been numerous allegations that CZ had an undisclosed relationship with China and a report from March 29th indicates that the company has indeed been concealing its links to the country for several years.

Binance Promises “to Defend (Its) Platform Vigorously”

In response to the complaint, the exchange stated it is disappointed with the Commission’s decision to go forward with the complaint. Binance also announced it is intent on defending its platform and added that the SEC’s lawsuit is another example of the watchdog undermining “America’s role as a global hub for financial innovation and leadership”.

Furthermore, echoing Coinbase’s statements following its receiving of a Wells notice, Binance revealed it had been attempting to work and negotiate with the Commission in good faith for a long time. According to the exchange, its efforts proved entirely in vain.

Binance also denied the allegations that its compliance and security—particularly with regard to Binance.US—have ever been compromised. The company also reaffirmed its commitment to working with policymakers and regulators across the globe.

Editorial note (June 5th, 2023, 01:32 PM EST): The article was expanded with the details of the complaint, the background on Binance’s ongoing issues with US regulators, as well as the details on the company’s official response to the complaint.

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