The Securities and Exchange Commission (SEC), on June 5, announced that it filed 13 charges against Binance and its CEO, Changpeng Zhao. The release stated that the crux of the charges is that the company operates unregistered exchanges, broker-dealers and clearing agencies, adding that it was in the habit of misrepresenting the extent of its controls over its US operations, while offering the sale of unregistered securities.
Increased scrutiny of crypto exchanges
The charges are the culmination of increased regulatory actions against crypto entities in the US in recent months. It stated that the activities of Changpeng Zhao, Binance US, Binance Holdings, BAM Trading Services (an affiliate of Binance US) and Binance.com, constituted violation of US securities law.
Among the issues the SEC raised in the SEC charge is that Binance secretly permitted high-value customers from the US to continue trading in Binance.com while creating the impression that US customers were restricted to trading on Binance US.
It further stated that, contrary to claims by CZ and Binance, Binance US is known not to be independent of Binance, which has secret control over the company.
Commingling of funds
The US regulator also alleged that funds held by Binance US are comixed with those held by Binance. It added that some of these have been traced to Sigma Chain, an entity owned by Changpeng Zhao.
It further stated that the Binance entity associated with Binance US, BAM, was involved in manipulative trading practices that inflated the trading volume of the platform and commingled billions of USD which it sent to a third-party entity, Merit Peak Limited, also owned by Chagpeng Zhao.
SEC further highlighted the violation of some of what it termed critical registration-related provisions of the country’s securities laws by stating that Binance and BAM Trading operated unregistered national securities exchanges, clearing agencies and brokerage.
The SEC complaint also talked about the sale of Binance-owned crypto assets such as Binance Coin and its stablecoin, BUSD, both of which they termed unregistered offers. Of further concern is the Binance lending and staking services.
Gensler leads the charge
“Through thirteen 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 SEC Chair Gary Gensler.
He advised the public to be wary of putting their funds in Binance, describing their operations as illegal. The SEC accused Binance and CZ of being aware of the rules but chose to ignore them, thereby putting investors’ funds at risk.
Multiple unregistered offerings
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
“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 Zhao’s control imposed outsized risks and conflicts of interest on investors.
He alleged a lack of transparency, dependence of third-party for transactions , manipulative trading and disclosure about control.
Unlicensed securities exchange
The SEC’s filing in the U.S. District Court for the District of Columbia alleges that, since at least July 2017, Binance.com and Binance.US have earned at least $11.6 billion in revenue from, among other things, transaction fees from U.S. customers.
A section of the filing stated that in one instance, the Binance chief compliance officer messaged a colleague that “[w]e are operating as a fking unlicensed securities exchange in the USA, bro.”
The SEC Chairman, Gary Gensler has since made a tweet regarding the legal action against Binance using the alleged message from the Binance compliance officer.