(Bloomberg) -- The US Securities and Exchange Commission accused Binance Holdings Ltd. and its Chief Executive Officer Changpeng Zhao of mishandling customer funds, misleading investors and regulators, and breaking securities rules.
In a 136-page complaint filed Monday in US federal court in Washington, the SEC laid out a range of alleged violations against the world’s biggest crypto exchange and its leader. For years, they flouted basic know-your-customer rules by letting Americans improperly open accounts and trade, the watchdog said. It’s just the latest legal headache for Zhao and Binance.
“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,” SEC Chair Gary Gensler said in a statement. “The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
The regulator asked that the court freeze Binance assets and appoint a receiver, a request typically reserved for cases in which the SEC fears company property may be lost or concealed.
Binance called the complaint “disappointing,” saying it had engaged with the SEC in good-faith negotiations to settle the matter. The exchange also said that the SEC was misguided in not providing clarity over rules for digital assets.
“While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis,” the firm said. “We intend to defend our platform vigorously.”
After the case was announced, Bitcoin fell by as much as 6.7%, the steepest decline in almost three months.
Among other allegations, the SEC said that two Binance-linked tokens, BNB and BUSD, were securities that the firm improperly offered and sold. The SEC alleged that Binance and its US affiliate weren’t actually independent from each other and improperly functioned as an exchange, broker-dealer, and clearing agency without registering with the agency.
“While Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for U.S. investors, Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes,” the SEC said.
Since August 2021, Binance didn’t require clients with account withdrawal limitations to submit any know-your-customer information when opening accounts, allowing them to bypass anti-money laundering restrictions, the SEC said.
The case follows a lawsuit from the US derivatives watchdog in March that alleges Binance and Zhao routinely broke its rules. At the time, the exchange and Zhao defended their compliance efforts and called the lawsuit by the Commodity Futures Trading Commission disappointing, while also pledging to keep working with regulators. The derivatives regulator also alleged that Binance worked to evade US regulations, a claim that the SEC repeated in its Monday complaint.
Binance said other regulatory action motivated the SEC. “Because of our size and global name recognition, Binance has found itself an easy target caught in the middle of a U.S. regulatory tug-of-war,” the company said in a statement.
Alleged Wash Trading
Meanwhile, the SEC also alleged that the “purposeful efforts to evade U.S. regulatory oversight while simultaneously providing securities-related services to U.S. customers put the safety of billions of dollars of U.S. investor capital at risk and at Binance’s and Zhao’s mercy.”
In addition, the agency accused Binance of misleading investors about controls in place at the US entity to prevent manipulative trading. “The supposed controls were virtually non-existent,” the lawsuit said, alleging that from at least September 2019 until June 2022, Sigma Chain — a trading firm owned and controlled by Zhao — used wash trading to artificially inflate Binance.US’s trading volume.
The regulator said that Binance moved and mixed customer funds improperly. Billions of dollars of those funds went to a bank account for an entity called Merit Peak Limited that was controlled by Zhao. Funds from that entity were then transferred to a third party and then appeared to be used to buy and sell crypto, the SEC said.
“The suit shows that the SEC is not afraid to take on the biggest players in this space,” Paul Kisslinger, a former SEC attorney now at the firm Lewis Brisbois, said in an interview. The agency has brought several high-profile cases against crypto firms this year and Gensler has often criticized firms for shirking the SEC’s rules.
“It seems to me they’re broadening their scope each time they bring a new crypto case,” Kisslinger said.
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The SEC also claimed that by 2021 at least $145 million was transferred from Binance.US to a Sigma Chain account. Another $45 million was deposited into the account from a Nevada-based trust company connected to the US platform. Sigma Chain used $11 million from the account to purchase a yacht, the agency alleged.
The SEC has for months been probing whether Binance illegally sold digital coins as the exchange was getting off the ground in 2017, Bloomberg has reported. The token, which is known as BNB, is now among the world’s largest.
A virtual currency may fall under the SEC’s remit if investors buy it to fund a company or project with the intention of profiting from those efforts. That determination is based on a 1946 US Supreme Court decision defining investment contracts.
In the lawsuit, the SEC also alleged that certain tokens - including SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI - traded on Binance.com and Binance.US were offered and sold as securities, a move that could have wide implications for other exchanges that offer these tokens.
--With assistance from Tom Schoenberg, Muyao Shen, Yueqi Yang and Stephanie Stoughton.
(Updates with case details throughout)
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