The Securities and Exchange Commission on Monday accused Binance, the world’s largest cryptocurrency exchange, of mismanaging customer funds and lying to US regulators and investors about its operations, in a broader case of power within crypto. Money has the potential to remake the landscape.
The SEC lawsuit was the second time this year that federal regulators accused Binance of evading laws designed to protect investors in the United States. Regulators have long viewed the exchange, which has said it does $65 billion in average daily trading volume, as a prime target for bringing to heel a crypto industry that centers around an explicitly anti-government ethos. has been made.
In the 136-page complaint, the SEC said Binance mixed billions of dollars in customer funds and secretly sent them to a separate company, Merit Peak Limited, which is controlled by Binance founder Changpeng Zhao.
The complaint also states that Binance misled investors about the adequacy of its systems to detect and control manipulative trading and about its efforts to prevent US users from trading on its international platform. . US-based customers had access to a separate company created specifically to operate only within the United States, called Binance.US.
“Binance and Mr. Zhao enriched themselves billions of dollars while putting investor assets at significant risk,” the regulator said in a civil lawsuit filed in Federal District Court in Washington.
In a blog post on Monday, Binance said its leaders were trying to reach a settlement with regulators and were “disappointed” and “disappointed” by the SEC’s decision to bring the matter. The company said the case was a “misguided and deliberate refusal to provide much needed clarity and guidance to the digital asset industry” and said it would “vigorously” fight back.
Binance also alleges that the SEC has moved the court to file a lawsuit, noting that the regulator last week provided the company with “a new set of 26 document requests.”
The charges were the latest action by US regulators and prosecutors to rein in the Wild West of crypto trading and force major players in the space to comply with US laws. Sam Bankman-Fried, the founder of FTX, which was a major crypto trading rival of Binance until it filed for bankruptcy in November, faces trial in October for fraud and other charges. In recent months, the SEC has also imposed fines and other penalties Against crypto lending firms.
The SEC has taken the position that most crypto tokens issued by exchanges such as Binance and FTX should be treated as securities under federal law.
“US regulators are coming down heavily on Binance and issuing notices to the crypto world,” said Reena Agarwal, professor of finance at Georgetown University.
Binance Was Already Under rising pressure, In March, the Commodity Futures Trading Commission filed its own civil enforcement action against Binance and Mr. Zhao. The Justice Department is also probing the exchange for money-laundering violations. Binance lost its external auditing firm late last year, and the company saw its control of the crypto market shrink,
In a bid to improve its reputation, Binance has hired new compliance officers, including a former federal prosecutor who now heads its compliance operations.
The SEC’s complaint “exposes the underbelly of crypto,” and large global exchanges like Binance “massively misled the public,” said David Silver, who has sued Binance multiple times.
In total, the SEC filed 13 charges against Binance and Mr. Zhao, better known in the crypto world as CZ. States that issue securities.
SEC’s Enforcement Division director Gurbir S. “We allege that Zhao and the Binance entities not only did not know the rules of the road, but also consciously chose to evade them, putting their customers and investors at risk,” Grewal said.
CFTC is too demand to bar Mr. Zhao for life from doing business falling within its jurisdiction. The agency wants to permanently delist Binance from the United States.
The SEC and CFTC often coordinate the filing of enforcement actions when they are investigating the same company, but the agencies are engaged in an uphill battle to determine who should act as the primary regulator of crypto trading. will emerge as
Binance has long been based out of the United States, offering high-risk trading options that are not legal for US customers. In 2019, it launched a separate exchange in the United States that offered a smaller range of trading capabilities. The company said the new exchange, Binance.US, will operate separately from Binance under its own leadership.
But the SEC said the separate entity was actually a ruse to hide the fact that Mr. Zhao and his associates were actively enabling US customers to trade on Binance’s much larger, unregulated offshore exchange.
The SEC complaint accuses Binance of recruiting US customers to the international exchange, even though it was not supposed to operate in the United States. “On the surface, we cannot see US users, but in reality, we must acquire them through other creative means,” a Binance executive wrote in an internal message in the complaint.
The filing states that when Binance took steps to submit to the US regulatory regime, it did so. Binance.US was supposed to separate from its offshore parent, but “behind the scenes,” Mr. Zhao and other senior Binance leaders were “critically involved,” the complaint said. According to the complaint, one executive remarked that “the whole team feels like they’ve been duped into being puppets”.
The SEC said Mr. Zhao provided instructions to encourage so-called VIP customers to bypass systems restricting US customers’ access to the platform. “Binance’s plan to keep luring US investors while pretending to ban them has succeeded,” the complaint states.
Some of the allegations against Binance echo the behavior that brought down FTX, leading to criminal charges against Mr. Bankman-Fried for conducting other business operations and using customer deposits to make political and charitable donations. According to the complaint against Binance, Merit Peak, a trading firm controlled by Mr. Zhao, received more than $20 billion, including customer funds, in bank accounts.
FTX is accused of improperly using a trading firm called Alameda Research, controlled by Mr Bankman-Fried, and using client money.
“The sending of Binance customer funds to Merit Peak exposed those funds to risks, including loss or theft, and was done without notice to customers,” the complaint said.