Charges include running unregistered exchanges, broker-dealers, and clearing agencies, lying about trading oversight and controls on the Binance.us platform, and offering and selling securities without a licensed broker.
The Securities and Exchange Commission has charged Changpeng Zhao, the founder of Binance Holdings Ltd. (“Binance”), Binance.com, the largest crypto asset trading platform in the world, BAM Trading Services Inc. (“BAM Trading”), and Binance.US, Binance.com’s joint venture partner, with a number of securities laws violations.
The SEC asserts, among other things, that Zhao and Binance surreptitiously allowed high-value U.S. clients to continue trading on the Binance.com platform despite publicly claiming that U.S. customers were prohibited from doing so. Furthermore, the SEC asserts that Zhao and Binance surreptitiously oversaw the activities of the Binance.US platform while publicly claiming that Binance.US was developed as a distinct, independent trading platform for American investors.
The SEC further asserts that Zhao and Binance have authority over the assets of the platforms’ users, allowing them to combine or redirect those funds as they see fit, including to an organization Zhao owned and controlled named Sigma Chain. The SEC’s complaint further claims that Sigma Chain engaged in manipulative trading that artificially increased the trading volume on the platform while BAM Trading and BAM Management US Holdings, Inc. (“BAM Management”) deceived investors about nonexistent trading controls over the Binance.US platform. The complaint also claims that the defendants acted in a mixed manner while transferring billions of dollars in investor assets to a different company, Merit Peak Limited, which is also owned by Zhao.
A number of crucial federal securities laws’ registration-related clauses are also allegedly violated, according to the complaint:
- Running unlicensed national securities exchanges, broker-dealers, and clearing companies are Binance and BAM Trading;
- Binance and BAM Trading with the unlicensed offer and sale of Binance’s own digital assets, such as a fictitious exchange token called BNB, a fictitious stablecoin named Binance USD (BUSD), specific crypto-lending products, and a staking-as-a-service program; and
- Zhao serves as the control person for the operation of unregistered national securities exchanges, broker-dealers, and clearing firms by Binance and BAM Trading.
SEC Chair Gary Gensler stated, “We allege through thirteen charges that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.” According to the allegations, Zhao and Binance deceived investors about their risk controls and tainted trade volumes while deliberately hiding who was running the platform, the manipulative trading of its connected market maker, and even the location and identity of the custodians of investor cash and crypto assets. They made an effort to get around U.S. securities regulations by declaring fake controls that they ignored in the background in order to retain valuable U.S. clients on their platforms. The general population should exercise caution while using or putting any of their hard-earned money on these illegal networks.
“We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk—all in an effort to maximize their own profits,” stated Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. The Binance platforms under Zhao’s leadership exposed investors to excessive risks and conflicts of interest by participating in numerous unregistered offers, neglecting to register, and merging the duties of exchanges, brokers, dealers, and clearing agencies. The lack of transparency, reliance on related-party transactions, and fabrication of the safeguards in place to stop manipulative trading on the Binance platforms only serve to increase these risks and conflicts. Today’s lawsuit starts the process of holding them accountable, despite their years-long attempts to avoid doing so.
UNREGISTERED Exchange, Broker, and Clearing Agent
According to the SEC’s complaint, which was submitted to the U.S. District Court for the District of Columbia, Zhao has been in control of Binance.com and Binance.US since at least July 2017. During this time, Zhao has allegedly earned at least $11.6 billion in revenue, mostly from transaction fees from customers in the United States. According to the SEC’s complaint, (1) Binance should have registered as a broker-dealer, clearing agency, and exchange for Binance.com; (2) Binance and BAM Trading should have registered as clearing agencies and exchanges for Binance.US; and (3) BAM Trading should have registered as a broker-dealer. The SEC further asserts that Zhao is accountable as a control person for the relevant registration breaches at Binance and BAM Trading.
CRYPTO ASSETS UNREGISTERED OFFER AND SALE
The SEC levied charges against Binance for making unauthorized offers and sales of BNB, BUSD, and cryptocurrency loan products called “Simple Earn” and “BNB Vault.” Additionally, the SEC accused BAM Trading of offering and selling Binance.US’s staking-as-a-service product without first registering it. Additionally, according to the lawsuit, Binance surreptitiously controls the funds that US consumers have staked in BAM’s staking program.
ACCESS TO BINANCE.COM BY U.S. INVESTORS IS NOT RESTRICTED.
According to the SEC’s complaint, Zhao and Binance established BAM Management and BAM Trading in September 2019 as part of a complex scheme to circumvent American federal securities laws by claiming that BAM Trading independently ran the Binance.US platform and that Americans couldn’t use the Binance.com platform. According to the lawsuit, Zhao and Binance secretly instructed Binance to permit and hide the ongoing use of Binance.com by several high-value U.S. clients while still maintaining significant engagement and control over the U.S. firm. The chief compliance officer of Binance once wrote in a communication to a colleague, “[w]e are operating as a fking unlicensed securities exchange in the USA, bro.”
LYING TO INVESTORS
The SEC’s lawsuit alleges that BAM Trading and BAM Management deceived equity investors and consumers of Binance.US about the presence and sufficiency of market surveillance and controls to identify and stop manipulative trading on Binance. trading volumes for digital assets on a US platform. The complaint also claims that Binance was primarily responsible for strategic and focused wash trading. The main unreported market-making trading company for the US platform, Sigma Chain, which is also controlled by Zhao, refutes claims made by BAM Trading regarding its market oversight and controls.
With the aid of Ainsley Kerr, John Marino, Donald Battle, and under the direction of Paul Kim, Kathleen Hitchins, Ann Rosenfield, and Colby Steele, the SEC conducted its investigation into the breaches relating to the Binance.US platform. Michael Baker, Donna K. Norman, and Martin Zerwitz investigated the infractions relating to the Binance.com platform under Deborah A. Tarasevich’s direction, with Sachin Verma and Alexander Lefferts’ help. Jorge G. Tenreiro and David Hirsch of the SEC’s Crypto Assets and Cyber Unit were in charge of both cases. Under the direction of David Nasse, Olivia Choe, and Mr. Tenreiro, the case is being handled by Matthew Scarlato, Jennifer Farer, and J. Emmett Murphy, with help from Hope Hall Augustini.
A Legal Fight Develops
A protective order and a request to compel are two of the legal proceedings at the center of the dispute between Binance US and the SEC. These are intricate legal tactics that call for thoughtful study and reactions on the part of both parties.
Important Future Deadlines
There are two pivotal dates approaching that will represent significant turning points in this judicial dispute:
1. September 5: Initially, this date was designated as Binance US’s due date for submitting a thorough response to the SEC’s legal proceedings. It’s an important time for Binance US to address the court with its arguments and defenses.
2. September 11: The new deadline is now scheduled for September 11, six days earlier than the original date. Binance US must respond to the motion to compel, the objection to the protective order motion, and many other legal demands on this day. The judge has made it quite apparent that Binance US must respond to each of these concerns in a distinct brief.
The importance of time
The September 11 deadline extension, which currently gives Binance US just four days, serves as a reminder of how quickly legal procedures move through the system. The Exchange must adhere to this deadline and offer thorough and convincing replies to the SEC’s legal proceedings.
Consequences that might occur
The result of this court dispute might have big effects on Binance and the larger cryptocurrency industry. If Binance US misses the last deadline, investors and the cryptocurrency community may become more fearful, unsure, and doubtful (FUD). It’s important to note that Binance has had significant directors depart the firm, which has made the issue more complicated.
It is impossible to overestimate the importance of this court dispute, which the cryptocurrency sector is keenly following. It highlights the increased regulatory scrutiny that cryptocurrency exchanges are subject to and the requirement for clear regulatory frameworks to control this quickly changing industry. The upcoming days will offer vital details on Binance US’s future and its position in the crypto market.
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