The world’s leading cryptocurrency exchange, Binance, and its founder, Changpeng “CZ” Zhao, have become subjects of a legal battle as the Securities and Exchange Commission (SEC) recently initiated a lawsuit against them. The regulatory body alleges that the company engaged in securities violations by attracting US customers to its unregulated international exchange, commingling investor funds with its own, and violating securities laws. This move by the SEC comes after the Commodity Futures Trading Commission (CFTC) had previously filed a similar complaint against Binance and Zhao earlier this year.
Allegations of Securities Violations
According to the SEC, Binance and its CEO, Changpeng Zhao, deliberately circumvented their own controls to allow high net worth US investors and customers to trade on the exchange’s unregulated international platform. One senior executive reportedly referred to the company as an unlicensed securities exchange in the US. The SEC claims that Binance created Binance.US as a means to shield the main company and Zhao, with the intention of evading law enforcement targets and protecting Binance’s operations.
Concerns Over Control and Compliance
Former CEOs of Binance.US, Catherine Coley and Brian Brooks, expressed deep concerns over CZ’s level of control. Testifying before federal regulators, they highlighted that Zhao’s mission did not align with their own, leading one of them to leave the company.
The SEC complaint reveals that Binance earned significant revenue, primarily from transaction fees, amounting to $11.6 billion from June 2018 to July 2021. Throughout its existence, Binance allegedly made efforts, both overt and covert, to attract US customers under the direction and control of Zhao.
Evasion of Regulations and Manipulation
The SEC alleges that Binance knew about the presence of tens of thousands of US customers but chose not to take action, despite federal laws prohibiting the unregistered offer and sale of securities. The complaint also accuses Zhao of ordering the creation of an evasion plan for high net worth customers, utilizing VPN services to conceal their US locations and submitting compliance documents to obscure their country of origin.
Additionally, Binance and Zhao are accused of using market-making companies under their control, such as Merit Peak and Sigma Chain, to artificially inflate trading prices and profit from their customers. These companies allegedly engaged in wash trading, trading with themselves to manipulate the prices of cryptocurrencies.
Response and Legal Ramifications
In response to the charges, CZ took to Twitter, dismissing them with a simple “4,” which is a popular phrase in the Binance community encouraging users to ignore fear, uncertainty, and doubt (FUD). Binance released a blog post expressing disappointment over the SEC’s decision to file a complaint and stated that they have been actively cooperating with the SEC’s investigations.
Meanwhile, SEC Chair Gary Gensler emphasized the severity of the allegations, stating that Zhao and Binance engaged in deception, conflicts of interest, lack of disclosure, and a calculated evasion of the law.
Final Thoughts
The SEC’s lawsuit against Binance and its CEO underscores the alleged securities violations committed by the crypto exchange. The regulatory body accuses Binance of attracting US customers to its unregulated international platform, commingling funds, and violating securities laws.
These charges come as the latest legal action against the company, following a similar complaint filed by the CFTC. As the case unfolds, the implications for Binance and Zhao could have far-reaching consequences in the cryptocurrency industry.