Explained: US charges crypto giant Binance with violating securities laws. What’s the case?

US regulators on Monday (June 5) charged cryptocurrency giant Binance with violating securities laws which collectively amounted to what the regulators called “an extensive web of deception” and “calculated evasion of the law.” The Securities and Exchange Commission (SEC), which filed a complaint in a federal court in Washington DC, listed 13 charges against Binance, its Chief Executive Officer (CEO) Changpeng Zhao and the operator of its purportedly independent US exchange, according to a report by the news agency Reuters early Tuesday.

Binance, which is the world’s largest cryptocurrency exchange, criticised the SEC’s action by saying it was a wrongheaded approach that threatened US’ role as a global hub for financial innovation and leadership. “We intend to defend our platform vigorously,” Binance said. 

What is the case?

The SEC’s case said that Changpeng Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” 

In its complaint, the SEC charged Binance with 13 offences, including operating an unregistered securities exchange and failing to restrict US customers from its platform. The SEC alleged that Binance artificially inflated its trading volumes, diverted customer funds and misled investors about its market surveillance controls. The SEC also claimed that the crypto giant and its CEO secretly controlled customers’ assets, allowing them to commingle and divert investor funds “as they please.”

“As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied,” the complaint read. 

The Commission also said from almost three years back until June 2022, Sigma Chain- a trading firm owned and controlled by Zhao, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on  Binance. Sigma Chain spent $11 million from an account on a yacht, the commission added. 

The complaint further alleged that billions of dollars in Binance customer funds were commingled in an account held by a Zhao-controlled firm called Merit Peak, in breach of American rules that require customer money to be kept separate.

The crypto giant denied mixing customer deposits and company funds, saying users who sent money to the account were not making deposits but rather buying Binance’s bespoke dollar-linked crypto token.

SEC case latest legal trouble for Binance

The SEC’s case is the latest in a series of legal troubles for Binance. In March, the crypto giant was sued by the US Commodity Futures Trading Commission (CFTC) for operating what the regulator alleged were an illegal exchange and a sham compliance program. Binance is also facing a probe from the US Justice Department for suspected money laundering and sanctions violations. 

The latest case depicts the company as determined to evade US securities law, a trait that meant defendants “enriched themselves by billions of US dollars while placing investors’ assets at significant risk.” 

Who is Changpeng Zhao? 

Zhao, 46, was born in China before moving to Canada in 1989 at the age of 12, two months after China’s Tiananmen Square crackdown on pro-democracy protesters. He founded Binance in 2017. Within six months, Binance became the world’s biggest crypto exchange and currently accounts for about 60 per cent of global crypto trading volumes. 

Over the years, Zhao installed a tight circle of associates, many of whom had worked or studied in China, into top jobs. Co-founder Yi He now runs Binance’s $7.5 billion venture capital arm, as well as other important departments. The 46-year-old tasked his Chinese-born head of back office, Guangying Chen, with managing the company’s finances.

And while Binance has hired widely from the traditional financial and regulatory worlds in recent years  Zhao’s tight control over his company has continued. In March, the CFTC said that Zhao answers to no one but himself. 

How as Binance reacted to the SEC case?

Criticising the SEC’s action, Binance said on Monday it would defend its platform vigorously, adding “Because Binance is not a US exchange, the SEC’s actions are limited in reach.”

“All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure,” the blog post said.

In a separate statement, the crypto giant said it actively cooperated with the SEC from the beginning and respectfully disagreed with the allegations. 

“Digital asset laws remain largely undeveloped in much of the world, and regulation by enforcement is not the best path forward,” Binance said. “An effective regulatory framework demands collaborative, transparent, and thoughtful policy engagement — a path the SEC has abandoned,”  it added. 

The crypto giant also highlighted that it did not directly refute all of the SEC’s claims. 

Meanwhile, Zhao tweeted that Binance’s “team is all standing by, ensuring systems are stable, including withdrawals, and deposits.”

(With inputs from agencies)

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