Cryptocurrency exchange Binance has been sued by Securities and Exchange Commission (SEC) in the U.S, accused of mishandling customer funds and lying to regulators and investors.
The SEC has accused Binance of mixing “billions of dollars” in customer funds and secretly sending them to a separate company controlled by Binance’s founder, Changpeng Zhao.
“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,” said Gurbir Grewal, director of the SEC’s enforcement division.
Among other things, the SEC alleges that, while Zhao and Binance publicly claimed that U.S. customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their own controls to secretly allow high-value U.S. customers to continue trading on the Binance.com platform.
Further, the SEC alleges that, 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 also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain. T
he SEC’s complaint further alleges that BAM Trading and BAM Management US Holdings, Inc. (“BAM Management”) misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume.
Further, the Complaint alleges that the defendants concealed the fact that it was commingling billions of dollars of investor assets and sending them to a third party, Merit Peak Limited, that is also owned by Zhao.
“Through thirteen charges, 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,” said SEC Chair Gary Gensler.
“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.
They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
The Complaint also charges violations of critical registration-related provisions of the federal securities laws:
- Binance and BAM Trading with operating unregistered national securities exchanges, broker-dealers, and clearing agencies;
- Binance and BAM Trading with the unregistered offer and sale of Binance’s own crypto assets, including a so-called exchange token, BNB, a so-called stablecoin, Binance USD (BUSD), certain crypto-lending products, and a staking-as-a-service program; and
- Zhao as a control person for Binance’s and BAM Trading’s operation of unregistered national securities exchanges, broker-dealers, and clearing agencies.
“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,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
“By engaging in multiple unregistered offerings and also failing to register while at the same time combining the functions of exchanges, brokers, dealers, and clearing agencies, the Binance platforms under Zhao’s control imposed outsized risks and conflicts of interest on investors.
Those risks and conflicts are only heightened by the Binance platforms’ lack of transparency, reliance on related-party transactions, and lies about controls to prevent manipulative trading. Despite their years-long efforts to not ‘be held accountable,’ today’s complaint begins the process of doing so.”
UNREGISTERED EXCHANGE, BROKER, AND CLEARING AGENCY
The SEC’s complaint, filed in the U.S. District Court for the District of Columbia, alleges that, since at least July 2017, Binance.com and Binance.US, while controlled by Zhao, operated as exchanges, brokers, dealers, and clearing agencies and earned at least $11.6 billion in revenue from, among other things, transaction fees from U.S. customers.
The SEC’s complaint alleges that (1) with respect to Binance.com, Binance should have registered as an exchange, broker-dealer, and clearing agency; (2) with respect to Binance.US, Binance and BAM Trading should have registered as an exchange and as clearing agencies; and (3) BAM Trading should have registered as a broker-dealer.
The SEC also alleges that Zhao is liable as a control person for Binance’s and BAM Trading’s respective registration violations.
UNREGISTERED OFFER AND SALE OF CRYPTO ASSETS
The SEC charged Binance for the unregistered offers and sales of BNB, BUSD, and crypto-lending products known as “Simple Earn” and “BNB Vault.” Further, the SEC charged BAM Trading with the unregistered offer and sale of Binance.US’ staking-as-a-service program. The complaint also notes that Binance secretly has control over assets staked by U.S. customers in BAM’s staking program.
FAILURE TO RESTRICT U.S. INVESTORS FROM ACCESSING BINANCE.COM
The SEC’s complaint alleges that Zhao and Binance created BAM Management and BAM Trading in September 2019 as part of an elaborate scheme to evade U.S. federal securities laws by claiming that BAM Trading operated the Binance.US platform independently and that U.S. customers were not able to use the Binance.com platform.
The complaint alleges that, in reality, Zhao and Binance maintained substantial involvement and control of the U.S. entity and that, behind the scenes, Zhao directed Binance to allow and conceal many high-value U.S. customers’ continued access to Binance.com.
In one instance, the Binance chief compliance officer messaged a colleague that, “[w]e are operating as a fking unlicensed securities exchange in the USA bro.”
MISLEADING INVESTORS
According to the SEC’s complaint, BAM Trading and BAM Management misled Binance.US customers and equity investors concerning the existence and adequacy of market surveillance and controls to detect and prevent manipulative trading on the Binance.US platform’s crypto asset trading volumes.
The complaint further alleges that the strategic and targeted wash trading largely perpetrated by the Binance.US platform’s primary undisclosed “market making” trading firm Sigma Chain, also owned by Zhao, demonstrates the falsity of statements BAM Trading made about its market surveillance and controls.
