In a major development, the US Securities and Exchange Commission (SEC) has filed an extensive lawsuit against Binance, the world’s largest cryptocurrency exchange. The lawsuit, detailing 13 separate charges, was filed in federal court on Monday, June 5, accusing Binance of mismanagement of client funds and misleading regulators and investors about its activities.
“Through thirteen indictments, we allege that Zhao and Binance entities engaged in an extensive web of deceit, conflict of interest, lack of disclosure and calculated evasion of the law,” said SEC Chairman Gary Gensler.
“As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes, while actively concealing who operated the platform, the affiliate market maker’s manipulative trading, and even where and with whom investor funds and crypto assets were held.”
The lawsuit
According to the SEC, Binance has been accused of mixing billions of dollars worth of client funds and surreptitiously transferring them to a separate company, Merit Peak Limited. This company is reportedly under the control of Binance founder, Changpeng Zhaowhich is commonly known as “CZ” in the cryptocurrency world
The charges against Binance extend to allegations of misleading investors about the robustness of its systems designed to identify and curb manipulative trading. The SEC further alleges that Binance has not taken adequate measures to prevent US investors from accessing the unregulated exchange.
The legal complaint also states that the SEC has identified several individual tokens that it believes to be securities, under which BNB, BUSD, SOL, ADA, MATIC, FIL, ATOM, ALGO, COTI, SAND (The Sandbox), MANA (Decentraland), AXS (Axie Infinity).
Binance responds
Zhao took to Twitter to address the allegations, indicating that he had not yet received the complaint and that the company would respond as soon as it did. Initially, their team said they were “standby to ensure systems are stable, including withdrawals and deposits.”
4.
Our team is on hand to ensure systems are stable, including withdrawals and deposits.
We will provide a response as soon as we see the complaint. Haven’t seen it yet. Media get the information before we do.
— CZ
Binance (@cz_binance) June 5, 2023
Zhao eventually tweeted the company’s official response to the allegations, claiming that the SEC aims to “unilaterally define” the shape of the crypto market.
“We are disappointed that the US Securities and Exchange Commission has chosen to file a complaint against Binance today,” the company explained in a blog post addressing the matter. “From the beginning, we have been actively cooperating with the SEC’s investigations and have worked hard to answer their questions and address their concerns.”
“Unfortunately, the SEC’s refusal to engage productively with us is just another example of the Commission’s misguided and deliberate refusal to provide much-needed clarity and guidance to the digital asset industry,” the post continued.
“Today’s action is yet another in a series of examples where, as with other crypto projects facing similar lawsuits, the Commission has decided to regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach required by this dynamic and complex technology. ”
What this means for Binance
This lawsuit against Binance is the latest in a series of actions by US regulators supposedly aimed at bringing order to a largely unregulated cryptocurrency trading space. While it is the apparent intent of regulators to ensure that major industry players comply with U.S. laws, there has been much debate and disagreement, even within the SEC’s own leadership, over whether it is “regulation by enforcement” policy of the organization is effective or fair.
Binance, like its competitor Coinbase, is grappling with increasing legal pressure in light of this approach. The Justice Department is currently investigating the first for possible money laundering violations. In addition, Mazars, Binance’s third-party accounting firm, cut ties with the company after it decided to end business with cryptocurrency companies last year. Binance’s dominance in the cryptocurrency market is also waning, although it remains the number one exchange in the market by volume.
In an effort to maintain its reputation and avoid complications with the SEC, Binance has brought on board several new compliance officers over the past year, including a former federal prosecutor who now heads the compliance operation.
In the SEC statement announcing the charges, Gurbir S. Grewal, Director of the SEC’s Enforcement Department, stated: “We allege that Zhao and the Binance entities not only knew the traffic rules, but also deliberately chose to avoid them and their customers and investors at risk.”
The SEC’s action comes just over a month after the Commodities Futures Trading Commission (CFTC) began its own civil enforcement action against Binance and Zhao, in which the CFTC seeks a lifetime ban on Zhao from doing business within its jurisdiction. It also aims to permanently drive Binance out of the United States.
Editor’s Note: This article was written by an nft now contributor in collaboration with OpenAI’s GPT-4.
