The Securities and Exchange Commission (SEC) complaint, filed in a federal court in Washington, DC, listed 13 charges against Binance, Zhao and the operator of its purportedly independent US exchange.
The SEC alleged that Binance artificially inflated its trading volumes, diverted customer funds, failed to restrict US customers from its platform and misled investors about its market surveillance controls.
The SEC also claimed that Binance and Zhao, its billionaire founder and one of the crypto industry’s highest-profile moguls, secretly controlled customers’ assets, allowing them to commingle and divert investor funds “as they please.”
Binance created separate US entities “as part of an elaborate scheme to evade US federal securities laws,” the SEC also alleged, citing a number of practices first reported by Reuters in a series of investigations into the exchange published this year and in 2022.
From almost three years ago until June 2022, a trading firm owned and controlled by Zhao, Sigma Chain, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform, the SEC also alleged. Sigma Chain spent $11 million from an account on a yacht, the SEC said.
“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,” SEC Chair Gary Gensler said in a statement.
In a blog post, Binance said: “We intend to defend our platform vigorously,” adding that “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 statement, Binance said it had “actively cooperated” with the SEC “from the start” and “respectfully disagree” with the SEC’s allegations. Binance had been trying to find a “reasonable resolution” with the SEC but the agency “at the eleventh hour” issued new requests and went to court. Binance said the SEC’s actions appeared to be an effort to “claim jurisdictional ground from other regulators.”
Binance.US, which is ultimately controlled by Zhao, said in a tweet that the lawsuit was “unjustified by the facts, by the law, or by the Commission’s own precedent.”
Bitcoin, the world’s biggest cryptocurrency, fell as much as 6% on the news to its lowest in almost three months. Binance’s own cryptocurrency BNB, the world’s fourth-largest by market size, dropped more than 5%.
Market players said the SEC’s allegations could hobble Binance, with the lawsuit likely to reverberate through the crypto industry. Binance dominates crypto trading, last year processing trades worth about $65 billion a day.
A March report from CCData showed that Binance’s spot market share across top-tier exchanges fell in March for the first time in five months to 57.7% from 62.0% in February. Its derivatives trading volume, however, rose.
“I think that there’s a big risk here that this could be crippling to Binance,” said Ed Moya, senior market analyst at Oanda.
Legal headaches
The SEC complaint is the latest in a series of legal headaches for Binance, which was also sued by the US Commodity Futures Trading Commission (CFTC) in March for operating what the regulator alleged were an “illegal” exchange and a “sham” compliance program . Zhao called those an “incomplete recitation of facts.”
Binance is also under investigation by the Justice Department for suspected money laundering and sanctions violations, according to people familiar with the probe.
The holding company of Binance is based in the Cayman Islands. It was founded in Shanghai in 2017 by CEO Zhao, a Canadian citizen born and raised in China until age 12. The exchange says it does not have a headquarters and has declined to state the location of its main Binance.com exchange.
The SEC alleged that Zhao designed and implemented a plan to “surreptitiously evade US laws.” The agency said Binance’s chief compliance officer admitted that: “We do not want [Binance].com to be regulated ever.” It said Zhao directed Binance.US even though the US entity has long said it operates independently.
The SEC said billions of dollars in Binance customer funds were commingled, or mixed with corporate funds, in breach of US laws, in a bank account of an entity controlled by Zhao, then transferred to a trading firm, Merit Peak, also controlled by Zhao .
Last month, Reuters reported that Binance commingled its customers’ funds with its corporate revenues in a US bank account belonging to Merit Peak. Binance 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.
Reuters reported on Monday before the SEC lawsuit that a senior Binance executive was the main operator for five bank accounts belonging to BAM Trading, the operator of Binance.US, including an account that held American customers’ funds.
The SEC wrote that the executive had at least until December 2020, also had “signatory authority over BAM Trading’s US Dollar accounts.”
