SEC: 13 charges against Binance and CZ

Yesterday, the SEC filed 13 charges against crypto exchange Binance and its co-founder and CEO Changpeng “CZ” Zhao. 

The official press release states that the Securities and Exchange Commission charged Binance Holdings Ltd., its US affiliate BAM Trading Services Inc. and their founder, Changpeng Zhao, with “a variety of securities law violations.”

The SEC has been waging a full-fledged campaign against cryptocurrencies and exchanges for several months now, as it has already gone after Kraken and Coinbase as well. 

It is focusing on major exchanges that are based in the US, such as indeed Kraken and Coinbase, and those that are very active in the country, such as indeed Binance US. 

The charges against the exchange and its CEO

First and foremost, the SEC accuses CZ and Binance of lying, as they publicly claimed that US customers were prohibited from transacting on the international exchange Binance.com, when in fact they allegedly voluntarily reduced controls in this regard in order to allow higher-value US customers to trade the same on the platform. 

It is worth recalling that in theory for US customers there would be Binance.US, which is a different exchange and disconnected from Binance.com. 

In fact, the SEC accuses CZ and Binance of lying about this as well, namely publicly claiming that Binance.US was a separate and independent trading platform from Binance.com, when in fact they secretly controlled it “behind the scenes.”

However, this is not the worst accusation. 

The US agency that oversees the security market alleges that CZ and Binance “exercise control of the platforms’ customers’ assets,” meaning that they keep their customers’ funds mixed with corporate-owned funds, so much so that they can hijack customers’ assets at will.

In this respect they accuse them of sending funds to two outside entities owned and controlled by CZ itself, namely Sigma Chain and Merit Peak Limited.

Another allegation is that of the non-existence of trading controls within the platform for US clients, Binance.US, with Sigma Chain itself allegedly engaging in manipulative trading that “artificially inflated the platform’s trading volume.” 

But the allegation that could have the greatest repercussions for the crypto markets is another. 

The issue with securities

Binance is the world’s largest crypto exchange, but at present it does not appear insolvent. In fact, yesterday the crypto markets lost only 5% after the news broke, with the drop not only being small but also short-lived. 

The real big problem is related to allegations of allowing the buying and selling of unregistered securities. 

The SEC oversees precisely the security market, and such assets in order to be sold freely to the public must be registered. 

The official press release states in no uncertain terms that Binance has been operating as an unregistered national exchange, broker-dealer, and clearing agency, hosting offers and sales of unregistered securities. 

Among these it specifically cites Binance’s cryptocurrency, Binance Coin (BNB), Binance USD (BUSD), some crypto lending products (Simple Earn and BNB Vault), and the staking-as-a-service program.

These are accusations that the SEC is already addressing to the other major exchanges operating in the US, including Coinbase. 

Should it succeed in proving that crypto exchanges allow the buying and selling of unregistered securities it could spell disaster for the majority of cryptocurrencies themselves, excluding Bitcoin. 

In the text of the complaint, filed in the US District Court for the District of Columbia, it states that Binance should have registered as an exchange, broker-dealer and clearing agency, and that CZ is the responsible party as a person in control. 

SEC executives’ comments on the allegations against Binance

SEC Chairman Gary Gensler stated: 

“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.

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.”

These words turn out to be quite strong, and it is no coincidence that among the major cryptocurrencies, the one that lost the most yesterday was BNB itself, dropping twice as much as the others on a percentage basis. 

The director of the SEC’s enforcement division, Gurbir S. Grewal, added: 

“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. 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.” 

Binance’s reaction to SEC allegations

At first, CZ and Binance’s reaction had seemed wait-and-see and cautious. 

In fact, their official press release merely states that they are disappointed and concerned that the SEC is trying to unilaterally define the structure of the cryptocurrency market. 

They state that from the beginning they have been actively cooperating with the agency’s investigation, and have worked hard to answer their questions and concerns. 

In short, they have not publicly denied all the allegations and responsibilities raised in the text of the complaint, but they have counterattacked the SEC. 

They claim that the SEC’s actions undermine America’s role as a global hub for innovation and financial leadership, and that the SEC’s goal does not appear to be to protect investors. 

However, the reality now is that the confrontation will move to the courtrooms unless the company can come to some kind of settlement as Kraken did a few months ago. 

lt will be a clash that will have the SEC on one side, with its unclear regulation of crypto assets in the US, and several exchanges operating in the US, including Coinbase, on the other. 

The clash promises to be violent, but Kraken’s precedent suggests that it could also end with some sort of convergence toward some intermediate compromise that saves face for both contenders. 

At the very least, this affair brings to light how many problems arise due to the absence of clear and explicit regulation of the crypto sector in the US.