The US Securities and Exchanges Commission (SEC) has filed charges against Binance Holdings Ltd., its US-based affiliates (BAM Trading Services Inc. and BAM Management US Holdings Inc.), and founder Changpeng Zhao (CZ) for purported breaches of US securities laws.
The SEC has brought forward a litany of charges revolving around the operation of Binance in the US and the provision of services to US customers. The most pertinent allegations are:
That Binance and BAM Trading, under CZ's leadership, knowingly offered unregistered exchange, broker-dealer, and clearing agency services to US consumers.
That Binance engaged in unregistered offers and sales of crypto asset securities, including Binance's BNB and BUSD, as well as "investment scheme" services BNB Vault and Simple Earn.
That BAM Trading and BAM Management engaged in misrepresentation with US investors while raising capital concerning the controls that BAM Trading says was implemented.
That Binance and CZ publicly claimed BAM Trading and BAM Management independently controlled US operations, but that behind the scenes CZ and Binance were involved in directing BAM Trading's operations insofar as employees were unable to freely conduct the business of the US platform and an employee of BAM Trading allegedly told Binance's CFO that her "entire team feels like [it had] been duped into being a puppet".
While saying the US platform did not serve US consumers, and announcing controls to block US customers, the SEC claims CZ and Binance concealed efforts to offer trading services to "high-value" US customers and assist those customers to circumnavigating any controls. Importantly, the SEC alleges the Binance COO said: "[o]n the surface we cannot be seen to have US users but in reality, we should get them through other creative means."
To evade regulatory oversight and provide securities-related services, CZ is alleged to have, at times, moved billions of dollars worth of assets into a US-based entity controlled by CZ, called Merit Peak Limited, which was then transferred to a third party in connection with the purchase and sale of assets. Merit Peak is seen as a market making business serving Binance.
That the US platform did not implement appropriate controls to protect against wash trading or self-dealing, which was allegedly occurring. The SEC claims the most notable wash trading was done by trading firm Sigma Chain AG, which was another market making firm which is owned and controlled by CZ. The SEC is alleging directly that CZ engaged in wash trading that artificially inflated the trading volume of crypto assets on the US platform.
The SEC has charged Binance, CZ and BAM Trading with the above (and other) violations and is seeking to block them from engaging in crypto-related operations while also setting a precedent with a severe penalty. Binance has already been in the cross-hairs recently having had a lawsuit filed by the Commodities and Futures Trading Commission.
Interestingly, the SEC claims also sets out a theory that Binance's BUSD stablecoin, which was approved by the New York State Department of Financial Services, is a security under US Federal law. The SEC alleges that BUSD purchasers invested in a common enterprise with each other and Binance, and that the ecosystem through which BUSD holders earn returns from pooled investments gave BUSD its profit potential, despite the token being a stablecoin which by definition was not designed to change.
It remains to be seen whether there will be a referral to the Department of Justice and what kind of defence will be brought. As the SEC continues its "regulation by enforcement" campaign it has fired the first shot against one of the world's largest exchange.
CZ shot back on Twitter:
and pointed out that they had not seen the complaint before the SEC had send it to media:
