So far, the main impact of the SEC lawsuit against Binance appears to be the crippling of its U.S. arm. The agency’s broadside, launched on June 5, prompted banks serving Binance.US to cease allowing its customers to use dollars for purchasing the tokens they trade on the platform, a hit that if not reversed, will chase traders away in droves. And if granted by the courts, the SEC’s proposed asset freeze would deliver a death blow. Though the American affiliate is now imperiled, it represents a tiny part of the Binance empire that as recently as December, controlled two-thirds of all the buying and selling of cryptocurrencies. What’s been mostly overlooked is the extreme vulnerability of Binance.com, the giant global exchange, to a loss of confidence and steep fall in price in its native self-created coin, BNB. (You can read my earlier feature for Fortune about how Binance makes its money here.) Put simply, Changpeng “CZ” Zhao built his entire empire on the faulty foundation of BNB. And now, as demonstrated by its recent sharp decline, the inevitable cracks are showing, and the fissures threaten to bring down the entire edifice.
It’s even possible that the SEC action mainly targeting the U.S. operation could also inflict big damages on Binance.com. In the complaint, the regulator names the parent of the global exchange, Binance Holdings Ltd., as a defendant. The complaint, for the first time, establishes the SEC’s position that BNB is a “security,” which to be lawfully sold and traded to U.S. customers must be registered with the agency. Of course, neither Binance nor any other coin issuer has sought approval from the SEC. Hence, the suit asserts that Binance.com unlawfully sold BNB in the U.S. as part of its 2017 initial coin offering (ICO), stating that “Binance’s ICO was marketed and sold to investors globally and Binance imposed no restrictions on U.S. investments in BNB.” The action further charges that Binance.US violated securities laws by selling BNB to more than 40,000 U.S. investors. “It’s highly possible that the SEC could seek large penalties not just from Binance.US, but from the big exchange because of the allegedly illegal sales cited in the complaint,” says Alex More, an attorney at Carrington Coleman in Dallas who represents a number of cryptocurrency clients.
