Summary
Here’s a quick summary of what happened today:
The US Securities and Exchange Commission filed a lawsuit against Binance, the largest cryptocurrency exchange, the most serious action taken by US regulators against the company.
The SEC said that Binance operated a shell company, Binance.US, to skirt federal regulators, along with diverting customer funds to outside entities.
Binance issued a response to the SEC’s lawsuit saying that it had been complying with regulators’ “questions” and was looking to negotiate a settlement with the agency.
In the aftermath of news of the complaint, the price of Bitcoin fell below $26,000 for the first time since March.
We’ll be closing this blog for now. Thanks for reading. You can read the full report on the lawsuit here:
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Seems like Christiano Ronaldo was set to announce a partnership with Binance soon. Ronaldo collaborated with Binance on an NFT collection last fall.
We're working on something with @Cristiano Ronaldo.
— Binance (@binance) May 26, 2023
Here's a behind the scenes look at what we've got coming up. pic.twitter.com/7n8NnBlGui
Before the SEC filed an official complaint against Binance for trying to bypassing US regulatory laws, Reuters published two investigative reports last year that detailed how the company became a conduit for money laundering and how it built up a plan to avoid US regulators. The investigations make it clear that much of what the SEC has sued Binance after had been coming to the surface for years.
In June of last year, Reuters reported that at least $2.35bn in illicit funds were exchanged through Binance. The funds came from hacking, investment frauds and illegal drug sales.
Then in October, Reuters published another investigation into Binance’s plan to set up a US operations that could appear to be independent, for the sake of US regulations, but would actually be a subsidiary of Binance. The company, Binance.US, publicly said that it would handle US investors, who would go through a rigorous screening and validation process. Instead, the company worked to quickly register users instead of conduct money laundering checks, former employees and advisers told Reuters.
The SEC’s lawsuit against Binance will likely make it harder for the company to curry favors with regulators in other countries, including the UK, where the Financial Conduct Authority (FCA) has said Binance is not capable of being regulated. Binance in the past had said it will still do “everything” to change the FCA’s mind. Here’s more from the Guardian’s global technology editor Dan Milmo:
As part of any UK process, Binance will need to register with the FCA, which requires crypto-exchanges to prove they have systems in place to prevent money laundering and terrorism financing.
The regulator said it did not comment on specific companies but its official position on Binance had not changed since 2021, when it barred the business from regulated activity in the UK. At the time that FCA said the firm was “not capable of being effectively supervised”. It appears nothing has happened yet to change that view.
The regulator’s 2021 supervisory notice referred to Binance’s ownership structure as “complex” and with an “extensive geographical spread”, factors that appeared to be “hindering the provision of adequate and reliable information to the FCA”.
Price of Bitcoin drops below $26k
In the aftermath of the SEC’s complaint against Binance, the price of Bitcoin has dropped below $26,000 for the first time since March. It’s not quite the jump seen after the collapse of FTX in November, when the price went from $20,000 to just above $15,000 in a matter of days, but it’s the first sign of instability in an already volatile sector.
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Today’s SEC complaint filed against Binance is just the latest in the company’s legal battles in the US. In March, regulators at a separate federal agency, the Commodity Futures Trading Commission (CFTC), filed its own lawsuit against the company alleging that it intended to grow its US customer base while publicly saying it was blocking US customers from its exchange.
The gist of the complaint is the same as the SEC, as both agencies accuse Binance of purposefully skirting US regulators when growing their US operations. Here’s more from the story that was originally published March 27:
The complaint alleges that Binance has grown its US business despite publicly stating its intent to block US customers from accessing the platform.
Allegations in the complaint include a claim that even after announcing US restrictions Binance told its most valuable US customers how to avoid its compliance controls.
“Defendants have disregarded applicable federal laws while fostering Binance’s US customer base because it has been profitable for them to do so,” the CFTC complaint stated. The CFTC said it was seeking punishments including fines and permanent trading bans.
Gretchen Lowe, the CFTC’s chief counsel, said Binance had put profits ahead of complying with the law. The complaint alleges that Binance has broken the law by offering commodity derivatives transactions – which effectively place a bet on the price of a cryptocurrency rather than buying it directly – to US customers since July 2019, despite not being registered with the CFTC.
Lowe said: “Defendants’ alleged willful evasion of US law is at the core of the commission’s complaint against Binance. The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law.”
The 136-page complaint the SEC filed against Binance contains some scathing details about how CEO Changpeng Zhao and the company knowingly evaded legal scrutiny in the US for years while still profiting off of US investors.
“Zhao and Binance understood that they were operating the Binance.com platform in violation of numerous US laws, including the federal securities laws, and that these ongoing violations presented existential risks to their business,” the complaint reads.
“As Binance’s CCO [chief commercial office] bluntly admitted to another Binance compliance officer in December 2018, “we are operating as a fking unlicensed securities exchange in the USA bro”.
The complaint then goes into how Binance hired several consultants to advise them on their exposure in the US. Ultimately, the company decided to pursue a company it called its “Tai Chi entity”. As first reported by Reuters in the fall, Binance imagined the company would essentially be a shell company that would serve as the target of US enforcement. They called the company Binance.US, and the plan is ultimately what got Binance into hot water with US regulators.
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Binance says allegations are 'simply wrong' and vows to 'vigorously defend' itself
Here’s more from Binance on the SEC lawsuit. The company has rejected allegations that customer funds were at risk as “simply wrong”.
The company also vowed to “vigorously defend” itself against the claims.
The statement added: “All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure, and we will vigorously defend against any allegations to the contrary.”
What the SEC is accusing Binance of
The US Securities and Exchange Commission has filed a total of 13 charges against Binance in US federal court. The core of the SEC’s complaint against Binance and CEO Changpeng Zhao is that the company knowingly skirted US regulations and deceived US investors and regulators about how it was operating its exchange.
The SEC says that Zhao and Binance, which was founded in Shanghai but has since moved out of China after the country banned cryptocurrency trades, falsely claimed the exchange banned US customers when in fact the company was secretly allowing traders access to the exchange. Binance said it created Binance.US, a separate, independent trading platform specifically for US investors, Zhao and Binance was controlling the entity behind the scenes.
The complaint says that Zhao and Binance exercised unlawful control over customer funds, including diverting them to outside entities that were also owned by Zhao, including one called Sigma Chain. Binance “misled” investors about trading control the company said it offered on the Binance.US platform and instead diverted funds to Sigma Chan. With the diverted funds, Zhao and Binance “engaged in manipulative trading” that led to an artificial increase in the platform’s trading value. It also diverted money to another Zhao-owned trading firm, Merit Peak Limited.
Other charges encompass broader accusations against Binance for operating in the US as an unregistered national securities exchanges.
The US Securities and Exchange Commission has filed a lawsuit against Binance, the world’s largest cryptocurrency exchange, and its CEO, Changpeng Zhao, accusing the company and Zhao of operating an illegal cryptocurrency exchange using billions of dollars in Binance customer funds.
This is the biggest crackdown of the cryptocurrency exchange and will likely cause a rumble in the cryptocurrency world, which was shaken by the collapse of FTX in the fall, what was the second-largest exchange to Binance.
“Through 13 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 law,” SEC head Gary Gensler said in a statement.
In its own statement on its website, Binance denounced the lawsuit saying that the company has been been “actively cooperating” with the investigation and “worked hard to answer their questions and address their concerns”.
“Most recently, we have engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigation,” the statement said. “Despite our efforts, with its complaint today the SEC abandoned that process and instead chose to act unilaterally and litigate.”
The company said it plans to “defend our platform vigorously”.
This is Lauren Aratani in New York. We’ll be covering new developments and reactions around Binance, so stay tuned.
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