Binance was charged on Monday by the Securities and Exchange Commission with mixing “billions of dollars” in customer funds and moving them to another company that was run by its founder and CEO Changpeng Zhao.
The largest crypto asset trading exchange was also charged with lying to federal regulators and its investors about how its operations are run, according to a filing in federal court that includes 13 charges.
CEO Chengpeng Zhao sent customer funds to Merit Peak Limited, a company that he controlled, the Wall Street regulator alleges in its filing.
"The SEC also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain," according to the SEC.
The SEC also charged Binance with pumping up the trading volume and alleges that another company entity Zhao owned and controlled, Sigma Chain, "engaged in manipulative trading that artificially inflated the platform’s trading volume."
The regulator also said in a filing with the U.S. District Court for the District of Columbia that Binance failed to take sufficient steps to stop investors in the U.S. from being able to trade on its unregulated exchange and mislead investors about the systems it created to determine if manipulative trading was occurring.
Cryptocurrency exchange platforms have come under greater scrutiny as regulators seek to ensure these companies that allow investors to buy and sell digital assets are complying with U.S. securities laws.
“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,” said SEC Chair Gary Gensler. “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."
Binance's Response
Binance said it was "disappointed" with the SEC allegations and said the crypto exchange has "actively cooperated with the SEC’s investigations and have 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 investigations," Binance said. "But despite our efforts, with its complaint today the SEC abandoned that process and instead chose to act unilaterally and litigate. We are disheartened by that choice."
Binance said it plans to defend itself and is dismayed that the regulator's refusal "to productively engage with us is just another example of the Commission’s misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry."
Failure to Register as Exchange, Broker-Dealer
The SEC said Binance.com and Binance.US, which are both operated by Zhao, should have registered as an exchange, broker-dealer and clearing agency.
The company did operate as "exchanges, brokers, dealers, and clearing agencies" since 2017 and generated at least $11.6 billion in revenue from transaction fees and other fees from its U.S. customers.
Binance.US, Binance and BAM Trading also should have registered as an exchange and as clearing agencies and BAM Trading should have registered as a broker-dealer the SEC complaint said.
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