On Monday, the Securities and Exchange Commission sued Binance, alleging that the world's largest crypto exchange violated U.S. securities law.
The SEC also named Changpeng "CZ" Zhao, the firm's cofounder and CEO, in the suit, as well as BAM Trading, the operator of Binance's U.S. branch.
In the 136-page lawsuit, the SEC filed 13 charges against Binance related to the alleged mishandling of customer funds and offering unregistered securities, outlining a "blatant disregard of the federal securities laws and the investor and market protections these laws provide."
The case was filed in the U.S. District Court for the District of Columbia.
"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," said Gurbir S. Grewal, director of the SEC’s Division of Enforcement, in a statement.
The lawsuit comes two months after the Commodity Futures Trading Commission moved to sue Binance and Zhao in March for allegedly offering illegal services to U.S. companies and not properly registering with the agency.
The SEC complaint includes similar allegations, including that Binance and Zhao were subverting controls to "secretly allow high-value U.S. customers to continue trading on the BInance.com platform" despite the service being closed to the region.
The agency also alleges that Zhao and Binance were exercising control of customer assets, which permitted them to commingle customer assets and divert them to a Zhao-owned entity called Sigma Chain. Additionally, the entity managing Binance.US—BAM Trading—misled investors about "nonexistent" trading controls, while Zhao's Sigma Chain engaged in manipulative trading to inflate the trading volume, according to the complaint. Assets were allegedly also sent to Merit Park Limited, another entity owned by Zhao.
"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," SEC Chair Gary Gensler said in a statement. "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."
The crypto exchange has faced regulatory challenges for months, including an enforcement action by the New York Department of Financial Services in mid-February that ordered Paxos to stop issuing a Binance-branded stablecoin, BUSD, amid questions over improper management. In Monday's lawsuit, the SEC named BUSD as a security, as well as Binance's exchange token, BNB.
"Our team is all standing by, ensuring systems are stable, including withdrawals, and deposits," Zhao tweeted after the complaint was published. "We will issue a response once we see the complaint. Haven't seen it yet. Media gets the info before we do."
4.
— CZ 🔶 Binance (@cz_binance) June 5, 2023
Our team is all standing by, ensuring systems are stable, including withdrawals, and deposits.
We will issue a response once we see the complaint. Haven't seen it yet. Media gets the info before we do.
🙏
"While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to defend our platform vigorously," the company said in a blog post published Monday. "Unfortunately, the SEC’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."
