CFTC sues cryptocurrency exchange Binance and founder Changpeng Zhao

SEC sues Binance and founder Changpeng Zhao over securities law violations

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The U.S. Securities and Exchange Commission today charged Binance Holdings Ltd. and its founding Chief Executive, Changpeng Zhao, with violating securities laws. 

The SEC has also named a Binance affiliate, BAM Trading Services Inc., in the lawsuit. It helped the company operate the U.S. version of its cryptocurrency exchange. Binance, BAM and Zhao are facing 13 charges in total. 

“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.

Binance is the world’s largest cryptocurrency trading platform. According to the SEC, the company’s international and U.S. cryptocurrency exchanges generated at least $11.6 billion in revenue since July 2017. Part of that revenue came from transaction fees paid by U.S. users. 

Companies that offer certain types of securities-related financial services must report their activities to the SEC. According to today’s lawsuit, Binance and BAM have both failed to register as exchange operators and broker dealers with the agency. Moreover, the SEC charges that the companies operated an unregistered clearing house, a service that helps process securities transactions.

The second part of the agency’s lawsuit focuses on the financial products that Binance offers through its platform. The SEC has charged the company with the unregistered offer and sale of its two internally-developed cryptocurrencies, BNB and BUSD. Furthermore, Binance is accused of failing to register two crypto lending products. 

BAM, the affiliate company named in the lawsuit, offered a so-called staking-as-a-service program to customers of Binance’s U.S. cryptocurrency exchange. Staking is an arrangement that allows users to earn financial rewards if they hold a cryptocurrency for a certain amount of time. According to the lawsuit, the program breached SEC registration rules.

Binance’s U.S. exchange launched four years ago under the name Binance.US. The company stated at the time that exchange would operate separately from the international version of its platform. Furthermore, Binance claimed that stateside users would not have access to the international version.

The SEC alleges the company nevertheless allowed some U.S. customers to continue accessing the international version. Binance allegedly “subverted their own controls” to do so. “While Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for U.S. investors, Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes,” the SEC stated today.

The agency has furthermore charged Binance and Zhao with misleading U.S customers, as well as investors. According to SEC, a firm called Sigma Chain that was owned by Zhao performed large-scale wash trading on Binance.US. Wash trading is a form of market manipulation.

The SEC charges that Sigma Chain was also involved in a scheme to “commingle customer assets or divert customer assets.” Merit Peak Limited, another company owned by Zhao, reportedly participated as well. The SEC puts the value of the affected customer assets at billions of dollars.

“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 Grewal, the director of the SEC’s enforcement division.

Image: Flickr

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