The United States Securities and Exchange Commission (SEC) has sued the world’s largest cryptocurrency exchange, Binance, and its CEO and founder, Changpeng Zhao, for allegedly failing to restrict US customers from its platform and misleading investors about its market surveillance controls as well as for operating an unregistered securities exchange.
The SEC’s complaint, filed on Monday in federal court in Washington, DC, also accused Binance and Zhao of secretly controlling customers’ assets, allowing them to commingle and divert customer funds, “as they please”.
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Binance created separate US entities “as part of an elaborate scheme to evade US federal securities laws”, the SEC also alleged.
From almost three years ago until June 2022, a trading firm owned and controlled by Zhao, Sigma Chain, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform, the SEC also alleged.
“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 said in a statement.
In a blog post, Binance said: “We intend to defend our platform vigorously,” adding that “because Binance is not a US exchange, the SEC’s actions are limited in reach.”
“Any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong,” the blog post said.
Binance.US, which is ultimately controlled by Zhao, said in a tweet that the lawsuit was “unjustified by the facts, by the law, or by the Commission’s own precedent.”
Bitcoin, the world’s biggest cryptocurrency, fell as much as 6 percent on the news to its lowest in almost three months. Binance’s own cryptocurrency BNB, the world’s fourth-largest by market size, dropped more than 5 percent.
The move is the latest in a series of legal woes for Binance, which was also sued by the US Commodity Futures Trading Commission in March for operating what the regulator alleged were an “illegal” exchange and a “sham” compliance programme. Zhao called those charges “disappointing” and an “incomplete recitation of facts”.
Binance is also under investigation by the US Department of Justice for suspected money laundering and sanctions violations, according to people familiar with the probe.
Market players said the SEC’s allegations could hobble Binance, with the lawsuit likely to reverberate through the crypto industry. Binance dominates crypto trading, last year processing trades worth about $65bn a day with up to 70 percent of the market.
“I think that there’s a big risk here that this could be crippling to Binance,” said Ed Moya, senior market analyst at Oanda.
Binance was founded in Shanghai in 2017 by Zhao, a Canadian citizen born and raised until the age of 12 in China.
While its holding company is based in the Cayman Islands, Binance says it does not have a headquarters and has declined to state the location of its main Binance.com exchange.
The firm has processed at least $10bn in payments for criminals and companies seeking to evade US sanctions, the Reuters news agency has previously reported.
Reuters also reported on May 23 that Binance commingled its customers’ funds with its corporate revenues in a Silvergate Bank account belonging to trading firm Merit Peak in breach of US financial rules that require client money to be kept separate.
Binance denied mixing customer deposits and company funds, saying that users who sent money to the account were not making deposits but rather buying Binance’s bespoke dollar-linked crypto token.