Washington, DC – The United States Securities and Exchange Commission (SEC) has launched a lawsuit against Binance, the world’s largest cryptocurrency exchange, and its CEO and founder, Changpeng Zhao. The regulatory agency claims that Binance allowed US customers to access its platform, misled investors about its market surveillance controls, operated an unregistered securities exchange, and engaged in deceptive practices related to customer funds.
The SEC filed the complaint on Monday in federal court in Washington, DC, alleging that Binance and Zhao surreptitiously controlled customers’ assets, enabling them to mix and divert customer funds at will. Additionally, the SEC accused Binance of setting up separate US entities as part of an intricate scheme to evade US federal securities laws.
According to the SEC’s complaint, a trading firm owned and controlled by Zhao, Sigma Chain, was involved in “wash trading,” a practice that artificially inflates the trading volume of crypto asset securities on the Binance.US platform. This activity allegedly took place from nearly three years ago until June 2022.
SEC Chair Gary Gensler stated, “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.” The SEC’s action comes as part of its ongoing efforts to regulate the rapidly growing cryptocurrency industry.
Binance responded to the lawsuit in a blog post, asserting their intention to vigorously defend their platform. They argued that since Binance is not a US-based exchange, the SEC’s actions are limited in their jurisdiction. The blog post also emphasized that user assets on the Binance.US platform were never at risk, refuting the allegations made by the SEC.
The news of the lawsuit had an immediate impact on the cryptocurrency market. Bitcoin, the largest cryptocurrency globally, experienced a 6 percent drop, reaching its lowest point in nearly three months. Binance’s own cryptocurrency, BNB, the fourth-largest by market size, also suffered a decline of over 5 percent.
This legal challenge is the latest in a series of troubles for Binance. In March, the US Commodity Futures Trading Commission filed a lawsuit, accusing the exchange of operating an “illegal” exchange and maintaining a “sham” compliance program. Binance is also under investigation by the US Department of Justice for suspected money laundering and sanctions violations, according to anonymous sources.
Market analysts predict that the SEC’s allegations against Binance could severely impact the exchange and reverberate throughout the entire crypto industry. With Binance processing trades worth approximately $65 billion daily, accounting for up to 70 percent of the market, the regulatory scrutiny poses a significant risk to the exchange’s operations.
Binance was established in Shanghai in 2017 by Changpeng Zhao, a Canadian citizen with roots in China. While its holding company is located in the Cayman Islands, Binance has not disclosed its headquarters’ exact location. In the past, the company has faced allegations of processing billions of dollars in payments for illicit activities and evading US sanctions.
Earlier reports from Reuters have also revealed that Binance mixed customer deposits with corporate revenues in a Silvergate Bank account, violating US financial regulations that mandate the separation of client funds. Binance, however, has denied these claims, stating that users who sent money to the account were purchasing Binance’s dollar-linked crypto token rather than making deposits.
As the legal battle unfolds, the outcome will have far-reaching implications for Binance and the broader cryptocurrency industry, potentially reshaping the regulatory landscape for exchanges and investors alike.