Legal woes mount for Binance in the US

Binance, the world’s largest crypto-currency exchange, is facing more legal problems in the US.

The Securities and Exchange Commission (SEC) yesterday charged Binance, which operates the largest crypto asset trading platform in the world,; US-based affiliate, BAM Trading, which, together with Binance, operates the crypto asset trading platform, Binance.US; and their founder, Changpeng Zhao, with a variety of securities law violations.

Following the charges, Binance came out guns blazing, saying it will “vigorously” defend itself against the allegations.

In another legal stand-off in the US, in March the Commodity Futures Trading Commission (CFTC) sued Zhao and three entities that operate the exchange, alleging numerous violations of the Commodity Exchange Act and CFTC regulations.

Binance was founded in 2017 by Zhao, a developer who had previously created high-frequency trading software.

It was initially based in China, but later moved its headquarters out of China shortly before the Chinese government imposed regulations on crypto-currency trading.

The company also has a presence in South Africa. In August last year, Binance appointed former HSBC SA global banking head Hannes Wessels as its country manager for SA.

Operating behind the scenes

In the latest legal action, among other things, the SEC alleges that while Zhao and Binance publicly claimed US customers were restricted from transacting on, Zhao and Binance in reality subverted their own controls to secretly allow high-value US customers to continue trading on the platform.

Further, the SEC alleges that while Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for US investors, Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes.

The SEC also alleges 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.

The SEC’s complaint further alleges BAM Trading and BAM Management misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume.

Further, the complaint alleges the defendants concealed the fact that it was commingling billions of dollars of investor assets and sending them to a third-party, Merit Peak, that is also owned by Zhao.

“Through 13 charges, we allege Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law,” says SEC chairman 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 US securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value US customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”

Abandoning good-faith talks

In a blog post, Binance says: “We are disappointed that the US Securities and Exchange Commission chose to file a complaint today against Binance seeking, among other remedies, purported emergency relief.

“From the start, we have actively co-operated 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. 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.”

The crypto exchange adds that while it takes 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. 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.

“Today’s action is another in a line of examples where, as with other crypto projects facing similar suits, the commission has determined to regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology.

“Unilaterally labelling certain tokens and services as securities – even ones over which other US authorities have asserted jurisdiction – only compounds these problems.

“Perhaps most surprising, the SEC’s actions undermine America’s role as a global hub for financial innovation and leadership. Digital asset laws remain largely undeveloped in much of the world, and regulation by enforcement is not the best path forward. An effective regulatory framework demands collaborative, transparent and thoughtful policy engagement – a path the SEC has abandoned.”

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