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The U.S. Securities and Exchange Commission (SEC) unveiled a range of charges against crypto exchange Binance and its founder, Changpeng Zhao, today. Binance is the biggest crypto exchange in the world. It operates internationally as Binance.com and in the U.S. as Binance.US. Users based in the U.S. are barred from using Binance.com, and the SEC alleges that Binance and Zhao violated securities laws by allowing U.S. customers to trade on Binance.com despite the ban. The SEC also alleges that the companies commingled billions of dollars worth of user funds—similar to activities that helped bring down FTX—and sent them to a European company controlled by Zhao In one instance, Binance’s chief compliance officer messaged a colleague that, “[w]e are operating as a (vulgarity) unlicensed securities exchange in the USA bro.” Why Is the SEC Suing Binance? Founded in 2017 by Changpeng Zhao, commonly known as CZ, Binance quickly became the world’s largest cryptocurrency trading platform by volume. Coinciding with the company’s launch, Binance also licensed the cryptocurrency Binance Coin (BNB) and released a stablecoin called Binance USD (BUSD). As of this writing, BNB is the fourth largest cryptocurrency in the world by market capitalization. Due to regulatory pressure, Binance.US spun out of Binance in 2019 to facilitate U.S. trading on the Binance platform. Binance.US was supposed to be operated by both Binance and the separate U.S. entity BAM Trading Services. This was done in order to meet U.S. regulatory guidelines without impinging on any programs offered by the international exchange, Binance.com. U.S.-based customers were not supposed to be able to gain access to Binance.com. On June 5, 2023, the SEC unveiled 13 separate charges against Binance and its founder, Zhao. Among other things, the SEC alleges that: Binance.com and Binance.US are operating as unregistered exchanges and clearing agencies. Binance.com is operating as an unlicensed broker. The exchanges are making unregistered offers and sales of BNB and BUSD, via crypto lending and staking-as-a-service programs. They are failing to restrict, and in some cases even encouraging, U.S. users from using Binance.com rather than Binance.US. They are misleading Binance.US customers about market surveillance controls to prevent manipulative trading on Binance.US. Binance Holdings, BAM Trading and Zhao were all mentioned by name in the SEC lawsuit. Binance.US versus Binance.com Although all the charges could be viewed as serious, the claim that Binance and Zhao encouraged high net worth individuals in the U.S. to continue trading on the international Binance.com exchange could be the most damaging charge. By questioning that the company has effectively kept Binance and Binance.US separate, the SEC is attacking the very structure of the business. In effect, it’s arguing that the safeguards Binance claims to have in place to keep the business in compliance with U.S. laws are deficient. Charges that Binance was acting as an unregistered exchange and offering unregistered securities could potentially have wide-reaching effects throughout cryptoworld, since they could apply to any number of other businesses. SEC chairman Gary Gensler has stated many times in the past that he believes most cryptocurrencies are securities, putting them under the purview of existing SEC regulations and U.S. laws. The SEC’s goal with this lawsuit is to stop Binance and Binance.US from violating federal law and to bar Zhao and Binance at large from issuing any more of what the SEC considers securities. The charges in the SEC’s lawsuit mirror an earlier lawsuit brought by the U.S. Commodity Futures Trading Commission (CFTC) in March 2023. The CFTC’s lawsuit claimed that Binance and Zhao were offering unregistered crypto derivatives products in the U.S. Binance Responds to the SEC Binance quickly responded on its company blog to the SEC’s complaint. In its response, Binance reinforced the company’s willingness “to cooperate with regulators and policymakers in the U.S. and across the globe.” Binance even stated that it has tried to negotiate a settlement with the SEC with regard to the recent allegations. However, in the statement, Binance also said, “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.” The company went on to say, “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.” The difficulty of parsing U.S. regulations has been a consistent complaint among cryptocurrency exchanges and other actors within the broader cryptosphere. They’ve even led to some of the largest U.S. crypto exchanges—most recently, Gemini and Crypto.com—to start looking to open new operations overseas. A tweet attributed to Zhao also mentioned the numeral: 4., in reference to an earlier tweet by Zhao to “ignore FUD”, which stands for fear, uncertainty and doubt. Immediate Impact of the SEC’s Action against Binance On the news, prices of the world’s leading cryptocurrencies tumbled. Bitcoin (BTC), the world’s largest cryptocurrency by market cap, quickly dropped nearly 6%, even dipping below the $25,600 threshold briefly—more than 60% below its all-time high of $64,400 set in November 2021. The world’s second-largest cryptocurrency by market cap, Ethereum (ETH), was down more than 5% as well, bottoming out below $1,800 before recovering slightly. ETH’s all-time high of $4,800 was also set in November 2021. Other leading cryptocurrencies, such as XRP (XRP), Cardano (ADA) and Dogecoin (DOGE) were down more than 6%, 7% and 8% respectively. Binance’s own BNB coin was down more than 9%.
Read more: forbes
