The Securities and Exchange Commission filed a lawsuit on Monday against the world's largest crypto exchange Binance Holdings and its founder Changpeng Zhao, alleging violations of US securities law.
The complaint claims Binance failed to register as a national securities exchange, broker-dealer, and clearing agency. The regulator also alleges that Binance misled investors by purporting surveillance and controls over manipulative trading on the Binance.US Platform without actually doing so.
“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's token BNB and bitcoin tumbledin the hour following the lawsuit. BNB dropped 10% to $275 per coin as by 6:00 pm Monday while bitcoin fell 5.3% to $25,674, according to Coinmarketcap. Year to date bitcoin is still up 54%.
Binance said in a tweet that "we believe the lawsuit is baseless and we intend to defend ourselves vigorously."
Zhao, who goes by "CZ" in the crypto world, tweeted the number "4" in reference to an earlier post he shared listing a goal for 2023 to "Ignore FUD, fake news, attacks, etc."
"Our team is all standing by, ensuring systems are stable, including withdrawals, and deposits," Zhao said.
Binance has said it made efforts to operate legally in the US, including establishing an affiliate, Binance.US, which offers crypto products excluding derivatives and certain tokens to American users.
The two Binance complaints represent the latest of many recent high-profile clashes between US regulators and the larger crypto world.
The SEC has issued a series of enforcement actions since the beginning of January against crypto firms and individuals.
It has also warned the largest US crypto exchange, Coinbase Global (COIN), of a potential action. Coinbase said in a March 22 regulatory filing it received a Wells Notice from the Securities and Exchange Commission stating that SEC staff had made a "preliminary determination" to recommend an enforcement action for violations of federal securities laws.
Coinbase sued the SEC in April, asking a federal judge to force the regulator to publicly share whether it would propose new securities rules for digital assets or extend existing securities rule-making processes to the asset class.
All of these legal battles could help establish how, and whether, cryptocurrencies are regulated in the US. One key area of debate is whether certain digital currencies are commodities or securities and therefore fall under the oversight of the CFTC and the SEC.
The draft bill aims to create clarity around gaps between the rules of the CFTC and the SEC. It also tries to direct what firms need to do need to register with the SEC and requires the SEC to write new rules that are customized to govern crypto.
Zhao Changpeng, founder and chief executive officer of Binance. REUTERS/Benoit Tessier ·Benoit Tessier / reuters
The new SEC suit against Binance outlines 13 different charges. The exchange, according to the SEC, secretly let high-value US customers trade on the Binance.com platform after publicly claiming US customers were restricted from doing so.
Binance and Zhao, the SEC said, also secretly controlled the operations of Binance.US "behind the scenes" despite claiming publicly that it was a separate, independent trading platform for US investors.
Binance’s chief compliance officer, according to the SEC, said to another compliance officer in December 2018 that “we are operating as a fking unlicensed securities exchange in the USA bro."
The regulator also alleged the control Binance and Zhao had over the platform allowed them to “commingle customer assets” and move them to an entity controlled by Zhao called Sigma Chain. In addition, "Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume."
The SEC is requesting temporary and preliminary injunctive relief, including asset freezes, a verified accounting, repatriation of assets, expedited discovery, preservation of documents and information, and a prohibition on the destruction of evidence.
“By engaging in multiple unregistered offerings and also failing to register while at the same time combining the functions of exchanges, brokers, dealers, and clearing agencies, the Binance platforms under Zhao’s control imposed outsized risks and conflicts of interest on investors,” Gurbir Grewal, director of the SEC's division of enforcement, said in a statement.
Binance said on Twitter that it has engaged in "good faith with SEC for nearly two and half years and that it wants to "work constructively toward a clear, practical regulatory framework that enables businesses like ours to grow, create jobs, and provide American consumers safe access to digital assets."
But "the relief sought by the Commission would harm the very investors the SEC is charged with protecting. It would also stifle innovation and punish our company and industry rather than working to allow American businesses to thrive."
It asked Congress to "step in and pass bipartisan legislation that creates a workable regulatory regime for digital assets and reins in the bureaucratic overreach of which our industry is the victim."
