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Binance, Binance US, and Changpeng Zhao (CZ) have been sued by the Securities and Exchange Commission (SEC) in a case that alleges they offered and sold unregistered securities, failed to register their functions with the SEC, wash-traded tokens, mishandled customer funds, and used Binance US as a shield to attract regulatory attention. This follows a similar case launched by the Commodities and Futures Trading Commission (CFTC) several weeks ago.
Earlier reporting by Forbes examined the “Tai Chi” documents, which were created for Binance by a consultant, and recommended setting up a US-based entity to attract the attention of regulators and distract from other violations.
The SEC case alleges that CZ followed this plan in establishing Binance US. Binance’s chief compliance officer (CCO) is quoted in the complaint as saying, “We do not want [Binance].com to be regulated ever.” This same executive also suggested that “on the surface, we cannot be seen to have US users but in reality, we should get them through other creative means.”
CFTC lawsuit against Binance claims CZ traded against users
Read more: Binance admits it commingled customer funds with token reserves
The team working for Binance US apparently resented the restrictions placed on them by Binance, with then-CEO Catherine Coley at one point telling Binance executives that her “team feels like [it had] been duped into being a puppet.” At one point in January 2020, the team began compiling a list of “shackles” or areas of Binance US that Binance controlled.
The SEC complaint alleges that large portions of operations were under the control of Binance, including that until December 2020, no Binance US executives had any control over Binance US bank accounts, which instead had Zhao or other Binance executives as the signatory.
Eventually, Binance US executives began taking control of some of these accounts, but allegedly Zhao was still a signatory as of last month.
SEC says Binance controlled US firm’s assets
The complaint repeatedly suggests that Zhao is the key leader for both companies and points out that he still owns 81% of Binance US. It also claims that he regularly micromanaged expenses for Binance US, including approving Binance-branded merchandise purchases.
The SEC also alleges that Binance-related entities like Merit Peak — controlled by Zhao — had Binance US customer funds transferred to it and then to Paxos in order to issue BUSD. This same entity was also the counterparty for users who took advantage of Binance OTC.
Multi-million dollar transfers to CZ firms confused Catherine Coley
Read more: Binance US could be shut down even with CFTC settlement
Furthermore, Sigma Chain, another Zhao-owned market maker, received in excess of $145 million from Binance US, and at one point spent $11 million to buy a large yacht.
Besides controlling the bank accounts, the complaint also alleges that Binance controlled crypto deposited at Binance US. Through at least December 2022, Binance controlled all cryptocurrency assets associated with Binance US. Furthermore, the SEC highlights that Binance US customers don’t have an agreement with either Binance or Binance US related to the custody of the cryptocurrency assets they deposit into Binance US.
Auditors for Binance US reportedly raised issues with Binance US’ poor internal controls, in 2020 highlighting the control over digital assets, bank accounts, and a lack of transparency.
The complaint also alleges that from the very beginning of Binance US, two Zhao-owned market makers (Merit Peak and Sigma Chain) were directed to be onboarded for Binance US. The lawsuit also alleges that there was significant wash trading on Binance US being perpetrated by Sigma Chain. The day after Binance US initially opened for trading accounts controlled by Sigma Chain, Zhao and Binance employees constituted more than 99% of the volume in an asset during the first hour of trading.
The complaint further claims that between January 1, 2022, and June 23, 2022, Sigma Chain wash-traded on at least 48 of the 51 total assets that were newly listed.
This is getting a little out of hand. The exchanges above fail to realize:
— CZ 🔶 Binance (@cz_binance) April 6, 2019
CREDIBILITY is the most important asset for any exchange!
If an exchange fakes their volumes, would you trust them with your funds? pic.twitter.com/LAizwYAJoC
Read more: From the US to Australia, regulatory knot around Binance tightens
The SEC’s list of securities is growing
The complaint also states that several assets are securities, including BNB, BUSD, Binance’s BNB Vault, Binance’s Simple Earn program, Binance’s staking program, Solana, Cardano, MATIC, Filecoin, ATOM, SAND, MANA, ALGO, Axie Infinity Shards, and COTI.
The complaint echoes the CFTC case in describing how there were no restrictions on US traders before September 2019, and that there was no KYC on Binance until August 2021 if you remained under the daily two-bitcoin withdrawal limit. In December 2018, Binance’s CCO allegedly said, “We are operating as a fking unlicensed securities exchange in the USA bro.” It further alleges that by 2019 there were 3,500 “VIPs” in the US.
Fate of crypto exchange Binance hangs on US money laundering investigation
Both the CFTC and SEC cases allege serious violations by Binance and Zhao, but so far no criminal charges have been brought. Reportedly, prosecutors in Western Washington believed they were ready to bring a case, but were held up waiting for approval from the Money Laundering and Asset Recovery Service (MLARS) in the Department of Justice (DOJ).
Binance reportedly also has the former head of MLARS negotiating on its behalf. Binance’s initial official statement highlighted the fact that it’s been negotiating a settlement with the SEC but it’s possible that criminal charges may still be waiting for Binance and Zhao.
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