The SEC is accusing Binance of mishandling funds and lying to regulators

The Securities and Exchange Commission on Monday charged Binance, the world’s largest cryptocurrency exchange, with mishandling customer funds and lying to US regulators and investors about its operations, in a sweeping case that has the potential to reshape the landscape of power and wealth within the cryptocurrency.

The lawsuit, filed by the SEC, was the second time this year that federal regulators have accused Binance of evading laws designed to protect investors in the United States. Regulators have long seen the exchange, which has said it generates $65 billion in average daily trading volume, as a key target in their quest to bring the crypto industry built around an overtly anti-government ethos into action.

In the 136-page complaint, the SEC said Binance mixed billions of dollars in customer funds and secretly sent them to a separate company, Merit Peak Limited, controlled by Binance founder Changpeng Zhao.

The complaint also said that Binance misled investors about the adequacy of its systems for detecting and monitoring manipulative trading and about its efforts to restrict US users from trading on its international platform. US-based customers were only supposed to have access to an ostensibly separate company formed specifically to operate within the US, called Binance.US.

In the civil lawsuit filed in Washington federal district court, the regulators said Binance and Mr. Zhao had “enriched themselves with billions of US dollars while putting investors’ assets at significant risk.”

In a blog post on Monday, Binance said its leaders were trying to negotiate a settlement with regulators and were “disappointed” and “disappointed” with the SEC’s decision to file a lawsuit. The company said the case was a “misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry” and added that it would “vigorously” fight back.

Binance also accused the SEC of rushing it to court to file the lawsuit, noting that last week regulators filed a “new set of 26 document requests” with the company.

The charges were the latest actions taken by US regulators and prosecutors to rein in the Wild West of cryptocurrency trading and force major players in the space to comply with US laws. Sam Bankman Fried, founder of FTX, which was a major crypto trading rival to Binance until it filed for bankruptcy in November, is facing trial in October on fraud and other charges. In recent months, the SEC has also imposed fines and other penalties on cryptocurrency lending firms.

The SEC has taken the position that most tokens issued by exchanges like Binance and FTX should be treated as securities under federal law.

“U.S. regulators are putting huge speed bumps on Binance and continue to notify the cryptocurrency world,” said Reena Aggarwal, a professor of finance at Georgetown University.

Binance has already been under increasing pressure. In March, the Commodity Futures Trading Commission filed its own civil enforcement action against Binance and Mr. Zhao. The DOJ is also investigating the exchange for money laundering violations. Binance lost its third-party audit firm late last year, which saw the company dominate the crypto market Shrink.

To improve its reputation, Binance has appointed new compliance officers, including a former federal prosecutor who now heads the compliance process.

David Silver, a lawyer who has sued Binance several times, said that the SEC complaint “exposes the essence of cryptocurrency,” and major global exchanges such as Binance have “generally misled the public for years.”

In all, the SEC has filed 13 counts against Binance and Mr. Zhao, known in the crypto world as CZ. It is seeking compensation from Binance and wants to prevent Mr. Zhao from serving as an officer or director of any entity registered in the U.S. countries issuing the securities. Finance.

Grewal, Director of Enforcement Division at the SEC, said: “We claim that Zhao and Binance entities not only knew the rules of the road, but also consciously chose to evade them and endanger their clients and investors.”

The CFTC is also seeking to ban Mr Zhao for life from doing business under its jurisdiction. The agency also wants to permanently ban Binance from the US.

The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) often coordinate filing enforcement actions when they investigate the same company, but the agencies have engaged in a battle for influence over which will emerge as the primary regulator for cryptocurrency trading.

Binance has been based out of the US for a long time and has been offering high risk and illegal trading options to US clients. In 2019, a separate exchange started in the US that offered a smaller set of trading capabilities. The company said that the new exchange Binance.US will operate separately from Binance, under its leadership.

But the SEC said the separate entity was really intended as a ploy to hide the fact that Mr. Zhao and his associates were actively enabling US clients to trade on the larger, unregulated offshore exchange Binance.

The SEC complaint accuses Binance of recruiting US clients for the international exchange, even though it was not supposed to operate in the US. “On the surface, it cannot be seen that we have US users, but in reality, we must obtain them through other creative means,” a Binance executive wrote in an internal message excerpted in the complaint.

The filing said that when Binance took steps to submit to a US regulatory regime, it did so deceptively. Binance.US was supposed to be separate from its offshore parent company, but “behind the scenes,” Mr. Zhao and other top Binance leaders were “closely involved,” according to the complaint. That led one executive to note that “the entire team feels like they’ve been tricked into becoming a puppet,” according to the complaint.

The SEC said Mr. Zhao gave instructions to encourage so-called VIP clients to bypass regulations intended to restrict US clients’ access to the platform. “Binance’s plan to retain profitable US investors while pretending to restrict them has worked,” the complaint said.

Some of the allegations against Binance replicated behavior that brought down FTX, leading to criminal charges against Bankman-Fried for using customer deposits to conduct other trading operations and to make political and charitable donations. According to the complaint against Binance, the bank account of Merit Peak, the trading company controlled by Mr. Zhao, received more than $20 billion, including customer funds.

FTX has been accused of using a trading company called Alameda Research, which is controlled by Mr. Bankman-Fried, to improperly transfer and use customer funds.

“The sending of Binance customer funds to Merit Peak put those funds at risk, including loss or theft, and was done without notice to customers,” the complaint states.