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SEC files 13 charges against Binance and CZ for breaking US securities laws

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(Kitco News) - The U.S. crackdown on crypto intensified on Monday as the Securities and Exchange Commission (SEC) filed a lawsuit against Binance, the world's largest cryptocurrency exchange, and its CEO, Changpeng Zhao (CZ).

“Through thirteen charges, 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. “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.”

According to the court filing by the SEC, the regulator has charged Binance and its CEO with operating an illegal platform in the U.S. and for the misuse of customer funds.

“This case arises from Defendants’ blatant disregard of the federal securities laws and the investor and market protections these laws provide,” the lawsuit said. “In so doing, Defendants have enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk.”

The SEC has alleged that customer funds were illegally diverted to Sigma Chain, a trading entity controlled by Zhao, and used to engage in fraudulent trading that made Binance’s volume appear larger than it actually was.

The filing also says that Binance concealed the fact that it commingled billions of dollars in customer assets that were sent to Merit Peak, another third-party entity owned by Zhao.

As part of its lawsuit, the SEC has labeled 12 tokens as securities, but said that list is not exhaustive. The tokens identified include BNB Smart Chain (BNB), Binance USD stablecoin (BUSD), Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos Hub (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS,) and Coti (COTI).

“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,” Binance said in a response to the SEC filing. “Unilaterally labeling certain tokens and services as securities – even ones over which other U.S. authorities have asserted jurisdiction – only compounds these problems.”

“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. We intend to defend our platform vigorously,” Binance said. “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.”

The dealings between Binance and Merit Peak were first reported back in February, with records showing that more than $400 million was transferred from an account at California’s Silvergate Bank belonging to Binance.US to Merit Peak Ltd between late 2020 and March of 2021.

Binance refuted the allegations at that time, with a spokesperson from Binance.US saying that the reports were based on “outdated information,” adding that “Merit Peak is neither trading nor providing any kind of services on the Binance.US platform,” and "only Binance.US employees have access” to the bank accounts in question.

Binance mixed company and customer funds at Signature, funneled them into BUSD: Report

According to a new report from Reuters, Guangying Chen, a close associate of CZ and senior Binance executive, was the main operator for five bank accounts belonging to Binance.US, which allowed Chen and her deputies to move funds held in the bank accounts. Company messages show that Binance.US had to ask Chen’s team to process payments and cover the company’s payroll.

The SEC said the new findings provide clear evidence of how Binance exercised tight control over Binance.US, despite both firms maintaining that they have always operated independently.

“Defendants’ purposeful efforts to evade U.S. regulatory oversight while simultaneously providing securities-related services to U.S. customers put the safety of billions of dollars of U.S. investor capital at risk and at Binance’s and Zhao’s mercy,” the court filing said. “Lacking regulatory oversight, Defendants were free to and did transfer investors’ crypto and fiat assets as Defendants pleased, at times commingling and diverting them in ways that properly registered brokers, dealers, exchanges, and clearing agencies would not have been able to do.”

According to the court filing, the SEC is seeking a final judgment that: permanently enjoins Binance and CZ from committing further violations of the federal securities laws they are alleged to have violated; orders them to disgorge their ill-gotten gains with prejudgement interest; and permanently enjoins them from participating in a variety of activities, including, but not limited to, “acting as an unregistered exchange or broker with respect to any securities, participating in the issuance, purchase, offer, or sale of any security, including any crypto asset security, or acting as an unregistered clearing agency with respect to any securities.”

“We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk – all in an effort to maximize their own profits,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

“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,” Grewal said. “Those risks and conflicts are only heightened by the Binance platforms’ lack of transparency, reliance on related-party transactions, and lies about controls to prevent manipulative trading. Despite their years-long efforts to not ‘be held accountable,’ today’s complaint begins the process of doing so.”

In the time since the lawsuit was announced, the crypto market has seen a steep dive, with Bitcoin (BTC) breaking below support at $26,000 to trade at $25,700, a decrease of 5.5% on the daily chart.

Binance has sought to lay the blame on this downturn at the feet of the SEC, saying, “We want to reiterate: although this glaring lack of process and cooperation is frustrating, what is most concerning to us is the fact that the SEC appears to have given no consideration to the drastic and cascading negative impact its actions today may have on users and the industry. User security has always been paramount to Binance, and although we will do everything we can to continue to provide that security to our users, any subsequent ripple effects through the platform and the industry will be directly attributable to the SEC's unjustified decision to unilaterally litigate on a purported emergency basis today.”

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