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Latest SEC filing details flows between Binance, Silvergate, Signature, Paxos and CZ-controlled entities
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(Kitco News) -
The U.S. Securities and Exchange Commission (SEC) submitted a new court filing on Wednesday in support of their lawsuit against Binance, the world’s largest cryptocurrency exchange, detailing billions of dollars in transfers between the exchange’s U.S. accounts, entities controlled by founder Changpeng Zhao (CZ), and other firms.
On June 5, the SEC filed a 13-charge lawsuit against Binance and Zhao accusing them of operating an illegal platform in the U.S. and misusing customer funds. The following day, the United States District of Columbia court granted the SEC’s request for an emergency restraining order to freeze the assets of Binance.US.
The SEC alleges that customer funds were illegally diverted to Sigma Chain, a trading entity controlled by Zhao, and used to engage in fraudulent trades that inflated Binance’s true trading volume. 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.
Wednesday’s new filing was submitted to the court by Sachin Verma, Assistant Chief Accountant in the Division of Enforcement. Verma said the information in the filing “is based upon my personal review of financial records such as bank statements, deposits, cancelled checks, wire transfers, signature cards, and other account documents produced to the SEC by the defendants, Silvergate Bank, Signature Bank, FedWire and other parties.”
The filing maps the complex flows between various Signature and Silvergate accounts, some ostensibly belonging to Binance and others directly controlled by Zhao, and a web of other offshore entities such as Merit Peak and Key Vision allegedly controlled by Zhao and his associates.
“Between 2019 and 2021, Merit Peak accounts received $22 billion, including approximately $11 billion from Key Vision, $7.2 billion from other Binance entities, and $1.2 billion from BAM Trading,” Verma wrote. “Merit Peak paid most of that money - $21.6 billion - to a foreign affiliate of Paxos TrustCompany, LLC (“Paxos”) the issuer of BUSD.”
On Feb. 13, stablecoin issuer Paxos Trust announced they would stop issuing the Binance USD coin (BUSD), the third largest stablecoin by market cap, following an order from the New York Department of Financial Services (NYDFS), just hours after Paxos received a Wells notice from the SEC informing them that the SEC considers BUSD to be an unregistered security.
Shortly afterward, Paxos announced that it would “end its relationship with Binance” for BUSD.
When news of the Paxos decision broke, CZ was quick to distance himself from the issuer and minimize Binance’s involvement with the BUSD token.
“We were informed by Paxos they have been directed to cease minting new BUSD by the New York Department of Financial Services (NYDFS),” he wrote. “Paxos is regulated by NYDFS. BUSD is a stablecoin wholly owned and managed by Paxos.” He also added that “The lawsuit is between the US SEC & Paxos.”
But the wording of the NYDFS statement on their action suggests that U.S. regulators saw Binance as the problem.
The NYDFS cited “several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD,” and explained that while they “authorized Paxos to issue BUSD on the Ethereum blockchain,” they did not authorize “Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.” This directly contradicted CZ’s assertion that Paxos was solely responsible for all BUSD.
Taken together with Monday’s filing and previous reports, it appears that the SEC is attempting to build a case: that Binance.US was directly controlled by Zhao despite their assertions to the contrary; that Binance.US customer funds were commingled with those of the main Binance exchange and Zhao’s own funds; that billions in commingled exchange funds were funneled to and through Zhao-controlled entities to his personal advantage and profit; that a Zhao-controlled entity actively traded back into the Binance exchange to artificially inflate volumes; and that billions of dollars were illegally converted into the BUSD stablecoin by Binance directly rather than through Paxos on the Ethereum blockchain.
As they have at every stage, Binance continues to deny the allegations. “The SEC's latest filing represents legal maneuvering rather than genuine concern for Binance.US customers and the safety of their assets,” Binance.US tweeted. “The SEC has shown in bringing this case, and countless others, that its true interest lies in political grandstanding and land grabbing, not in protecting consumers or allowing businesses to thrive in the US. We continue to believe the SEC's allegations are baseless and we look forward to defending ourselves in court.”
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