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(Kitco News) -
One week after a Washington, DC district court granted the U.S. Securities and Exchange Commission (SEC) their request for an emergency restraining order to freeze the assets of Binance.US, lawyers for the world’s largest cryptocurrency exchange struck back.
On June 5, the SEC filed a 13-charge lawsuit against Binance and its founder Changpeng 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.
In a 42-page filing submitted on Monday, lawyers for Binance characterized the order freezing their assets as unnecessary, and accused the SEC of manufacturing an emergency.
“The SEC’s request for a temporary restraining order should be denied for several reasons, but the most important is this: there is no risk to BAM’s customer assets,” they wrote. “Indeed, there is no ‘emergency’ here at all, other than the one manufactured by the SEC for its own purposes, when the alleged securities law violations, according to the SEC, have been going on publicly and openly for years.”
Binance’s lawyers said that the SEC’s allegations that both Binance.com and Binance.US have been operating illegally since they launched make no sense. “Why did the SEC let these platforms grow to their current size if it was always illegal?” they asked. “And how is it that the sudden ‘emergency’ happens to coincide with the SEC’s assault on the crypto industry as a whole, with Binance and Coinbase being sued on back-to-back days?”
They wrote that while the SEC’s investigation into Binance has been going on for years, “until May 30, 2023, the SEC never suggested to Defendants Binance Holdings Limited (“BHL”) or Changpeng Zhao that there was even a theoretical risk to BAM’s customer assets.” They also claimed that none of the Commission’s filings from last week “provide any answer to the fundamental question: why now?”
The filing goes on to list three basic arguments as to why the restraining order should be denied.
“First, the relief the SEC requests is unwarranted and improper,” they wrote, because the SEC “must carry the burden of establishing a right to the relief it requests,” but all they have shared are “the unfounded and subjective worries of its staff.” They also claim that the SEC’s request for “verified accounting of all of BHL’s and Mr. Zhao’s assets” above and beyond those of Binance.US is “overbroad and unduly burdensome.”
The second argument they offer is that the SEC’s conditions are “untethered to the actual violations” they accuse BHL and Zhao of committing. “The case alleges only registration violations against BHL and only control person liability for registration violations against Mr. Zhao,” they write. “The SEC’s brief does not identify a single instance in which BAM customer assets were mishandled or misused” and they claim that contrary to the SEC’s own standard for action, the requested relief does not preserve the status quo ante and harms the interest of investors.
The third argument is built on the now-familiar claim that the SEC cannot demand that Binance’s U.S. operations register with them if they cannot provide a clear definition of which crypto assets are securities and under their jurisdiction.
“[T]he SEC has failed to show the requisite likelihood of success as to the registration claims against BHL and the control person claims against Mr. Zhao,” they wrote. “The SEC does not have authority to require registration when it has not answered the threshold question of what cryptocurrency assets, if any, constitute securities under federal securities laws. This complex question is the subject of intense debate and extensive legal proceedings across the nation. It deserves to be considered on a full record, not on a purportedly emergency basis over a matter of just a few days.”
After providing an alternative background history of the development of the Binance platforms and the businesses belonging to Zhao from the one contained in last week’s SEC filings, the lawyers devote the remainder of their filing to a detailed argument for why the emergency order should be denied.
“The TRO should be denied for several reasons,” they wrote. “First, the SEC provides no evidence that BAM customer assets are currently at risk or will be in the future, and, in any event, a number of the remedies sought by the SEC are moot or otherwise improper. Second, the SEC lacks standing to seek the remedies sought in the TRO against BHL and Mr. Zhao.”
Third, they argue that the SEC “failed to meet its burden showing a substantial likelihood of success on its claims that BHL violated the Exchange Act or Securities Act, or that Mr. Zhao acted as a control person for those alleged violations.”
And finally, the lawyers claim that the emergency order “is plainly not in the public interest. On the contrary, a TRO risks panic and destabilizing of the cryptocurrency markets.”
The SEC filed the emergency motion with the United States District Court for the District Of Columbia on June 6, asking that the court grant them “(1) an order to show cause why a preliminary injunction should not be granted as to the defendants; (2) an order freezing the assets of BAM Management; (3) an order directing the defendants to repatriate assets held for the benefit of BAM Trading's or BAM Management’s (together “BAM”) customers; (4) an order for other relief concerning the custody and control of BAM customers’ assets; (5) an order prohibiting the destruction of records by the defendants; (6) an order requiring sworn accountings of certain assets from the defendants; (7) an order authorizing expedited discovery from the defendants; and (8) an order granting alternate means of service.”
Later that day, the court filed a response explaining why they had agreed to grant the SEC’s request.
“The Commission has made a sufficient and proper showing in support of the relief granted herein,” the court wrote, “by setting forth evidence from which an inference of a violation can be drawn and showing a likelihood that the Commission will prevail at trial on the merits and that the Defendants have engaged in and, unless temporarily restrained and enjoined by order of this Court, will continue to engage in acts, practices, and courses of business constituting violations” of the Securities Act and the Exchange Act.
By granting the order, the court effectively froze the assets of Binance entities BAM Management and BAM Trading and prevented them from transferring the assets except to recognized third-party custodians. It also requires Binance to repatriate any assets held outside of the United States on behalf of Binance.US customers.
Even if Binance were to prevail in their argument to the court, the emergency order has already had a profound and far-reaching impact on both their U.S. and global business operations.
On June 9, Binance.US said that as a result of the freeze, the exchange would no longer be able to continue processing U.S. dollar deposits and withdrawals, announcing that they would become a crypto-only exchange.
“[I]n light of the Commission's increasingly aggressive tactics, our payment and banking partners have signaled their intent to pause USD fiat channels as early as June 13, 2023, meaning our ability to accept USD fiat deposits and process USD fiat withdrawals will be impacted,” they wrote, adding that they are notifying users promptly so they can “take necessary actions as we transition to a crypto-only exchange.”
The exchange also immediately suspended USD deposits and recurring buy orders, though they said any deposits already initiated will be processed. “Any USD balances remaining on the platform after June 15th, 2023 may be converted to stablecoin that can be withdrawn on-chain,” they said.
Beginning June 12, the exchange started delisting U.S. dollar-denominated trading pairs such as BTC-USD, but will continue to support stablecoin pairs such as BTC-USDT. “Cryptocurrency services remain fully operational, including: crypto trading, staking, deposits and withdrawals,” they wrote.
“Until we secure more stable banking partners, Binance.US will remain a crypto-only exchange - at least for a time,” they said. “Thank you for your continued support as we fight for a path forward for those who want a thriving digital asset marketplace in America.”
The SEC lawsuit and restraining order also caused liquidity and activity on the Binance.US and Binance.com exchanges to fall, according to a report by Kaiko published June 12.
Liquidity on Binance.US, which is measured by aggregated market depth for 17 tokens, dropped 76% in the week following the SEC's lawsuit, falling from $34 million to $7 million.
As a result of the exodus of market makers, the exchange has seen its U.S. market share drop to 4.8% in June from 20% in April.
Binance’s global exchange experienced a drop in market depth since the lawsuit as well. “Binance [liquidity] is down ~7% since the start of June,” Kaiko’s data shows. “Binance’s market depth initially held steady, even increasing in the immediate aftermath of the lawsuit, but over the weekend fell as altcoin markets sold off.”
“The sharp drop in liquidity suggests market makers are nervous and want to avoid volatility-induced losses and the non-negligible possibility that their assets could get stuck on an exchange à la FTX collapse,” Kaiko wrote.
