Seven Alleged Offenses of Binance.US and CZ in the Eyes of the US SEC During Investigation

Compiled by Frank, Foresight News

On June 6th, the US Securities and Exchange Commission (SEC) applied to the court for a temporary restraining order against Binance and its affiliates BAM Management, BAM Trading, and Binance founder Zhao Changpeng. The order requires the freezing of assets related to Binance.US to ensure the safety and availability of US investors’ assets and to prevent the defendants from transferring assets.

Foresight News has compiled the 67-page document released by the SEC and extracted the “Seven Charges” against Binance, its affiliates BAM Management, BAM Trading, and Binance CEO Zhao Changpeng for readers.

The Object and Content of the Temporary Restraining Order

First, let’s briefly understand the object and content of this temporary restraining order. It mainly targets Binance Holdings Limited (Binance), BAM Trading Services Inc. (BAM Trading), BAM Management US Holdings Inc. (BAM Management), and Zhao Changpeng himself, among which:

  • BAM Trading is a company registered in Delaware, USA, and is the legal entity responsible for operating Binance.US;

  • BAM Management is also a company registered in Delaware, USA, and is the parent company of BAM Trading and other affiliated entities. It is wholly owned by BAM Management ComBlockingny Limited, a Cayman Islands company, which is wholly owned by Zhao Changpeng’s British Virgin Islands company CPZ Holdings Limited. Currently, Zhao Changpeng holds 81% of the shares of BAM Management;

SEC stated that due to the defendants’ repeated failure to provide sufficient assurances, the SEC requested that the court require defendants Binance, BAM Trading, BAM Management, and Zhao Changpeng to take the following actions:

  • Repatriate and freeze the assets of BAM Management and BAM Trading;

  • Repatriate the customer assets of BAM Trading, comply with specific remedies related to the custody and control of customer assets, and avoid transferring these assets to entities or individuals related to Binance or Zhao Changpeng, unless it is a transfer in the normal course of business;

  • Provide accounts, do not destroy or tamper with relevant documents and information, and participate in the investigation to speed up problem detection;

  • Explain why certain remedies should not continue to be taken;

Additionally, the SEC is seeking the court’s permission to notify defendants Binance and Changpeng Zhao through other means.

Foresight News compiled the SEC’s 67-page document and distilled five key factual bases for the SEC’s allegations against Binance and its affiliates BAM Management, BAM Trading, and Binance CEO Changpeng Zhao.

SEC accuses Binance and Changpeng Zhao of “Seven Deadly Sins”

1. Binance offers and sells BNB in the form of securities

Binance began issuing BNB in June 2017 and explicitly stated that the issuance was to raise funds for the launch of the Binance platform in July 2017. Binance raised about $15 million through the ICO, selling BNB to approximately 20,000 investors worldwide.

Binance’s BNB ICO was marketed and sold to investors worldwide, and there were no restrictions on US investors purchasing BNB or immediately reselling BNB to US investors.

To promote the ICO, Binance also released a whitepaper to potential BNB investors worldwide, stating that the purpose of the ICO was to raise funds for the Binance team to “build a world-class cryptocurrency exchange” and repeatedly referred to the ICO participants as “investors.”

The whitepaper also stated that Binance would repurchase and burn BNB using profits related to its platform, burning half of the BNB, which provided BNB investors with a reasonable profit expectation, similar to how stock issuers use profits to provide dividends to investors or execute stock buybacks to increase the ownership of remaining shareholders.

Additionally, since at least 2019, Binance has been selling BNB to its employees as a form of compensation paid in BNB. In a February 11, 2019 interview, Changpeng Zhao stated that “almost everyone [employee] gets some BNB as compensation, and many people choose to take all their compensation in BNB,” and Binance did not restrict these employees from reselling their BNB tokens to anyone in any amount.

At the same time, Binance also sells BNB by offering it as an incentive to newly recruited employees, such as when Changpeng Zhao hired the BAM CEO, who received 50,000 BNB as an “incentive bonus.”

BNB’s issuance and sale have never been registered with the United States Securities and Exchange Commission (SEC) by Binance.

2. Under the control of Changpeng Zhao, Binance provided unregistered exchange, broker-dealer, and clearing agency services to U.S. investors through the platform.

Starting in 2017, Binance offered several crypto assets, including BNB, for purchase and sale as securities.

1. Changpeng Zhao and the platform actively solicited U.S. investors to trade crypto assets on the platform.

From the launch of the platform through at least September 2019, Binance openly marketed its services to all customers and did not restrict Americans from purchasing, selling, and trading crypto assets on the platform.

During this period, Binance and Changpeng Zhao knew that Americans were trading on the platform through customer KYC or IP addresses located in the United States.

In addition, at least through August 2021, Binance did not require customers who submitted KYC information to be restricted to withdrawing only two bitcoins per day, allowing these investors to circumvent international anti-money laundering restrictions and information disclosure requirements when seeking to open accounts on the platform.

2. The platform provided a market and facility for trading crypto asset securities.

Users could create and access accounts via the website, the Binance mobile application, or API interfaces created by Binance. The platform displayed customer account information, including account balances, open orders, order history, and transaction history related to the available crypto assets on the platform.

In addition, since the launch of the platform, Merit Peak Limited, an entity owned by Changpeng Zhao, provided OTC trading services on the platform and market-making services on the Binance.US platform.

3. Binance held and controlled customers’ funds and crypto assets.

To use any functionality on the platform, investors had to create an account and fund their Binance account with fiat currency or crypto assets.

4. Binance cleared and settled customers’ trades.

Binance cleared and settled all trades on the platform. After matching buy and sell orders, Binance settled the resulting trades by debiting and crediting accounts associated with each counterparty on its internal ledger maintained by Binance.

5. Binance’s Revenue

Binance’s revenue mainly comes from fees charged for cryptocurrency asset trading conducted through the platform.

III. BAM Trading was born out of Zhao Changpeng and Binance’s “Tai Chi” plan, which intentionally evades U.S. law and secretly controls Binance.US’s platform operation for profit

In order to avoid legal risks under U.S. federal securities law, Binance hired several advisors in 2018 to provide advice on a plan called “Tai Chi” that involved creating a U.S. entity (later Binance.US) to become a target of U.S. regulatory enforcement, “so as to free Binance from the responsibility of bearing the legacy and future consequences.”

Zhao Changpeng admitted in June 2019 that their “goal” was to “reduce their own losses while keeping U.S. regulators from giving us trouble.”

The entity, called “Tai Chi,” eventually became the Binance.US platform operated by BAM Trading and its parent company BAM Management, which Zhao Changpeng and Binance guided to create in 2019 and build its operational structure. Zhao Changpeng and Binance continue to allow and even encourage valuable U.S. customers to trade on Binance, including by instructing customers how to evade controls purportedly designed to prevent U.S. customers and steering them to the Binance.US platform, and Zhao Changpeng and Binance exercise control over Binance.US.

IV. BAM Trading and Binance, under Zhao Changpeng’s control, provide unregistered exchanges and clearing agency services to U.S. customers, and BAM Trading also provides brokerage services to U.S. customers.

The Binance.US platform officially launched on September 24, 2019. Since then, it has provided opportunities for U.S. retail and institutional investors to buy, sell, and transfer approximately 150 types of cryptocurrency assets, including cryptocurrency asset securities such as BNB.

1. BAM Trading and Binance, under Zhao Changpeng’s control, solicit investors

In order to attract investors to open accounts and trade cryptocurrency asset securities on the Binance.US platform, BAM Trading actively promotes its various services in the U.S. market, including through its website, blog, and various social media platforms.

Additionally, BAM Trading frequently promotes certain metrics of the Binance.US platform, such as daily trading volume and every cryptocurrency asset and trading pair available for spot trading.

2.Under Zhao Changpeng’s control, BAM Trading and Binance jointly maintain and provide a market and facility for trading cryptographic securities

In February 2019, Zhao Changpeng and Binance directed the creation of two US corporate entities, BAM Management and its wholly-owned subsidiary BAM Trading, to launch the Binance.US platform. BAM Trading is a public entity responsible for operating the Binance.US platform.

Under Zhao Changpeng’s guidance, many Binance employees developed and launched the Binance.US platform, including designing the website, determining the cryptocurrency trading pairs available for trading, arranging fiat currency services with US banks, designing the platform’s transaction ledger, developing the trading engine, and developing the platform’s trading clearing and settlement functions.

Since the launch of the Binance.US platform in September 2019, BAM Trading controlled by Zhao Changpeng and Binance have jointly operated the platform’s exchange functions. The Binance.US platform has always used Binance’s matching engine software, digital wallet, clearing and settlement technology, trademarks, and related technical support and hosting environment, all of which were created, deployed, and maintained by Binance engineers and other employees guided and invested by Zhao Changpeng.

3.Under Zhao Changpeng’s control, BAM Trading and Binance hold and control customer funds and cryptocurrencies

To trade on the Binance.US platform, customers must create a Binance.US account and deposit and maintain sufficient cryptocurrency assets or US dollars to pay for their orders.

To trade in fiat currency, customers typically first establish funds and deposit them into account B of Trust Company (a US-based trust company), which is linked to the Binance.US platform through an API. Each customer signs an agreement with Trust Company B authorizing BAM Trading to directly debit and deposit to settle any fiat currency transactions, pay fees, and handle related matters.

BAM Trading is responsible for managing the opening and maintenance of customer cash accounts held by Trust Company B, including accessing and withdrawing funds for use on Binance.US.

At least until December 2022, Binance provides digital wallets related to the Binance.US platform, and holds and controls the cryptographic assets deposited and traded on the Binance.US platform, and Binance has transferred more clearing and settlement control to BAM Trading.

4. BAM Trading Revenue

BAM Trading generates its primary revenue from transaction fees charged to Binance.US platform customers.

5. BAM Trading and BAM Management Engaged in Investor Fraud and Made False and Misleading Statements to Investors

BAM Trading and BAM Management failed to take control measures to prevent manipulative trading on the Binance.US platform, but told investors that they were monitoring such trading.

However, BAM Management and BAM Trading should have known that manipulative trading was actually occurring, yet they continued to report false trading volume and liquidity statistics.

BAM Trading and BAM Management also publicly touted their supposed efforts to detect and prevent manipulative trading, exaggerating their manipulative trading detection and prevention measures in soliciting equity investors at least from September 2021 to April 2022.

Prior to the launch of the Binance.US platform, senior management and employees of BAM Trading were already aware of the possibility of wash trading, which lasted at least until 2022.

For example, in January 2021, the BAM Trading institutional sales director told the BAM CEO: “Obviously we have no measures to prevent wash trading? I tested it myself and successfully sold my own sell order to my own buy order. I’m not sure if anyone is exploiting this loophole. Low fees make it easy for market makers to manipulate the market.”

Until at least February 2022, BAM Trading lacked any trading surveillance mechanisms – that is, more than three and a half years after BAM Trading and BAM Management began presenting a business plan to prospective equity investors and after Binance.US platform went live and publicly declared a ban on such conduct.

As a result of these practices and misleading statements, BAM Trading and BAM Management have received significant revenue from the transaction fees paid by cryptocurrency investors on the Binance.US platform and from approximately $200 million invested by equity investors in BAM Management.

6. Since 2019, Changpeng Zhao and Binance Have Transferred Billions of Dollars Through US Bank Accounts and Mixed Binance Platform Funds with US Investor Funds

Changpeng Zhao and Binance designed and operated the Binance.US platform to evade US legal scrutiny and maintain control and oversight over Binance.US platform investor assets. At the same time, they have also transferred billions of dollars through US bank accounts via entities owned by Binance and other beneficiaries.

  • In 2022, Swipewallet (ultimately owned by Changpeng Zhao) sent $1.5 billion overseas through wire transfers from its U.S. bank account;

  • On January 1, 2023, a total of $840 million was deposited into accounts belonging to eight Binance/Zhao-owned companies, and $899 million was withdrawn from these accounts. By the end of March 2023, all of these accounts had been emptied except for one with a balance of $180,000;

  • Between January and March 2023, multiple Binance accounts further transferred credit exceeding $162 million to overseas accounts;

Additionally, two overseas entities owned by Changpeng Zhao, Merit Peak and Sigma Chain, mixed funds from the Binance platform with other funds and deposited them into their U.S. bank accounts.

Merit Peak provides liquidity for cryptocurrency asset trading on the Binance.US platform, and from 2019 to 2021, Merit Peak’s accounts received more than $22 billion in funds, primarily including assets from Binance customers, funds from Binance.US platform customers, and funds from other sources.

Overall, Merit Peak received approximately $11 billion in customer funds from the platform through an entity called Key Vision Development Limited, and received approximately $1.2 billion in funds from BAM Trading. In addition, Merit Peak also received approximately $6.3 billion in funds from Binanced.

These funds were mixed in Merit Peak’s accounts and then transferred to a New York limited purpose trust company.

Sigma Chain is another entity owned by Changpeng Zhao, which claims to be the “primary market maker” for and also serves as an OTC trading service and market maker on the Binance.US platform.

From 2019 to 2023, Sigma Chain’s U.S. bank account received nearly $500 million in funds, including $184 million from Binance, $145 million from BAM Trading, $36 million from Binance Capital Management, and $15 million from Key Vision.

Seven, Changpeng Zhao and Binance have substantial involvement and control over BAM Trading, and this situation continues to this day.

Since the establishment of BAM Trading, Changpeng Zhao and Binance have had control over the operation of the Binance.US platform.

1. Zhao Changpeng and Binance control BAM Trading’s bank accounts

Zhao Changpeng and Binance coordinated with the former CEO of BAM Trading to establish a bank account in a way that would enable Binance and Zhao Changpeng to maintain control while avoiding scrutiny by US regulators. At least for the first two years of Binance.US’ operations, employees of Binance’s finance team in Shanghai had the power to transfer assets in and out of BAM Trading’s bank accounts without BAM Trading’s knowledge. For example, in December 2020, Binance transferred $17 million out of BAM Trading’s bank account without BAM Trading’s knowledge. The CEO of BAM Trading later inquired about the transaction with Binance’s finance employee in Shanghai and learned that the transfer was related to Merit Peak’s trading on Binance.US.

Over time, Zhao Changpeng and Binance may have transferred formal signatory control of the bank accounts to new signatories at BAM Trading. However, as of at least the end of May 2023, Zhao Changpeng remains a signatory on the BAM Trading Prime Trust account that holds customer funds from the Binance.US platform.

2. Zhao Changpeng and Binance had broad control over BAM Trading’s cryptocurrency assets at least until December 2022

Zhao Changpeng and Binance have freely handled billions of dollars worth of Binance.US customer assets without supervision or control, and US investors are entitled to US legal protections and the right to obtain enforceable statements from BAM Trading to ensure they can access their property in the US during SEC reviews.

As of December 31, 2022, BAM Trading’s audited financial statements show that BAM Trading held over $1.7 billion in Binance.US customer cryptocurrency assets, and as of May 2023, lawyers for BAM Trading stated that they custody over $2.62 billion in customer assets, of which approximately $377 million is held in US dollar bank accounts and the remaining $22.46 billion is in cryptocurrency assets.

BAM Trading admits that Zhao Changpeng and Binance continue to have significant or at least some degree of control over some of BAM Trading’s cryptocurrency assets.

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