13 Counts: US SEC Brings 13 Charges Against Binance and Changpeng Zhao

On June 5, 2023, the U.S. Securities and Exchange Commission (SEC) filed 13 charges against Binance, its entity, and founder Changpeng Zhao, including operating unregistered exchanges, broker-dealers, and clearing agencies; distorting trading controls and supervision on the Binance.US platform; and issuing and selling unregistered securities.

Below is a summary of the 13 charges brought against Binance and Zhao by the SEC:

On June 5, 2023, the U.S. Securities and Exchange Commission (SEC) filed charges against Binance Holdings Ltd. (“Binance”), which operates the world’s largest cryptocurrency asset trading platform Binance.com; U.S. subsidiary BAM Trading Services Inc. (“BAM Trading”) operates the cryptocurrency asset trading platform Binance.US with Binance; and their founder Changpeng Zhao is accused of various securities law violations.

The SEC alleges that although Zhao and Binance publicly claimed that U.S. customers were limited to trading on Binance.com, in fact, Zhao and Binance broke their own controls and secretly allowed high-value U.S. customers to continue trading on the Binance.com platform. In addition, the SEC alleges that although Zhao and Binance publicly claimed that Binance.US was a separate, independent trading platform created for U.S. investors, Zhao and Binance secretly controlled the operation of the Binance.US platform behind the scenes.

The SEC also accuses Zhao and Binance of controlling the assets of platform customers, allowing them to freely mix or transfer customer assets, including transferring them to Sigma Chain, an entity owned and controlled by Zhao. The SEC’s complaint further alleges that BAM Trading and BAM Management US Holdings, Inc. (“BAM Management”) misled investors about the non-existent trading controls on the Binance.US platform, and that Sigma Chain participated in manipulating transactions, artificially inflating the platform’s trading volume. Additionally, the complaint alleges that the defendants concealed the fact that billions of dollars of investor assets were commingled and sent to third-party Merit Peak Limited, which is also owned by Zhao.

The complaint also alleges violations of key registration provisions in federal securities laws:

  • Binance and BAM Trading operate as unregistered national securities exchanges, broker-dealers, and clearing agencies;

  • Binance and BAM Trading offer and sell Binance’s own cryptocurrency assets, including the exchange token BNB, stablecoin Binance USD (BUSD), certain cryptocurrency lending products, and staking-as-a-service programs in an unregistered manner; and

  • Zhao is a controlling person of Binance and BAM Trading that operate as unregistered national securities exchanges, broker-dealers, and clearing agencies.

SEC Chairman Gary Gensler said, “Through 13 charges, we allege that Zhao and the Binance entities engaged in a wide range of deceits, conflicts of interest, and violations of disclosure obligations, all with the aim of profiting from investors. As alleged, Zhao and Binance misled investors about their exposure to risk and about the operations of the platform, hiding crucial information about the involvement of the operator of the platform and its affiliated market maker in trades on the platform, and even the location of the platform and its operators. They attempted to evade U.S. securities laws by announcing that they would not serve U.S. users going forward, yet they allowed U.S. users to continue to trade on the platform and held them out as VIP clients to extract profits from them. The public should be wary of any platform that claims to ignore rules or fails to be transparent about its operations, especially when it comes to something as critical as our financial system.”

We allege that Zhao and the Binance entities not only knew these rules, but also intentionally chose to violate them, putting their customers and investors at risk—all to maximize profits,” said Gurbir S. Grewal, Director of the SEC’s Enforcement Division. “By engaging in multiple unregistered offerings, as well as operating an unregistered exchange, broker, and dealer, Zhao’s Binance platforms created significant risks to investors and sought to profit from those risks through undisclosed and unapproved mark-ups on trades, among other misconduct. These risks were compounded by the defendants’ failure to provide investors with the required disclosures about their operations and by their reliance on complex, opaque trades across multiple affiliated entities to transfer digital assets and profits between accounts. Despite their efforts to avoid regulatory scrutiny, we will continue to enforce the registration provisions of the federal securities laws and to scrutinize digital asset transactions conducted on Binance’s platform.”

Unregistered Exchange, Broker-Dealer, and Clearing Agency

The SEC’s complaint, filed in the U.S. District Court for the District of Columbia, alleges that, beginning no later than July 2017, Binance.com and Binance.US, while controlled by Zhao, operated as unregistered exchanges, broker-dealers, and clearing agencies, with trading revenue from U.S. customers of at least $11 billion. The SEC’s complaint alleges that: (1) with respect to Binance.com, Binance should have registered as an exchange, broker-dealer, and clearing agency; (2) with respect to Binance.US, Binance and BAM Trading should have registered as an exchange and clearing agency; and (3) BAM Trading should have registered as a broker-dealer. The SEC also alleges that Zhao, as a control person, is responsible for the violations of Binance and BAM Trading.

Unregistered Offering and Sale of Digital Assets

The SEC has accused Binance of illegally issuing and selling BNB, BUSD, and crypto lending products named “Simple Earn” and “BNB Vault” without registration. In addition, the SEC has also charged BAM Trading with providing and selling Binance.US’s staking-as-a-service plan without being registered. The complaint also notes that Binance secretly controlled the assets that U.S. customers pledged in the BAM staking plan.

Failure to Restrict U.S. Investors’ Access to BINANCE.COM

The SEC complaint alleges that Zhao and Binance created BAM Management and BAM Trading in September 2019 as part of a carefully planned scheme to evade U.S. federal securities laws, claiming that BAM Trading independently operated the Binance.US platform, which U.S. customers could not use. The accusation states that in reality, Zhao and Binance maintained substantial involvement and control over U.S. entities and, behind the scenes, Zhao directed Binance to allow and conceal many high-value U.S. customers’ continued access to Binance.com. At one point, Binance’s chief compliance officer messaged a colleague saying, “We are operating a damn unlicensed securities exchange in the U.S.”

Misleading Investors

According to the SEC’s allegations, BAM Trading and BAM Management misled Binance.US customers and equity investors about the existence and sufficiency of market surveillance and controls to detect and prevent manipulative trading of cryptocurrency assets on the Binance.US platform. The accusations also state that strategic and targeted wash trading primarily conducted by Sigma Chain, the main undisclosed “market maker” trading firm of the Binance.US platform (also owned by Zhao), demonstrates that BAM Trading’s statements about its market surveillance and controls are false.

The SEC’s investigation into Binance.US’s misconduct was conducted by Kathleen Hitchins, Ann Rosenfield, and Colby Steele with assistance from Ainsley Kerr, John Marino, and Donald Battle, and supervised by Blockingul Kim. Michael Baker, Donna K. Norman, and Martin Zerwitz investigated Binance.com’s misconduct with assistance from Sachin Verma and Alexander Lefferts and supervised by Deborah A. Tarasevich. Both matters were overseen by Jorge G. Tenreiro and David Hirsch of the SEC’s Division of Enforcement’s Cryptocurrency and Cyber Unit. The lawsuit is being led by Matthew Scarlato, Jennifer Farer, and J. Emmett Murphy with assistance from Hope Hall Augustini and supervised by David Nasse, Olivia Choe, and Mr. Tenreiro.

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