The SEC has fully scrutinized Binance and Zhao Changpeng’s “seven accusations,” including illegally selling unregistered securities BNB, providing securities trading services to US investors, mixing funds from Binance and Binance.US platforms, and engaging in investor fraud, among others.
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 affiliated companies BAM Management, BAM Trading, and Binance founder Zhao Changpeng, requesting that assets related to Binance.US be frozen to ensure the safety and availability of US investor assets and to prevent the defendants from transferring assets.
Foresight News has compiled the SEC’s 67-page document and extracted the “seven major accusations” against Binance and its affiliated companies BAM Management, BAM Trading, and Binance CEO Zhao Changpeng for readers’ reference.
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Objects and contents of the temporary restraining order
First, let’s briefly understand the objects and contents of the temporary restraining order, which mainly targets Binance Holdings Limited (Binance), BAM Trading Services Inc. (BAM Trading), BAM Management US Holdings Inc. (BAM Management), and Zhao Changpeng himself, where:
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BAM Trading is a company registered in Delaware, USA and is the legal entity responsible for operating Binance.US.
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BAM Management is also a company registered in Delaware, USA and is the parent company of BAM Trading and other affiliated entities, wholly owned by BAM Management ComBlockingny Limited, a Cayman Islands company, which is wholly owned by CPZ Holdings Limited, a British Virgin Islands company owned and controlled by Zhao Changpeng. Currently, Zhao Changpeng holds 81% of the shares of BAM Management.
The SEC stated that due to the defendants’ repeated failure to provide sufficient guarantees, the court requested that defendants Binance, BAM Trading, BAM Management, and Zhao Changpeng take the following measures:
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Repatriate and freeze the assets of BAM Management and BAM Trading;
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Repatriate the customer assets of BAM Trading, comply with specific remedial measures for 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 normal business process transfer;
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Provide accounts, do not destroy or tamper with relevant documents and information, and participate in the investigation to speed up problem discovery;
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Explain why certain remedial measures should not continue.
Additionally, the SEC is seeking permission from the court to notify defendants Binance and Zhao Changpeng through other means.
Foresight News compiled the SEC’s 67-page filing and distilled five major factual bases for the SEC’s allegations against Binance and its affiliates BAM Management, BAM Trading, and Binance CEO Zhao Changpeng.
The SEC accuses Binance and Zhao Changpeng of “seven deadly sins” One, Binance provides and sells BNB in the form of securities
Binance began issuing BNB in June 2017, explicitly stating that the issue was aimed at raising 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, with no restrictions on US investors buying BNB or immediately reselling BNB to US investors.
To promote the ICO, Binance also released a white paper to potential BNB investors around the world via the Internet, stating that the purpose of the ICO was to raise funds for the Binance team to “establish a world-class cryptocurrency exchange,” repeatedly referring to ICO participants as “investors.”
The white paper also stated that Binance would repurchase and destroy BNB by using profits related to its platform, burning half of the BNB, which provided reasonable profit expectations for BNB investors, similar to issuers of stocks using profits to provide dividends or execute stock buybacks to increase the ownership of remaining shareholders.
Furthermore, since at least 2019, Binance has been selling BNB to its employees by paying them in BNB . Zhao Changpeng stated in an interview on February 11, 2019, that “almost all (employees) would take some BNB as compensation, and many would choose all BNB as compensation,” and Binance did not restrict these employees from reselling their BNB tokens to anyone in any amount.
At the same time, Binance also sold BNB by offering it to newly recruited employees , such as when Zhao Changpeng hired the BAM CEO, who received 50,000 BNB as an “incentive bonus.”
Binance has never registered the issuance and sale of BNB with the U.S. Securities and Exchange Commission (SEC).
2. Under Zhao Changpeng’s control, Binance provided unregistered exchange, broker-dealer, and clearing services to U.S. investors through the Binance.com platform.
Since 2017, Binance has offered the purchase and sale of several cryptocurrencies, including BNB, as securities.
1. Zhao Changpeng and the Binance.com platform actively solicited U.S. investors to trade cryptocurrencies on the Binance.com platform.
From the launch of the Binance.com platform to at least September 2019, Binance openly marketed its services to all customers, and did not restrict Americans from buying, selling, and trading cryptocurrencies on the Binance.com platform.
During this time, Binance and Zhao Changpeng knew that Americans were trading on the Binance.com platform through customer KYC or IP address located in the United States.
In addition, at least until August 2021, Binance did not require customers whose accounts were not restricted to withdrawing only two bitcoins per day to submit any KYC information, allowing these investors to bypass international anti-money laundering restrictions and disclosure requirements when seeking to open accounts on the Binance.com platform.
2. The Binance.com platform provided a market and facilities for trading cryptocurrency securities.
Users can create and access accounts through the Binance.com website, the Binance mobile application, or API interfaces created by Binance. The Binance.com platform displays customer account information, including account balances, outstanding orders, order history, and transaction history related to available cryptocurrencies on the platform.
Additionally, since the launch of the Binance.com platform, Merit Peak Limited (Merit Peak), an entity owned by Zhao Changpeng, has provided over-the-counter trading services on the Binance.com platform, as well as market-making services on the Binance.US platform.
3. Binance holds and controls customers’ funds and cryptocurrencies.
To use any feature on the Binance.com platform, investors must create an account and fund their Binance accounts with fiat or cryptocurrency.
4. Binance clears and settles customers’ trades.
Binance clears and settles all trades on the Binance.com platform. After matching buy and sell orders, Binance settles the resulting trades by debiting and crediting accounts associated with each counterparty on an internal ledger maintained by Binance.
5. Binance’s Revenue
Binance’s revenue primarily comes from fees charged for cryptocurrency asset trading through the Binance.com platform.
3. BAM Trading was born out of Zhao Changpeng and Binance’s “Tai Chi” plan, which intentionally evaded US law, while secretly controlling the operation of the Binance.US platform to profit
To evade legal risks under US federal securities laws, Binance hired several advisers in 2018 who proposed a plan called “Tai Chi” involving the creation of a US entity (later Binance.US) to become a target of US regulatory enforcement, “so as to free Binance from the responsibility of bearing the consequences of historical events and future risks.”
In June 2019, Zhao Changpeng admitted that their “goal” was “to reduce our losses while making sure we’re not getting into trouble with the US regulators.”
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 completion in 2019 and built its operating structure. Zhao Changpeng and Binance continue to allow and even encourage valuable US customers to trade on Binance, including instructing customers how to evade control measures allegedly intended to prevent US customers and lead them to the Binance.US platform, and Zhao Changpeng and Binance exercise control over Binance.US.
4. BAM Trading and Binance, under Zhao Changpeng’s control, provide unregistered exchange and clearing agency services to US customers, and BAM Trading also provides brokerage services to US customers
The Binance.US platform officially launched on September 24, 2019. Since then, it has offered US retail and institutional investors the opportunity to buy, sell, and transfer about 150 types of cryptocurrency assets, including cryptocurrency asset securities like BNB.
1. BAM Trading and Binance, under Zhao Changpeng’s control, solicit investors
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 US 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 each cryptocurrency asset and trading pair available for spot trading.
2.Under the control of Changpeng Zhao, BAM Trading and Binance jointly maintain and provide markets and facilities for trading cryptocurrency securities
In February 2019, Changpeng Zhao and Binance instructed 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 the guidance of Changpeng Zhao, many Binance employees developed and launched the Binance.US platform, including designing the website, determining the cryptocurrency trading pairs available for trading, arranging fiat services with US banks, designing the platform’s trading 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 and Binance, controlled by Changpeng Zhao, have jointly operated the platform’s exchange functions , Binance.US platform has been using Binance’s matching engine software, digital wallets, clearing and settlement technology, trademarks, and related technical support and hosting environments, all of which are created, deployed, and maintained by Binance engineers and other employees under the guidance and input of Changpeng Zhao.
3.Under the control of Changpeng Zhao, 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, deposit and maintain enough cryptocurrency assets or US dollars to pay for their orders.
To trade with fiat currency, customers typically first establish funds and deposit them into an account with Trust Company B (a US-based trust company) linked to the Binance.US platform via API. Each customer signs an agreement with Trust Company B authorizing BAM Trading to directly debit and deposit to settle any transaction involving fiat currency, pay fees, and handle related matters.
BAM Trading is responsible for managing the opening and maintenance of customer cash accounts held at Trust Company B, including accessing funds for use on the Binance.US platform.
At least until December 2022, Binance provides digital wallets related to the Binance.US platform and holds and controls the cryptocurrency assets deposited and traded on the Binance.US platform. Binance has delegated more clearing and settlement control to BAM Trading.
4. BAM Trading Revenue
BAM Trading generates its main revenue by charging transaction fees to customers on the Binance.US platform.
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 manipulative trading.
However, BAM Management and BAM Trading should have known that manipulative trading was actually occurring, yet they continued to report false trading volumes and liquidity statistics.
BAM Trading and BAM Management also publicly boasted about their so-called efforts to monitor and prevent manipulative trading, and during at least the period from September 2021 to April 2022, they exaggerated their manipulative trading detection and prevention measures when soliciting equity investors.
Before 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, BAM Trading’s institutional sales director told the BAM CEO: “Obviously, we have no measures in place to prevent wash trading. I’ve tested it myself and successfully sold my own sell orders to my own buy orders. I’m not sure if anyone is taking advantage of this loophole, but low fees make it easy for market makers to manipulate the market.”
Until at least February 2022, BAM Trading lacked any trading monitoring mechanism – more than three and a half years after BAM Trading and BAM Management began presenting their business plan to prospective equity investors and after the Binance.US platform went live and publicly declared that such conduct was prohibited.
As a result of these practices and misleading statements, BAM Trading and BAM Management received significant revenue from the transaction fees paid by cryptocurrency investors on the Binance.US platform and from the approximately $200 million invested by equity investors in BAM Management.
6. Since 2019, Changpeng Zhao and Binance have transferred billions of dollars through U.S. bank accounts and commingled Binance platform funds with U.S. investor funds
Changpeng Zhao and Binance designed and operated the Binance.US platform to avoid U.S. regulatory scrutiny and to maintain control and oversight over Binance.US platform investor assets. At the same time, they also transferred billions of dollars through U.S. bank accounts via entities owned by Binance and other beneficiaries.
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In 2022, Swipewallet (ultimately beneficially owned by Changpeng Zhao) sent $1.5 billion overseas from its Bank of America account via wire transfer;
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On January 1, 2023, a total of $840 million was deposited into accounts of eight Binance-affiliated / Changpeng Zhao-owned companies, from which $899 million was withdrawn, leaving only one account with a balance of $180,000 by the end of March 2023;
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Between January and March 2023, multiple Binance accounts further transferred over $162 million overseas;
In addition, two overseas entities owned by Changpeng Zhao, Merit Peak and Sigma Chain, commingled funds received from Binance with other funds in their Bank of America accounts.
Merit Peak provides liquidity for cryptocurrency trading on the Binance.US platform, and received over $22 billion in funds from 2019 to 2021, including assets belonging to Binance customers, funds from Binance.US platform customers, and other sources of funds.
Overall, Merit Peak received approximately $11 billion in Binance.com platform customer funds through an entity named Key Vision Development Limited, and received approximately $1.2 billion in funds from BAM Trading. In addition, Merit Peak received approximately $6.3 billion in funds from Binanced.
These funds were commingled in Merit Peak’s accounts and then transferred to a New York-based special purpose trust company.
Sigma Chain is another entity owned by Changpeng Zhao, which claims to be a “leading market maker” on Binance.com and also serves as an OTC trading service provider and market maker on the Binance.US platform.
From 2019 to 2023, Sigma Chain’s Bank of America 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.
7. Changpeng Zhao and Binance have substantial involvement and control over BAM Trading, which 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 BAM Trading’s former CEO to establish a bank account in a way that would allow Binance and Zhao Changpeng to maintain control while avoiding scrutiny from US regulators. At least for the first two years of Binance.US’s operation, employees of Binance’s finance team in Shanghai had the power to transfer assets within BAM Trading’s bank account without BAM Trading’s knowledge.
As a typical example, in December 2020, Binance transferred $17 million from BAM Trading’s bank account without BAM Trading’s knowledge. After learning of the transfer, BAM CEO inquired with Binance’s finance employee in Shanghai about the transaction and ultimately learned that it was related to Merit Peak’s transactions on the Binance.US platform.
Over time, Zhao Changpeng and Binance may have transferred control of the bank account’s formal signing authority to new signatories at BAM Trading. But at least until the end of May 2023, Zhao Changpeng remains a signatory on BAM Trading’s Prime Trust account, which holds customer funds for the Binance.US platform.
2. Zhao Changpeng and Binance Had Extensive Control Over BAM Trading’s Cryptocurrency Assets Until at Least December 2022
Zhao Changpeng and Binance have had free rein to handle billions of dollars’ worth of Binance.US’s client assets without supervision or control, and US investors should be entitled to protection under US law and have the right to obtain an enforceable statement from BAM Trading to ensure that they can access their property within the US during the SEC review.
As of December 31, 2022, BAM Trading’s audited financial statements show that BAM Trading holds over $1.7 billion in cryptocurrency assets from Binance.US’s clients; as of May 2023, BAM Trading’s lawyer representatives say they are holding over $2.62 billion in client assets, with about $377 million held in US dollar bank accounts and the remaining $22.46 billion in cryptocurrency assets.
BAM Trading admits that Zhao Changpeng and Binance continue to hold or at least control some of BAM Trading’s cryptocurrency assets.
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