SEC Files Lawsuit Against Binance Holdings and its CEO for Alleged Rule Violations

The Securities and Exchange Commission has filed a lawsuit against Binance Holdings Ltd. and its CEO, Changpeng Zhao, accusing them of violating US regulations, according to a filing first seen by Bloomberg.

In a complaint filed in US federal court, the SEC has accused Binance and its CEO of violating investor protection laws through a multitude of practices. The regulator alleges that Binance operated unregistered exchanges, misrepresented trading controls, sold unregistered securities, and allowed manipulative trading among other violations. Via thirteen distinct charges, the SEC contends that Binance and Zhao are implicated in an extensive network of deceptive practices, conflicts of interest, inadequate disclosures, and deliberate evasion of the law.

Specifically, the SEC has outlined a series of securities law violations in its charges against Binance. Despite public claims by Zhao and Binance that US customers were restricted from transacting on, the SEC argues that the company “subverted their own controls to secretly allow high-value U.S. customers to continue trading on the platform.” Similarly, Binance and Zhao claimed that Binance.US was established as a separate and independent trading platform for US investors. However, the SEC alleges that Zhao and Binance secretly had complete control over the Binance.US platform’s operations.

In addition, the SEC claims that Zhao and Binance maintained control of customer assets, enabling them to mix or divert customer assets, including to Sigma Chain, an entity owned and controlled by Zhao. BAM Trading and BAM Management US Holdings, affiliates of Binance, are also accused of lying to investors about trading controls over the Binance.US platform that ended up being non-existent. Furthermore, the SEC alleges that Binance and Zhao secretly pooled billions of dollars of investor assets and sent them to Merit Peak Limited, a third party company also belonging to Zhao.

Binance and BAM Trading are accused of “operating as unregistered national securities exchanges, broker-dealers, and clearing agencies,” as well as offering and selling BNB, Binance USD, and staking-as-a-service programs without adequately registering the products as per federal securities laws. Zhao is additionally charged as a control person for these alleged operations.

The complaint asserts that and Binance.US, under Zhao’s control, have operated as exchanges, brokers, dealers, and clearing agencies since at least July 2017, generating at least $11.6 billion in revenue, primarily from transaction fees from US customers. The SEC suggests that Zhao is culpable as a control person for Binance’s and BAM Trading’s respective registration violations.

In terms of misleading investors, the SEC argues that BAM Trading and BAM Management misled Binance.US users and investors about sufficient market surveillance and controls to block manipulative trading on the platform.

In response to the SEC’s lawsuit, Binance and Zhao argued they were in full compliance and expressed disappointment. “We are disappointed that the US Securities and Exchange Commission chose to file a complaint today against Binance seeking, among other remedies, purported emergency relief,” the exchange said in a statement. “While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to defend our platform vigorously.”

Binance regards the SEC’s decision as an example of their refusal to provide necessary clarity and guidance to the digital asset industry, adding that resorting to regulation through enforcement and litigation is merely a blunt approach that’s inappropriate for the dynamic and complex nature of the cryptocurrency space. “Unilaterally labeling certain tokens and services as securities— even ones over which other US authorities have asserted jurisdiction only— compounds these problems.”

Binance points out that the SEC’s recent actions could potentially undermine America’s position as a global center for financial innovation. Moreover, In response to allegations that user assets on the Binance.US platform may have been at risk, Binance refutes these claims, affirming that customers’ assets across all platforms, including Binance.US, are safely secured. “The SEC’s actions here appear to be in service of an effort to rush to claim jurisdictional ground from other regulators— and investors do not appear to be the SEC’s priority,” the exchange claimed.

Information for this briefing was found via the SEC and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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