The Security Exchange Commission sued crypto exchange Binance and its billionaire founder, Changpeng Zhao, mainly known as CZ, alleging that they worked to attract American customers to its unregulated international exchange, commingled investor funds with their own, and violated securities laws. The SEC has filed thirteen charges after the CFTC unveiled a similar complaint against Binance and Zhao earlier this year.
The U.S. regulator alleged on Monday that CZ and his exchange worked to subvert “their own controls” to allow high-net-worth U.S. investors and customers to continue trading on Binance’s unregulated international exchange. The complaint alleges Binance created Binance.US as a shield for the main company and CZ, to “reveal, retard, and resolve” law enforcement targets and insulate Binance.
Bitcoin Price on June 5, 2023
Source: Google Finance
This lawsuit has struck a blow at the heart of crypto and the effect is rippling across markets. Bitcoin was down more than 5% in afternoon trading to about $25,700. Shares of Coinbase Global, the big publicly traded crypto exchange, were off 12% to about $57. The SEC’s action is a landmark move by regulators against one of the most important players in digital assets. Binance is, by far, the world’s largest crypto exchange, and CZ is arguably the industry’s single-most influential individual, playing a key role in the collapse of rival FTX last year.
SEC Chairman Gary Gensler said in a statement: “Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.” The agency also claims that Binance exercises control of assets held on its platform, “permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned,” and that this has been concealed.
Binance knew that tens of thousands of customers were in the United States but chose not to act, the SEC alleged, despite federal law barring the unregistered offer and sale of securities. Binance’s ultimate compliance, in 2019, was largely a public show, the SEC complaint continues. The SEC alleges CZ ordered the creation of an evasion for high net worth customers, using a VPN service to hide their location and submitting compliance documents to obscure their country of origin. Furthermore, the SEC alleged that Binance and CZ used market-making companies that they controlled to inflate trading prices and profit off their customers. Most damaging to investors, they allegedly engaged in “wash trading,” trading with themselves to artificially prop the price of crypto assets.
CZ dismissed the charges on Twitter by saying “4,” a popular refrain in Binance’s community urging users to ignore fear, uncertainty, and doubt, or “FUD.” Binance said in a statement that it is “disappointed” in the SEC’s actions and will “vigorously defend our business and the industry.” The company added that it disagrees with the SEC’s allegations that Binance operated as an unregistered securities exchange or illegally offered and sold securities.
The complaint comes after the Commodity Futures Trading Commission filed similar charges against the crypto exchange, alleging it failed to prevent U.S. customers from accessing it.