SEC sues Binance and CEO Changpeng Zhao for U.S. securities violations

SEC sues Binance

SEC sues Binance and CEO Changpeng Zhao for U.S. securities violations

The Securities and Exchange Commission (S.E.C.) has lodged 13 charges against Binance, the largest cryptocurrency exchange globally, and its founder, Changpeng Zhao. The allegations claim that Binance mingled billions of dollars worth of user funds and transferred them to a European company controlled by Zhao.

The U.S.U.S. regulatory body asserts that Zhao and his exchange deliberately bypassed their controls to enable high-net-worth American investors and customers to continue trading on Binance’s unregulated international platform.

According to the complaint, a senior executive reportedly admitted to a compliance officer that the company operated as an unlicensed securities exchange in the United States. This revelation emphasizes the alleged effort made by Binance to circumvent regulations.

To shield the leading company and Zhao himself, Binance established Binance.US as a protective measure aimed at obstructing and resolving law enforcement investigations while isolating Binance from legal consequences.

The S.E.C. claims that two former Binance.US C.E.O.s expressed deep concern regarding Zhao’s level of control. Both individuals testified before federal regulators, with the first and second C.E.O.s identified as Catherine Coley and Brian Brooks.

One former Binance.US C.E.O., referred to as “BAM CEO B” in the S.E.C. documents, testified that he realized he was not the one indeed running the company and that the mission he initially believed in was not aligned with the actual operations. Consequently, he chose to leave the organization.

The complaint reveals that Binance accumulated $11.6 billion in revenue between June 2018 and July 2021, primarily derived from transaction fees. The S.E.C. alleges that since its inception, Binance has actively sought to attract U.S.U.S. customers, initially overtly and later covertly, under the direction and control of its founder Zhao.

Despite being aware that tens of thousands of customers were based in the U.S., Binance allegedly failed to take appropriate action, disregarding federal laws that prohibit the unregistered offer and sale of securities. The S.E.C. argues that Binance’s compliance efforts in 2019 were mainly a public facade.

According to the S.E.C., Zhao orchestrated the development of an evasion plan targeting high-net-worth customers. This plan involved using a virtual private network (VPN) service to hide the customers’ U.S.U.S. locations and submitting compliance documents to obscure their countries of origin.

Previous reports from CNBC highlighted how Binance employees encouraged users to bypass the exchange’s “know your customer” (KYC) systems by utilizing VPNs.
In 2019, Zhao allegedly instructed his top team to finesse the message to users regarding changing their KYC on, emphasizing the need for careful wording as any communication would be public.

He allegedly absolved himself and the team of accountability for the message’s content.
Additionally, the S.E.C. claims that Binance and Zhao utilized market-making companies under their control to artificially inflate trading prices and profit from their customers.

Two specific firms, Merit Peak and Sigma Chain, allegedly acted as market makers for Binance’s platforms, perpetually available to fulfill customer orders to buy or sell cryptocurrencies. However, the S.E.C. complaint highlights multiple concerns regarding the roles of these companies.

They were beneficially owned by Zhao and collected billions of dollars from customers while also mixing customer funds with Binance’s assets, resembling allegations made against the bankrupt crypto exchange F.T.X.

The most damaging accusation is the allegation of “wash trading,” in which Binance and its controlled companies engaged in trading with themselves to artificially boost the price of crypto assets.

The S.E.C. alleges that Sigma Chain collected $190 million for the benefit of Zhao, who then reportedly spent $11 million on a yacht.
On Twitter, Zhao dismissed the charges with a single character, “4,” which is a common response in the Binance community to encourage users to ignore fear, uncertainty, and doubt (F.U.D.).

This complaint comes after the Commodity Futures Trading Commission (C.F.T.C.) filed similar charges against Binance, claiming that the exchange failed to prevent U.S.U.S. customers from accessing its services.

Zhao responded on Twitter, stating that Binance would issue a response once they had reviewed the complaint. He also expressed disappointment that the S.E.C. had chosen to file a complaint and mentioned the ongoing cooperation and good-faith discussions with the S.E.C. to reach a settlement.

According to the S.E.C., the defendants demonstrated a blatant disregard for federal law. The complaint includes a high-level overview of Binance’s ownership structure, alleging that Zhao and his holding vehicles exert complete control over various entities associated with both Binance and Binance. U.S. U.S.

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