It’s no secret The US Securities and Exchange Commission is investigating Binance, the world’s largest crypto exchange—which processes $12 billion worth of cryptocurrency transactions every day despite having no head office or formal address. But the indictment filed today by the SEC in the District of Columbia contains a list of 13 violations of securities laws, some with inescapable echoes of FTX, the crypto exchange that spectacularly collapsed in November, sending turmoil across the industry.
Among other allegations, the SEC claims that Binance and the company’s CEO and founder, Changpeng Zhao, were free to “divert customer assets as they pleased” — which the SEC alleges involved Sigma Chain, another business owned by Zhao. Artificially (Binance) Artificial trading that increases trading volume. The SEC alleges that Binance and Zhao together hid billions of dollars in customer assets, which were transferred to Merit Peak Ltd., another third party owned by Zhao. In FTX’s case, customer assets were allegedly combined and transferred to a sister company, Alameda Research, to finance trading activities and debt repayments, among other things.
“We allege that Zhao and the Binance entities engaged in an extensive web of fraud, conflicts of interest, lack of disclosure and evasion of the law,” SEC Chair Gary Gensler said in a statement accompanying the charges. “The public should be cautious about investing any of their hard-earned assets in or on these illegal platforms,” Gensler said.
In an emailed statement, Binance spokesman Simon Matthews said the firm was disappointed by the SEC charges, attacking the regulator for failing to provide adequate rules for crypto companies operating in the US—now, a common refrain. He also said that all user assets across all Binance platforms are “safe and secure”. a Tweet Published shortly after the SEC complaint, Zhao wrote a “4”—a symbol he uses to dismiss allegations against his company as unsubstantiated FUD (an acronym for fear, uncertainty, and doubt).
But as dramatic as the allegations seem, industry insiders are unfazed. “No one in the space is going to be surprised by the charges,” says Corey Clipston, CEO of rival trading platform Swan Bitcoin.
Founded by Zhao in 2017, Binance has grown rapidly with an emphasis on low fees, alternative crypto assets and innovative investment products. But it has long had a rocky relationship with regulators.
Because US laws prohibit the sale of crypto derivatives—more profitable but riskier investment products—Binance operates a separate, more limited service, Binance.US. But the exchange has deliberately avoided geo-restrictions, allowing US users to trade on its international platform and allowing the two platforms to operate virtually as one—claiming they are unrestricted to protect their independence. Another regulator, the Commodities and Futures Trading Commission, had earlier made the same allegation.
The SEC also claims that Binance misled investors about risk controls it supposedly had in place to protect against manipulative practices such as “wash trading” — a process in which crypto assets are sold in circles among a small number of accounts, which creates an exaggeration of demand. The price is likely to increase. The complaint claims that wash trading is common on Binance.US.