US regulators sued Binance and its CEO Changpeng Zhao on Monday for allegedly operating a “web of deception”, piling further pressure on the world’s biggest cryptocurrency exchange and sending Bitcoin to its lowest in almost three months.
The Securities and Exchange Commission (SEC) complaint, filed in a federal court in Washington, DC, listed 13 charges against Binance, Zhao and the operator of its purportedly independent US exchange.
The SEC alleged that Binance artificially inflated its trading volumes and diverted customer funds, as well as failed to restrict US customers from its platform and misled investors about its market surveillance controls.
The SEC also claimed that Binance and Zhao, its billionaire founder and one of the crypto industry’s highest-profile moguls, secretly controlled customers’ assets, allowing them to commingle and divert investor funds “as they please”.
Binance created separate US entities “as part of an elaborate scheme to evade US federal securities laws”, the SEC also alleged, citing a number of practices first reported by Reuters in a series of investigations into the exchange published this year and in 2022.
From almost three years ago until June 2022, a trading firm owned and controlled by Zhao, Sigma Chain, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform, the SEC also alleged.
“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,” said SEC Chair Gary Gensler said in a statement.
In a blog post, Binance said: “We intend to defend our platform vigorously,” adding that “because Binance is not a US exchange, the SEC’s actions are limited in reach.”
“Any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong,” the blog post said.
Binance.US, which is ultimately controlled by Zhao, said in a tweet that the lawsuit was “unjustified by the facts, by the law, or by the Commission’s own precedent”.
Bitcoin, the world’s biggest cryptocurrency, fell as much as six per cent on the news to its lowest in almost three months. Binance’s own cryptocurrency BNB, the world’s fourth-largest by market size, dropped more than 5pc.
The SEC complaint is the latest in a series of legal woes for Binance, which was also sued by the US Commodity Futures Trading Commission (CFTC) in March for operating what the regulator alleged were an “illegal” exchange and a “sham” compliance programme. Zhao called those an “incomplete recitation of facts.”
Binance is also under investigation by the Justice Department for suspected money laundering and sanctions violations, according to people familiar with the probe.
Market players said the SEC’s allegations could hobble Binance, with the lawsuit likely to reverberate through the crypto industry. Binance dominates crypto trading, last year processing trades worth about $65 billion a day with up to 70pc of the market.
“I think that there’s a big risk here that this could be crippling to Binance,” said Ed Moya, senior market analyst at Oanda.
The holding company of Binance, founded in Shanghai in 2017 by CEO Zhao, a Canadian citizen born and raised until the age of 12 in China, is based in the Cayman Islands. The exchange, however, says it does not have a headquarters and has declined to state the location of its main Binance.com exchange.
The SEC said that billions of dollars in Binance customer funds were commingled in a bank account of an entity controlled by Zhao, and then transferred to a third-party firm, Merit Peak, also controlled by Zhao.
Reuters reported last month that Binance commingled its customers’ funds with its corporate revenues in a US bank account belonging to Merit Peak, in breach of US financial rules that require client money to be kept separate.
In response to the article, Binance denied mixing customer deposits and company funds, saying that users who sent money to the account were not making deposits but rather buying Binance’s bespoke dollar-linked crypto token.
Reuters also reported on Monday that a senior Binance executive was the main operator for five bank accounts belonging to the giant cryptocurrency exchange’s US affiliate, including an account that held American customers’ funds.
The SEC said that the executive had at least until December 2020, also had “signatory authority over BAM Trading’s U.S. Dollar accounts”.