accusations SEC against Binance are similar to the agency’s charges against failed crypto exchange FTX and its subsidiary Alameda Research, including mixing company and customer assets, misuse of user funds, and possible manipulation of the native token market. The Block writes about it.
The journalists of the publication studied in detail the 136-page complaint of the Commission and the arguments given in it, including the testimony of former high-ranking Binance.US executives, as well as corporate correspondence of the exchange employees.
As in the FTX case, regulators suggest that Binance attracted customers from the US despite operating offshore and not registering in the country, and did little to segregate its trading operations in different jurisdictions, bypassing existing regulatory requirements.
The SEC has requested a court order for the immediate “confirmed” accounting of Binance and Binance.US finances, the freezing and repatriation of assets, the preservation of documents, and the appointment of a recipient of Binance assets.
The Commission’s complaint follows the one filed in March CFTC the lawsuit, which also points to serious malfeasance and violations of the law, which could potentially lead to a ban on the exchange and its CEO Changpeng Zhao (CZ) from operating in the United States.
For its part, Binance has already announced its readiness to “resolutely” resist the pressure of the regulator and resolve the issue out of court.
Movement of client funds
In the allegations against the exchange, the SEC alleges mixing “billions of dollars of customer funds” between Binance and its US affiliate Binance.US in the account of “Zhao-controlled firm” Merit Peak Limited.
The same assets, according to the agency, were used to purchase the BUSD stablecoin associated with the platform.
“Using Merit Peak as an intermediary to move platform clients’ money to buy BUSD presented an undisclosed counterparty risk to investors,” the complaint reads.
The regulator mentioned that Merit Peak’s bank account at the now-defunct US bank Silvergate Bank “has received more than $20 billion, including client funds from both Binance platforms.” The amount then went to an unnamed trust “in transfers that appear to be related to the purchase of BUSD.”
The SEC also alleges that Binance.US market makers Merit Peak and another Zhao-owned firm, Sigma Chain, are involved in “tens of billions of dollars in transfers involving BAM Trading, Binance and related entities.” Among these assets were customer funds, the Commission believes.
“In the absence of regulatory oversight, Defendants <…> freely transferred investors’ crypto-currency and fiat assets at their discretion, sometimes mixing and redirecting them in ways that properly registered brokers, dealers, exchanges and clearing agencies could not do,” the complaint says.
At least $190 million was transferred from a bank account owned by Binance.US to Sigma Chain’s account in 2021, according to the SEC. However, not all of the funds were used for BUSD purchases or potential market manipulation, as Sigma Chain also acquired a yacht for $11 billion.
Similar SEC and CFTC Arguments
Similar to the findings of the CFTC, SEC lawyers believe that Binance violated US laws by operating without prior approval in the country. At the same time, attracting US customers bypassing regulation was a core part of the platform’s business strategy, they add.
The text of the complaint cites a December 2018 correspondence between the Binance commercial director and a compliance officer, in which the former writes: “We operate as an unlicensed securities exchange in the United States, bro.”
The document also quotes Zhao from an internal meeting in 2019, in which Binance’s top management explained the need to hide the true geographic origin of US clients, since they provide a significant part of the exchange’s trading volume.
The SEC claims that through constant monitoring, Binance knew where customers were logging in from and realized that blocking the Americans would deal a severe blow to its business. According to the regulator, in August 2019, the exchange served over 1.47 million customers in the United States without any restrictions.
Mixing assets of Binance and Binance.US
On the public plane, Binance tried to separate from Binance.US, but in reality controlled this branch, which casts doubt on the observance of the law by both parties, according to the Commission.
Testimony in the complaint from the former COO of Binance.US and former CEOs demonstrates that Binance staff ran most of the US company’s operations. The regulator also points to the “opaque” corporate structure of the trading platform.
Similar accusations were made against FTX, which was accused of de facto control of FTX.US and an extensive international network of legal entities.
In its accusations, the SEC focuses not only on corporate correspondence, but also on the testimony of former exchange executives without mentioning their names. However, given the dates of their tenures, The Block assumed they were former Binance.US CEOs Katherine Coley and Brian Brooks.
In particular, Brooks under oath mentioned that the US branch of Binance cannot operate without liquidity provided by Zhao-related investment funds Merit Peak and Sigma Chain. He also expressed concern about their integral role in the functioning of the platform.
“[Через этих двух поставщиков ликвидности] the company was actually heavily dependent on CZ not only as a controlling entity, but also as an economic counterparty, and this is problematic, so I thought that we need to explore the possibility of removing them from the platform,” said Brooks.
He also considered the level of communication between Binance and the Binance.US holding company, BAM Trading, to be a “problem”.
Kohli testified about the “significant lack of transparency” of Binance.US trading data and that CZ did not explain to her how the operating data of the main platform and the US affiliate should be separated.
Money laundering through Binance
Despite allegations made by the CFTC and SEC that Binance is not complying with US anti-money laundering laws, none of these agencies directly oversees this area.
The U.S. Treasury Department, which is responsible for this matter, launched an investigation into the parent company Binance Holdings Ltd in May. on the fact of possible violations of sanctions against the Russian Federation. However, so far there have been no official charges against the exchange or its top management.
Media suggest that if the CFTC and SEC succeed in court, much of the evidence included in the civil lawsuits could be used to support selective enforcement efforts by the Treasury and Justice Department.
CFTC March complaint cites internal communication from then-current Compliance Officer Lim on transactions Hamasin which he acknowledges the use of the platform by criminals.
“Kamon, [очевидно же]that they are here for criminal purposes,” Lim allegedly told another employee in a chat in 2020.
In response, his interlocutor admitted that “we see the bad, but turn a blind eye to it.”
As a reminder, the US Securities and Exchange Commission filed 13 charges against Binance, including unregistered offers and sales of BNB and BUSD tokens, Simple Earn and BNB Vault products, and staking.
In March 2023, the CFTC filed a lawsuit alleging that the platform violated derivatives trading rules in the absence of proper registration.
Binance previously denied Reuters reports of a mix of user funds and revenue in 2020 and 2021.
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