SEC Sues Binance. What It Means for Bitcoin and Coinbase.
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Changpeng Zhao, or ‘CZ,’ is one of the most important players in crypto.
AFP via Getty Images
The U.S. Securities and Exchange Commission charged cryptocurrency exchange Binance and its founder, Changpeng Zhao, with a range of securities violations on Monday.
This has struck a blow at the heart of crypto and the effect is already rippling across markets.
It 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 Zhao—known in the industry as “CZ”—is arguably the industry’s single-most influential individual, playing a key role in the collapse of rival FTX last year.
Markets are already reacting to the SEC’s charges, with the price of
Bitcoin
shedding as much as 5% in the wake of the news. Shares in
Coinbase Global
(ticker: COIN), the largest U.S. crypto exchange—which was warned earlier this year by the SEC of looming charges—fell 10.5% in New York.
The SEC alleges that while Binance and Zhao publicly claimed that U.S. customers were restricted from using Binance—the core, offshore trading venue—the group is alleged to have bent controls to allow continued access to high-value customers. The agency also alleges that while Binance.U.S. was positioned as an independent, U.S.-based platform, in reality it was secretly controlled by Binance and Zhao.
Binance referred Barron’s to a blog post, when approached for comment, in which it said: “We intend to defend our platform vigorously.”
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.
For traders, this allegation is likely to be particularly shocking. The alleged commingling of customer money between FTX and an affiliated hedge fund, Alameda Research, controlled by Sam Bankman-Fried, was integral to the meltdown of that crypto exchange last November. Amid the market turmoil that ensued in the wake of FTX’s collapse, more funds flowed into Binance in what was seen as a flight to quality.
Binance said in the blog post that it has engaged in good faith with U.S. regulators and is “disheartened” by the agency’s decision to litigate. It added that user assets on Binance and Binance.U.S. are safe and secure.
“Unfortunately, the SEC’s refusal to productively engage with us is just another example of the Commission’s misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry,” Binance said.
The swift reaction in crypto markets, with digital asset prices tumbling, is unsurprising.
Binance is a pillar of the digital asset economy, in some months commanding almost two-third of all crypto trading volumes, though it has recently shed some of its market share. A crisis at Binance threatens to undo remarkable gains for Bitcoin, up almost two-thirds this year.
The news is also likely to have a negative impact on broker
Coinbase
.
While Binance has operated offshore for years and dodged requests from lawmakers to open up about its finances, Coinbase has positioned itself as crypto’s answer to a blue-chip stock that plays by the rules. But Coinbase revealed in March that the SEC had sent it a so-called Wells notice, a warning the agency may sue the exchange. After Monday’s developments at Binance, investors will have heightened concerns.
Write to Jack Denton at jack.denton@barrons.com
