Seven key points from the SEC’s charges against Binance and Binance.US

On June 5, the U.S. Secu­ri­ties and Exchange Com­mis­sion (SEC) filed exten­sive charges against lead­ing cryp­tocur­ren­cy exchange Binance and relat­ed par­ties, alleg­ing secu­ri­ties law violations.

The fil­ing rep­re­sents one of the most com­pre­hen­sive sets of charges filed by the SEC against a cryp­tocur­ren­cy com­pa­ny to date. Below are the most impor­tant alle­ga­tions and facts.

1. BNB and BUSD are securities

The SEC declared Binance’s cryp­tocur­ren­cies, includ­ing the BNB exchange token (BNB) and the Binance USD sta­ble­coin (BUSD), as securities.

The reg­u­la­tor stat­ed that Binance’s BNB Vault, Binance’s Sim­ple Earn pro­gram, and Binance.US’s stak­ing ser­vices are secu­ri­ties as well. It said the company’s offer­ings and sales were all con­duct­ed ille­gal­ly and with­out registration.

The SEC more broad­ly said that Binance and its U.S. coun­ter­parts failed to reg­is­ter as an exchange, bro­ker-clear­er, or clear­ing agency though they were required to do so.

2. Several third-party tokens are securities

The SEC said that sev­er­al tokens list­ed by Binance are secu­ri­ties, includ­ing Solana (SOL), Car­dano (ADA), Poly­gon (MATIC), File­coin (FIL), Cos­mos (ATOM), The Sand­box (SAND), Decen­tra­land (MANA), Algo­rand (ALGO), Axie Infin­i­ty (AXS), and Coti (COTI).

These tokens were “sold as an invest­ment con­tract and, there­fore, [were] a secu­ri­ty” from their first sale, the SEC said. Though Binance did not issue the above tokens, the SEC com­plained that Binance did not restrict the trad­ing of the assets on its platform.

3. SEC wants Zhao, others enjoined

The SEC said that Binance CEO Chang­peng Zhao, Binance, Binance.US par­ent BAM firm Trad­ing, and asso­ci­at­ed par­ties should be per­ma­nent­ly enjoined — or pre­vent­ed — from vio­lat­ing rel­e­vant sec­tions of the Secu­ri­ties Act and Exchange Act. It also said those par­ties should be ordered to pay dis­gorge­ment and civ­il penalties.

The reg­u­la­tor added that Zhao should be barred from cer­tain lead­er­ship roles. It stat­ed that Binance and its relat­ed com­pa­nies should be barred from deal­ing in secu­ri­ties, cryp­to asset secu­ri­ties, and engag­ing in relat­ed business.

4. Binance evaded U.S. regulations

The SEC said that Binance explic­it­ly mar­ket­ed its ser­vices to U.S. cus­tomers after its 2017 launch and covert­ly after nom­i­nal­ly restrict­ing U.S. access in 2019.

One con­sul­tant told Binance to cre­ate a “Tai Chi” enti­ty in the U.S. tasked with pub­lish­ing reports and engag­ing with the SEC “sole­ly to pause poten­tial enforce­ment efforts.” The con­sul­tant also encour­aged Binance to block U.S. users on its main exchange while pri­vate­ly telling some of those users how to bypass restrictions.

Binance and its exec­u­tives did not accept the Tai Chi plan entire­ly, but many expressed inter­est in con­tin­u­ing to work with the consultant.

5. Executives were aware of the situation

Binance’s CCO — unnamed by the SEC — made state­ments indi­cat­ing that he was aware of wrong­do­ing. In 2018, the CCO said: “We are oper­at­ing as a fking unli­censed secu­ri­ties exchange in the USA, bro.” In 2020, he said that Binance “[does] not want [Binance].com to be reg­u­lat­ed ever” and said this led to the cre­ation of local entities.

Zhao and oth­ers were also involved in dis­cus­sions of the Tai Chi plan. Zhao rec­og­nized that there were “safer” alter­na­tives but pro­ceed­ed with much of the plan regard­less. Zhao per­son­al­ly direct­ed Binance to cre­ate a plan advis­ing users to bypass geo-block VPNs; he also told Binance to encour­age VIP users to bypass KYC checks.

The SEC said that Zhao and Binance were aware of the exchange’s large num­ber of U.S. users, as evi­denced by inter­nal pre­sen­ta­tions esti­mat­ing the firm had 1.47 mil­lion Amer­i­can users in 2019.

6. CZ-owned companies, controlled U.S. funds

The SEC said that Binance CEO Chang­peng Zhao, along with oth­er enti­ties owned by Zhao, had 100% own­er­ship of sev­er­al Binance-relat­ed companies.

Though Zhao did not have 100% own­er­ship of U.S. com­pa­nies under BAM, he and Binance had sig­nif­i­cant con­trol over their bank accounts and user cryp­to deposits. Fur­ther­more, Zhao’s Mer­it Peak and Sig­ma Chain “were used in the trans­fer of tens of bil­lions of U.S. dol­lars” between Binance and its U.S. coun­ter­parts, the SEC said.

Zhao and Binance were also involved in the design, launch, hir­ing, trad­ing activ­i­ties, and oper­a­tions of U.S.-based com­pa­nies, accord­ing to the regulator.

7. Wash trading ran rampant

Final­ly, the SEC said that Binance’s U.S. com­pa­nies mis­led users by over­stat­ing pro­tec­tions against wash trad­ing and the accu­ra­cy of trad­ing volumes.

Sig­nif­i­cant wash trad­ing took place due to Sig­ma Chain’s role as a mar­ket mak­er, the SEC said. At one point, Sig­ma Chain accounts wash-trad­ed 48 of 51 of the new­ly list­ed assets; at anoth­er point, those accounts wash-trad­ed 51 out of 58 list­ed assets.

Despite ear­li­er promis­es that the fea­ture exist­ed, Binance’s U.S. firms had no trade sur­veil­lance mech­a­nisms until at least Feb­ru­ary 2022. Exec­u­tives were alleged­ly aware of wash trad­ing but took no action to stop the activity. 

The SEC said that trad­ing data is mate­r­i­al infor­ma­tion for users and equi­ty investors and that Binance’s U.S. com­pa­nies prof­it­ed from these mis­lead­ing state­ments. There­fore, the firms’ actions con­sti­tute fraud and deceit, the reg­u­la­tor declared.