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 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.