Introduction
Binance, the world's largest crypto asset trading platform, along with its U.S.-based affiliate, BAM Trading Services Inc. (BAM Trading), and founder Changpeng Zhao, has come under fire from the Securities and Exchange Commission (SEC). The SEC has brought up a series of securities law violations against the company, including operating unregistered exchanges, broker-dealers, and clearing agencies. In this article, we will delve into the allegations, the reactions from the SEC, and what this could mean for Binance and the crypto industry as a whole.
A Web of Deception: The SEC's Allegations against Binance and Zhao
Alleged Evasion of U.S. Securities Laws
The SEC accuses Binance and Zhao of actively attempting to evade U.S. securities laws. While the company claimed that U.S. customers were restricted from transacting on the Binance.com platform, the SEC alleges that Binance and Zhao secretly allowed high-value U.S. customers to continue trading on the platform. Additionally, it is alleged that Binance and Zhao exercised control over customer assets, permitting them to commingle assets or divert them as they pleased, including to an entity owned and controlled by Zhao called Sigma Chain.
Misrepresentation of Trading Controls and Oversight
Another allegation revolves around the misrepresentation of trading controls and oversight on the Binance.US platform. The SEC claims that BAM Trading and BAM Management US Holdings, Inc. (BAM Management) misled investors about non-existent trading controls over the platform. Furthermore, it is alleged that Sigma Chain engaged in manipulative trading to artificially inflate the platform's trading volume.
Concealment of Asset Commingling and Third-Party Transactions
The SEC also alleges that Binance concealed the fact that billions of dollars in investor assets were being commingled and sent to a third party, Merit Peak Limited, which is also owned by Zhao.
Violation of Registration-Related Provisions
The SEC's complaint also charges Binance and BAM Trading with several registration-related violations of federal securities laws. These include:
- Operating unregistered national securities exchanges, broker-dealers, and clearing agencies;
- The unregistered offer and sale of Binance's own crypto assets, such as BNB, BUSD, certain crypto-lending products, and a staking-as-a-service program;
- Zhao being held liable as a control person for Binance's and BAM Trading's operation of unregistered national securities exchanges, broker-dealers, and clearing agencies.
SEC Chair Gary Gensler's Statement on the Allegations
SEC Chair Gary Gensler stated that the allegations against Zhao and Binance entities involve an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law. He said that Binance and Zhao misled investors about risk controls, trading volumes, and the operators of the platform. Gensler warned the public to beware of investing in or on unlawful platforms.
Gurbir S. Grewal, Director of the SEC's Division of Enforcement, on Binance's Evasion of Rules
Gurbir S. Grewal stated that Binance and Zhao not only knew the rules but consciously chose to evade them, putting customers and investors at risk. By engaging in multiple unregistered offerings and failing to register as exchanges, brokers, dealers, and clearing agencies, Binance platforms imposed outsized risks and conflicts of interest on investors.
The SEC's Complaint: Key Areas of Focus
Unregistered Exchange, Broker, and Clearing Agency
Since at least July 2017, Binance.com and Binance.US, while controlled by Zhao, allegedly operated as exchanges, brokers, dealers, and clearing agencies, earning at least $11.6 billion in revenue from transaction fees from U.S. customers. The SEC claims that Binance and BAM Trading should have registered as an exchange, broker-dealer, and clearing agency. Zhao is also held liable as a control person for these registration violations.
Unregistered Offer and Sale of Crypto Assets
Binance is charged with the unregistered offers and sales of BNB, BUSD, and crypto-lending products like "Simple Earn" and "BNB Vault." BAM Trading is accused of the unregistered offer and sale of Binance.US' staking-as-a-service program. The complaint also states that Binance secretly controls assets staked by U.S. customers in BAM's staking program.
Failure to Restrict U.S. Investors from Accessing Binance.com
The SEC alleges that Zhao and Binance created BAM Management and BAM Trading in September 2019 as part of an elaborate scheme to evade U.S. federal securities laws. They claimed that BAM Trading operated the Binance.US platform independently and that U.S. customers were not able to use the Binance.com platform. However, the complaint alleges that Zhao and Binance maintained substantial involvement and control of the U.S. entity, allowing and concealing many high-value U.S. customers' continued access to Binance.com.
Misleading Investors
The SEC's complaint states that BAM Trading and BAM Management misled Binance.US customers and equity investors about the existence and adequacy of market surveillance and controls to detect and prevent manipulative trading on the platform. The complaint further alleges that wash trading by Sigma Chain, also owned by Zhao, demonstrates the falsity of statements made by BAM Trading about its market surveillance and controls.
Conclusion
The allegations against Binance, BAM Trading, and Changpeng Zhao are severe and far-reaching. If proven true, they could have significant ramifications for the company and the crypto industry as a whole. The SEC's investigation and subsequent legal proceedings will be closely watched by investors, regulators, and industry participants alike. As the crypto market continues to grow, it is essential for platforms like Binance to operate within the boundaries of the law and prioritize transparency and investor protection.
