The US Securities and Exchange Commission (SEC) has filed a complaint against Binance, the world's largest cryptocurrency exchange, and its CEO and founder Changpeng Zhao for allegedly failing to bar US customers from its platform, misleading investors about market surveillance controls, and operating an unregistered exchange.
The SEC complaint, filed Monday in federal court in Washington, D.C., also accuses Binance and Zhao of secretly managing customer assets and allowing them to commingle and divert customer funds "at will."
The SEC also alleges that Binance established a separate US company "as part of an elaborate scheme to circumvent US federal securities laws."
The SEC also alleges that from approximately three years ago until June 2022, Sigma Chain, a trading company owned and controlled by Zhao, engaged in so-called wash trades to artificially inflate the trading volume of cryptoasset securities on the Binance.US platform.
"We allege that Zhao and Binance engaged in an extensive web of deception, conflicts of interest, lack of disclosure and calculated circumvention of the law," SEC Chairman Gary Gensler said in a statement.
'We intend to vigorously defend our platform,' Binance said in a blog post, adding that 'Binance is not a US exchange, so the SEC's action is limited in scope.
"Allegations that user assets on the Binance.US platform have been compromised are completely false," the blog post said.
Binance.US, which is ultimately controlled by Zhao, said in a tweet that the action was "not justified by the facts, the law, and the Commission's own precedent."
Bitcoin, the world's largest cryptocurrency, fell as much as 6% on the news, hitting a three-month low. BNB, the cryptocurrency held by Binance, the world's fourth-largest marketplace, fell more than 5%.
‘Big risk’
Binance was sued by the US Commodity Futures Trading Commission in March for running an 'illegal' exchange and a 'sham' compliance program; Zhao called the charges 'disappointing' and an 'incomplete recounting of the facts'.
Binance is also under investigation by the US Department of Justice for alleged money laundering and sanctions violations.
Market participants said the SEC allegations could hurt Binance and the case is likely to reverberate across the crypto sector. Binance has dominated crypto trading over the past year, with 70% of the market trading at around USD 65 billion a day.
"I think there's a big risk that this could be crippling for Binance," said Ed Moya, senior market analyst at Oanda.
Binance was founded in Shanghai in 2017 by Zhao, a Canadian born in China and raised there until the age of 12.
The holding company is based in the Cayman Islands, but Binance has no head office and declined to say where the main Binance.com exchange is located.
The company has paid out at least US$10 billion to criminals and companies trying to evade US sanctions, Reuters previously reported.
Reuters also reported on May 23 that Binance commingled customer funds with corporate earnings in an account at Silvergate Bank owned by trading firm Merit Peak, in violation of US financial rules requiring customer funds to be kept separate.
Binance denied mixing customer deposits with corporate funds, stating that users who transferred money into the account were not making deposits, but purchasing Binance's bespoke dollar-linked crypto tokens.
Binance accused of 'web of deception' in US
The Securities and Exchange Commission (SEC) announced that a trading platform and its founder, Changpeng Zhao, continued to operate in the US without regard to rules designed to protect investors.
Both the company and Mr. Zhao are accused of mishandling customer funds.
Binance said it would "vigorously" defend the platform.
The SEC's complaint is the second filed against the company this year and follows a US pledge to more aggressively police the crypto industry.
The company, which was founded in 2017 and operates in more than 100 countries, denied that customer money was put at risk.
"We take the SEC's allegations seriously, but we should not be subject to SEC enforcement action," Binance said, adding that it was in talks with regulators.
It said the legal action was an example of the regulator's "misguided and deliberate refusal to provide the digital asset industry with the clarity and guidance it needs."
Binance, registered in the Cayman Islands, is known as the world's largest platform for trading cryptocurrencies and other digital assets.
Lack of disclosure
The SEC complaint lists 13 charges accusing the company and Mr. Zhao of illegally soliciting investors and customers, misrepresenting the scope of trading on the platform and misleading the public about its oversight.
It is also alleged that both the crypto company and its founder diverted customer funds to a company controlled by Mr. Zhao, a Chinese-Canadian billionaire known in the industry as CZ.
Zhao and Binance "engaged in a vast web of deception, conflicts of interest, lack of disclosure and calculated circumvention of the law," SEC Chairman Gary Gensler said in a 136-page announcement of the lawsuit.
"The public should be wary of investing their hard-earned assets in or on these illegal platforms," it added.
The lawsuit comes as US authorities vow to use existing laws to root out fraud and other problems in the crypto industry, especially after the dramatic collapse of Binance's rival FTX last year.
The US financial regulator, the Commodity Futures Trading Commission, filed its own lawsuit against Binance in March, accusing the company of operating illegally in the country. The company is also under investigation by the Department of Justice.