SEC Targets Binance in Landmark Lawsuit over Securities Violations

The U.S. Securities and Exchange Commission (SEC) has charged leading crypto exchange Binance, its U.S. subsidiary Binance.US, and founder Changpeng “CZ” Zhao, alleging numerous violations of federal securities laws. The accusations revolve around the trio’s provision of unregistered securities – specifically, the BNB token and Binance-linked BUSD stablecoin. The suit also claims that Binance’s staking service breached securities law.

The lawsuit extends its reach to BAM Trading, the company that operates Binance.US. Both BAM Trading and Binance are charged with failing to register as a broker, clearing agency, and exchange. The SEC is further concerned with the alleged mixing of customer funds and Zhao’s “secret” control over Binance.US.

A Twist in the US Customer Narrative

The SEC accused Binance of falsely claiming non-service to U.S. persons, despite knowingly allowing them to trade on its platform. The suit alleges, “When the Binance.US Platform launched in 2019, Binance announced that it was implementing controls to block U.S. customers from the Binance.com Platform. In reality, Binance did the opposite.” Allegedly, Zhao directed Binance to discreetly assist some high-value U.S. customers in evading these controls.

The SEC’s claim of unregistered securities goes beyond BNB tokens and BUSD stablecoin, extending to native coins for a variety of blockchains including Solana (SOL), Cardano (ADA), Polygon (MATIC), Coti (COTI), and Algorand (ALGO), Filecoin (FIL), Cosmos (ATOM), Sandbox (SAND), Axie Infinity (AXS), and Decentraland (MANA).

Alleged Financial Missteps

Accusations of financial mismanagement have been raised, including the diversion of customer funds for potentially personal uses. According to the SEC, entities controlled by Zhao, such as Merit Peak Limited and Sigma Chain, had vast access to customer funds, with Sigma Chain allegedly receiving almost $200 million from BAM Trading. The suit also alleges CZ himself “personally received $62.5 million from one of the Binance bank accounts” between October 2022 and January 2023.

The suit provides insights into Binance’s complex corporate structure, wherein Zhao allegedly holds 100% ownership of a chain of entities that ultimately control Binance.US. The SEC documents suggest U.S. executives felt restricted by the control exerted by CZ and global Binance officials.

Brian Brooks, former Binance.US CEO, reportedly stated, “I realized, huh, I’m not actually the one running this company, and the mission that I believe I signed up for isn’t the mission. And as soon as I realized that, I left.” This sentiment echoed the experience of Catherine Coley, Binance.US’s first CEO, who was identified in the suit as “CEO A” and reported that her “entire team is at their breaking point.”

The SEC suit raises additional concerns, such as Binance’s access to Binance.US’s assets and private keys, and internal discussions about enabling U.S. customers to trade on binance.com.

In response to the allegations, Binance.US issued a statement, calling the suit “the latest example of regulation by enforcement,” and labelling the suit as “baseless.” They insisted that user assets on their platform have always been secure, and vowed to “vigorously defend against the SEC’s overreach.”