The legal turmoil has fallen on Binance, as well as on its founder and Chief Executive Officer, Changpeng Zhao. With the U.S. Securities and Exchange Commission (SEC) filing a litany of charges against the cryptocurrency exchange, one might ask, “Is Binance in trouble?” In this article, we will delve into the context surrounding the SEC's allegations, analyze the charges and their potential implications for the cryptocurrency market.
The SEC’s Aggressive Crackdown on Cryptocurrencies
The SEC's actions against Binance are part of a broader crackdown on the cryptocurrency sector. Following the collapse of FTX in early November 2022, the SEC has filed lawsuits against several companies, including Binance and Coinbase, which is another major cryptocurrency exchange.
The crackdown is believed to be led by the desire of the U.S. Securities and Exchange Commission, led by its chairman Gary Gensler, to improve investor protection in the crypto sector.
In his efforts to curb the “wild west” of cryptocurrencies, Gensler has acknowledged the need for greater regulatory oversight in the cryptocurrency landscape. The move, however, contradicts the fundamental principles of decentralization and financial independence that underlie the crypto movement.
But what about Binance?
The SEC began its investigation into Binance in 2017 when the exchange launched its token, Binance Coin (BNB). After ongoing legal disputes between the two parties, the SEC finally filed its complaint in the summer of 2023 in a federal court in Washington, DC.
Why Is Binance Being Sued? The Charges Against Binance Brought by the SEC
The SEC's complaint has implications for both Binance, its associated companies BAM Trading Services Inc (“BAM Trading”), and Changpeng Zhao, the Chief Executive Officer of Binance. Specifically, it outlines a multitude of alleged securities law violations. These charges encompass deceptive practices, operational irregularities, and unregistered offerings, collectively painting a damning picture of Binance's trading practices.
To better understand all sides of this complaint, we will look at some of the charges under each allegation.
Binance’s Operation of Unregistered Exchanges, Brokers, and Clearing Agencies
The SEC alleges that Binance, under CZ's control, operated as an exchange, broker-dealer, and clearing agency without being properly registered. This allegation is based on the claim that Binance.com and Binance.US, the platform's U.S. subsidiary, should have been registered as such. The SEC's complaint extends to BAM Trading, which, according to the agency, should have registered as a broker-dealer.
Unregistered Offer and Sale of Crypto Assets
Binance is facing allegations related to the unregistered offer and sale of its crypto assets, including Binance Coin (BNB) altcoin and Binance USD (BUSD) stablecoin. In addition, the SEC has expressed concerns about crypto-lending products offered by Binance, such as Earn and BNB Vault. Meanwhile, BAM Trading is accused of the unregistered offer and sale of Binance.US's “staking-as-a-service” program.
Lack of Control and Deceptive Practices
The SEC alleges that Changpeng Zhao and Binance exercised control over customer assets, which allowed the commingling and diversion of these assets, including sending them to an entity called Sigma Chain, owned and controlled by CZ. In addition, BAM Trading and BAM Management US Holdings, Inc. are accused of misleading investors in connection with trading controls on the Binance.US platform. This includes allegations of manipulative trading practices that artificially inflated trading volume on the platform. The SEC alleges that the defendants concealed the commingling of billions of dollars of investor assets and their transfer to a third-party entity called Merit Peak Limited, also owned by Binance’s CEO.
Concealment of Access by High-Value U.S. Customers
The SEC alleges that Zhao and Binance created BAM Management and BAM Trading in 2019 to evade U.S. federal securities laws. They claimed that BAM Trading operated Binance.US independently, restricting U.S. customers' access to Binance.com. However, behind the scenes, Changpeng Zhao and Binance allegedly maintained substantial involvement and control over the U.S. entity, allowing many high-value U.S. customers to continue to have access to Binance.com. This revelation sheds light on what one Binance executive described as “operating as an unlicensed U.S. exchange.”
Binance's Response to the SEC Lawsuit
The SEC's legal action against Binance represents a significant challenge for the cryptocurrency exchange. The SEC seeks to prohibit the company from conducting business in the U.S. Binance has seen a substantial reduction in its market share since the lawsuit's filing. Additionally, several European countries have signaled their unwelcoming stance towards Binance, and the Department of Justice reportedly investigates CZ and Binance.
Binance remains resolute in its determination to fight the SEC charges, vehemently declaring them “unjustified.” However, Changpeng Zhao has maintained that he does not oppose cryptocurrency regulation entirely, emphasizing that he believes rules are necessary for the evolving industry.
Binance affirms its active cooperation with the SEC's investigations and its willingness to engage in good-faith discussions to resolve the investigations. However, Binance expresses concern about the SEC's reluctance to engage in substantive dialogue and its unilateral decision to resort to litigation rather than due process.
Binance asserts its disagreement with the SEC's allegations, particularly regarding its status as an unregistered exchange and the sale of securities. The cryptocurrency exchange argues that its native token, Binance Coin (BNB), and its fiat-backed stablecoin, BUSD, do not fall into the securities category, emphasizing their role as utility tokens within the Binance ecosystem.
The Binance response highlights the ongoing efforts and investments made by Binance to comply with regulations and improve security and compliance standards in the industry.
Implications for the Cryptocurrency Industry
The SEC's lawsuits against several cryptocurrency companies, including Binance, could have far-reaching implications for the cryptocurrency industry. If successful, these lawsuits could lead to the classification of most cryptocurrencies as securities, subjecting them to traditional financial regulations, which is in stark contrast to the industry's original intention to operate independently of centralized financial systems.
In its statements, Binance questions the SEC's commitment to investor protection, suggesting that its intent may be more focused on making headlines than safeguarding investors. In the face of these challenges, Binance remains steadfast in defending its business and the technology it represents, emphasizing its dedication to user safety and its willingness to collaborate with regulators and policymakers around the world.
Binance Sued: What to Expect Next?
The SEC's pursuit of Binance carries immense implications for the broader cryptocurrency market. It forces us to confront the balance between regulatory oversight and the principles of financial autonomy that underpin the world of cryptocurrency. As this legal saga unfolds, the crypto industry waits with bated breath to see whether the rules of the market will change permanently.