SEC sues Binance over wash trading, misuse of customer funds

abdelaziz Fathi

The US Securities and Exchange Commission (SEC) has filed a fresh lawsuit against Binance and its founder and CEO, Changpeng Zhao (commonly known as CZ). The move comes barely two months after the Commodity Futures Trading Commission (CFTC) hit Binance and its top executives with similar charges.

The SEC detailed 13 counts against Binance on Monday, stating that the world’s largest digital asset ecosystem commingled substantial amounts of user funds and transferred them to a European company under CZ’s control.

The US regulatory body claims that both Binance and Zhao intentionally circumvented their own internal controls to enable wealthy US investors to trade on the exchange’s unregulated platform. As a result, Binance earned more than $11 billion in revenue between June 2018 and July 2021, primarily derived from transaction fees.

According to the complaint, CZ is also accused of orchestrating an evasion plan to cater to high-net-worth customers. The plan involved, among other purported tactics, the use of a virtual private network (VPN) service to conceal the customers’ location within the United States.

“We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC Chair Gary Gensler in a statement.

Additionally, the SEC claims that Binance facilitated the submission of compliance documents that obscured the true origin of US-based customers. These actions imply an intentional effort by Binance and CZ to subvert US federal rules and allow American customers to continue trading on the platform despite the regulatory restrictions in place, the regulator explains.

The SEC further accused Sigma Chain, a trading firm owned and controlled by Binance CEO, of engaging in wash trading on the platform of its US-based affiliate. This involved artificially inflating the trading volume of crypto asset securities, creating a misleading perception of market activity to mispresent the liquidity on Binance.US.

In response to the increased regulatory scrutiny from US authorities, Binance.US and its founder were reportedly looking at ways to decrease CZ’s ownership stake in the company.

Sources familiar with the matter told The Information that the American outpost of the world’s biggest crypto exchange has been actively exploring strategies to reduce Zhao’s equity since last summer. This move, which was discussed even before the CFTC lawsuit, is seen as an attempt to improve the company’s reputation and standing with US regulators.

Executives at Binance.US are reportedly worried that their ability to obtain additional regulatory licenses and scale the business in the US may be impeded if CZ retains his majority stake. This concern was expressed in light of the ongoing regulatory scrutiny and Zhao’s connection to the parent company, which has been accused of operating illegally in the US.

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