The SEC accused Binance — the world’s largest cryptocurrency exchange — of mishandling customer funds and failing to register under securities laws in a court filing released on Monday, June 5.
The lawsuit also claims that Binance — as well as BAM Trading and Binance.US — engaged in the unlawful sale of securities and failed to register under the Exchange Act.
The SEC claims that “First, Binance and BAM Trading, under Zhao’s leadership and control, have unlawfully offered three essential securities market functions—exchange, broker-dealer, and clearing agency—on the Binance Platforms without registering with the SEC. Acutely aware that U.S. law requires registration for these functions, Defendants nevertheless chose not to register, so they could evade the critical regulatory oversight designed to protect investors and markets.”
The SEC asserts that BAM Trading’s stake program is an Investment Contract, and therefore falls under the definition of Security.
Binary and BAM trading “have engaged and continue to engage in unregistered offers and sales of crypto asset securities, effecting unregistered crypto asset securities transactions on the Binance Platforms.”
The SEC also claims Binance and CEO Changpeng ‘CZ’ Zhao were “intimately involved in directing BAM Trading’s U.S. business operations.”
“Zhao directed Binance to assist certain high-value U.S. customers in circumventing those controls and to do so surreptitiously because—as Zhao himself acknowledged—Binance did not want to ‘be held accountable’ for these actions,” The filing states.
Zhao and Binance were sued for allegedly using social media to promote their business. “actively solicited” Binance asked Binance employees to keep US investors in the Binance.com Platform, despite Binance’s announcement of June 2019, that US investors would be removed. “it would no longer serve U.S. investors.”
SEC alleges further in its complaint that BNB (the native token of Binance Smart Chain) is not registered as a security. It also states Binance’s various staking program are in violation with the SEC registration requirements.
“We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk,” Gurbir S. Grewal is the director of SEC enforcement.
Binance.US referred Blockworks to a tweet Blockworks made about the case when Binance.US was contacted for a response.
“While we remain open to a productive compromise that protects our customers and their digital assets, with this latest action taken against our business and following similar actions taken against Coinbase, Gemini, Kraken, and other market participants, the SEC seeks a near eradication of our industry,” Tweet said.
“The SEC’s choice is disheartening for Binance, its users, and the industry as a whole. However, this action will not stop us from continued robust collaboration with other regulators and policymakers across the globe, and we will continue to vigorously defend our business and this technology,” Binance informed Blockworks via email.
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