Binance Holdings Ltd, its US-based affiliate, BAM Trading Services Inc. (BAM Trading), and their founder, Changpeng Zhao, have all been charged with a variety of securities law violations.

The SEC is the latest regulator to take on Binance after the CFTC charged three Binance entities in March over alleged numerous violations of the Commodity Exchange Act and Commodity Futures Trading Commission regulations.

The SEC alleges that, among other things, the entities were operating as unregistered exchanges, broker-dealers, and clearing agencies, and that they were misrepresenting trading controls and oversight on the Binance.US platform, plus the unregistered offer and sale of securities.

“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 – all in an effort to maximize their own profits.”

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement

“As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied”, said SEC Chair Gary Gensler.

US investors scheme

Zhao and Binance have publicly claimed that US customers were restricted and could not trade on Binance.com. However, according to the complaint, both Binance.com and Binance.US, while under Zhao’s guidance, have operated as exchanges, brokers, dealers, and clearing agencies since at least July 2017, and earned over $11.6bn in revenue, which includes transaction fees from US customers.

Allegedly, BAM Management and BAM Trading were created by Zhao and Binance in September 2019 as part of “an elaborate scheme to evade US federal securities laws” by stating the Binance.US platform was run independently by BAM Trading, and that US customers could not access the Binance.com platform.

“They attempted to evade US securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value US customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms,” Gensler said.

The complaint further alleges that Zhao and Binance had a substantial involvement and control of the US platform, and that Zhao directed Binance to allow and conceal many high-value US customers’ access to Binance.com. Something which was also alleged in the CFTC’s claims.

According to the compaint, the chief compliance officer of Binance also messaged a colleague “[w]e are operating as a fking unlicensed securities exchange in the USA bro”.

Wash trades

The complaint states that BAM Trading and BAM Management misled Binance.US customers and equity investors regarding market surveillance and controls to detect and prevent manipulative trading of the Binance.US crypto trading volumes.

It also claims that a big part of the strategic and targeted wash trading activities on Binance.US that inflated trading volume was performed by the “market making” trading firm Sigma Chain, a company that Zhao owns. Furthermore, defendants also concealed the commingling billions of dollars of investor assets, which were sent to the third-party firm Merit Peak Limited, another Zhao-owned company.

For these failings, the SEC is bringing charges over violations of critical registration-related provisions of the federal securities laws over:

• Binance and BAM Trading operating as unregistered national securities exchanges, broker-dealers, and clearing agencies;
• Binance and BAM Trading for the unregistered offer and sale of Binance’s own crypto assets, including a so-called exchange token, BNB, a so-called stablecoin, Binance USD (BUSD), certain crypto-lending products, and a staking-as-a-service program; and
• Zhao over being liable as a control person for Binance’s and BAM Trading’s operation of unregistered national securities exchanges, broker-dealers, and clearing agencies.

BAM Trading has also been charged with the unregistered offer and sale of Binance.US’s staking-as-a-service program, and the complaint notes that Binance secretly has control over assets staked by US customers in BAM’s staking program.

Binance ‘knew of rules violations’

CFTC Chairman Rostin Behnam has already said that Binance knew for years what they were doing and violating rules, and the SEC’s Gurbir S Grewal, Director of the SEC’s Division of Enforcement, has similar views.

“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 – all in an effort to maximize their own profits,” he said.

“By engaging in multiple unregistered offerings and also failing to register while at the same time combining the functions of exchanges, brokers, dealers, and clearing agencies, the Binance platforms under Zhao’s control imposed outsized risks and conflicts of interest on investors. Those risks and conflicts are only heightened by the Binance platforms’ lack of transparency, reliance on related-party transactions, and lies about controls to prevent manipulative trading. Despite their years-long efforts to not be held accountable, today’s complaint begins the process of doing so,” Grewal continued.

Binance disappointed

In a written statement, Binance claimed to have worked closely with the Commission, and said it was disappointed by the charges. It said the regulator had chosen to “regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology.

“While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to defend our platform vigorously. Unfortunately, the SEC’s refusal to productively engage with us is just another example of the Commission’s misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry,’ Binance said.

“[W]e are operating as a fking unlicensed securities exchange in the USA bro.”

A text message from Binance chief compliance officer

Rob Mason, Director of Regulatory Intelligence at Global Relay, our parent company, commented: “This is going to be a huge litigation with multiple strands and tentacles. Binance initially publicly disputed the SEC’s allegations, and the SEC appears to have reacted aggressively and clearly feel they have significant concerns on a number of fronts.

“This is likely to destabilise the whole crypto exchange space as well as Binance itself, which will need to dedicate material resources to manage this and may well struggle to survive the reputational fallout, given general crypto compliance concerns. One also feels for the compliance /surveillance team who have a complex model to manage and a CEO whose interests stretch across a number of related entities”, Mason added.