SEC Charges Binance and Founder Changpeng Zhao with 13 Violations

The Securities and Exchange Commission (SEC) has filed charges against Binance Holdings Ltd., BAM Trading Services Inc., and their founder Changpeng Zhao, alleging various securities law violations. Binance, which operates the world's largest crypto asset trading platform, Binance.com, and its U.S.-based affiliate, BAM Trading, along with Zhao, are accused of deceptive practices and violation of securities laws.

Subversion of Controls and Secret Operations

The SEC claims that despite public claims by Zhao and Binance that U.S. customers were restricted from trading on Binance.com, they actually bypassed their own controls to allow high-value U.S. customers to continue trading secretly. Similarly, while Zhao and Binance maintained that Binance.US was an independent platform for U.S. investors, they allegedly controlled its operations behind the scenes.

Control of Customer Assets and Manipulative Trading

Furthermore, the SEC alleges that Zhao and Binance exercised control over customer assets, permitting them to commingle and divert assets as they pleased, including to Zhao's owned and controlled entity, Sigma Chain. The complaint also accuses BAM Trading and BAM Management of misleading investors about non-existent trading controls on the Binance.US platform, while Sigma Chain engaged in manipulative trading to inflate trading volume. The defendants are accused of concealing the fact that they commingled billions of dollars in investor assets and transferred them to a third-party corporation named Merit Peak Limited, which Zhao also owns.

Violations of Registration-Related Provisions

Binance and BAM Trading are charged in the SEC complaint with running unregistered national securities exchanges, broker-dealers, and clearing agencies. It also accuses them of the unregistered offer and sale of their own crypto assets, including BNB (exchange token), BUSD (stablecoin), certain crypto-lending products, and a staking-as-a-service program. Additionally, Zhao is deemed a control person for the operation of these unregistered entities.

Deception, Conflicts of Interest, and Evasion

SEC Chair Gary Gensler remarked on the case, noting, “Through thirteen charges, 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.” Gensler emphasized that the defendants misled investors about risk controls, manipulated trading volumes, and concealed important operational details. He warned the public to exercise caution when investing with or on these unlawful platforms.

Conscious Evasion of Rules

Gurbir S. Grewal, Director of the SEC's Division of Enforcement, added, “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.” Grewal said that their many unregistered offers, as well as their refusal to register while acting as exchanges, brokers, dealers, and clearing agencies, presented substantial dangers and conflicts of interest for investors.

Unregistered Exchange, Broker, and Clearing Agency

The SEC's complaint, filed in the U.S. District Court for the District of Columbia, contends that Binance.com and Binance.US, controlled by Zhao since at least July 2017, acted as exchanges, brokers, dealers, and clearing agencies, earning over $11.6 billion in revenue, including transaction fees from U.S. customers. The SEC asserts that Binance should have registered as an exchange, broker-dealer, and clearing agency for Binance.com, and Binance and BAM Trading should have registered as an exchange and clearing agency for Binance.US. BAM Trading should have also registered as a broker-dealer. Zhao is held liable as a control person for the registration violations of Binance and BAM Trading.

Unregistered Offer and Sale of Crypto Assets

The SEC has also charged Binance with the unregistered offer and sale of various crypto assets, including BNB, BUSD, and crypto-lending products known as “Simple Earn” and “BNB Vault.” BAM Trading, on the other hand, is accused of the unregistered offer and sale of Binance.US' staking-as-a-service program. The complaint highlights that Binance secretly controlled assets staked by U.S. customers in BAM's staking program.

Failure to Restrict U.S. Investors from Binance.com

According to the SEC's complaint, Zhao and Binance established BAM Management and BAM Trading in September 2019 as part of a scheme to evade U.S. federal securities laws. They claimed that BAM Trading operated independently and that U.S. customers couldn't access the Binance.com platform. However, the complaint alleges that Zhao and Binance maintained substantial involvement and control over the U.S. entity, allowing high-value U.S. customers continued access to Binance.com. In one instance, the Binance chief compliance officer referred to operating as an “unlicensed securities exchange in the USA.”

Misleading Investors

BAM Trading and BAM Management are accused of misleading Binance.US customers and equity investors regarding the existence and adequacy of market surveillance and controls to detect manipulative trading. The complaint alleges that the undisclosed market-making firm Sigma Chain, owned by Zhao, engaged in strategic and targeted wash trading, exposing the falsehood of BAM Trading's statements about market surveillance and controls.

SEC's Investigation and Litigation

The SEC's investigation into the violations related to the Binance.US platform was conducted by Kathleen Hitchins, Ann Rosenfield, and Colby Steele, with the assistance of Ainsley Kerr, John Marino, and Donald Battle, under the supervision of Paul Kim. Michael Baker, Donna K. Norman, and Martin Zerwitz led the investigation into the Binance.com platform infractions, with support from Sachin Verma and Alexander Lefferts and supervision from Deborah A. Tarasevich. Both cases were overseen by Jorge G. Tenreiro and David Hirsch of the SEC's Crypto Assets and Cyber Unit. The case is being handled by Matthew Scarlato, Jennifer Farer, and J. Emmett Murphy, with the help of Hope Hall Augustini, and is overseen by David Nasse, Olivia Choe, and Mr. Tenreiro.

The charges brought by the SEC against Binance Holdings Ltd., BAM Trading Services Inc., and Changpeng Zhao highlight the alleged extensive deception, conflicts of interest, and violation of securities laws. The case underscores the importance of transparency and adherence to regulations within the rapidly evolving cryptocurrency industry.

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