Binance SEC lawsuit could dent crypto exchange’s global plans

The SEC lawsuit, which levies 13 charges against Binance, its U.S. entity and the CEO, came within weeks of a Reuters report alleging that the exchange was commingling customer funds.
Prashant Jha
Posted by Prashant Jha June 21, 2023 6 Mins Read
The SEC lawsuit, which levies 13 charges against Binance, its U.S. entity and the CEO, came within weeks of a Reuters report alleging that the exchange was commingling customer funds.

The United States Securities and Exchange Commission filed a lawsuit against Binance along with its U.S. platform and CEO Changpeng Zhao on June 5 in a Washington, D.C. federal district court for allegedly violating securities laws and offering unregistered securities. 

The U.S. regulator has accused the crypto exchange of offering unregistered securities in the form of its now-paused Binance USD (BUSD) stablecoin and its native token BNB (BNB). The SEC also deemed its Simple Earn and BNB Vault products and its staking program as violations of securities law.

The SEC further alleged that Binance.US and its legal company, BAM Trading, failed to register as an exchange, broker or clearing agency and named Zhao as a “controlling person.” Although Binance has maintained throughout that the global entity, as well as the U.S.-based crypto platforms, are independent, the lawsuit alleged that the funds from the Biance global platform and Binane.US were co-mingled on multiple occasions.

The suit also listed nine crypto tokens trading on the platform as securities — Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS) and Coti (COTI).

The SEC lawsuit, which levies 13 charges against the crypto exchange, its U.S. entity and the CEO, came within weeks of a Reuters report alleging the exchange was comingling customer funds.

The report alleged that the crypto exchange mixed its corporate revenue with customer funds in 2020 and 2021 and that the commingling occurred on a daily basis.

Reuters cited three insiders with knowledge of the crypto exchange’s finances and further claimed that the majority of commingling had occurred on accounts held at now-bankrupt Silvergate Bank, with amounts reaching the billions of dollars.

The report also claimed that many of the Silvergate accounts involved in comingling were linked to Zhao. At the time, Binance had refuted the claims and called it a conspiracy theory, only for the SEC to include those accusations in their lawsuits just a few weeks later.

Binance refuted the accusations made by the SEC in the lawsuit in a blog post and claimed that the onus falls on the SEC for not offering any clear regulatory guidelines for crypto platforms in the United States.

The SEC lawsuit also came within months of another lawsuit against the crypto exchange and CEO Zhao by the United States Commodity Futures Trading Commission on March 27. The CFTC lawsuit had alleged violations of derivatives law and failure to register with the required authorities.

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The SEC lawsuit might have taken many by surprise even though the security regulator has been investigating the crypto exchange since early 2022.

The SEC’s social media post, highlighting an insider message from Binance’s chief compliance officer from 2018, further raised eyebrows.

To some, the inclusion of this comment in the SEC’s public announcement made the commission’s approach look more like a personal vendetta than an enforcement drive. 

Iota co-founder Dominik Schiener told Cointelegraph that the agenda of the SEC under Gary Gensler has never been to close the regulatory gap of digital assets and to offer companies a path forward to become compliant:

“The approach of the SEC has always been to delay, obfuscate and ignore. After the SEC’s blatant failure in protecting retail investors in FTX, Celsius, Voyager and others, they have now chosen to actively fight the crypto industry, with Binance having become the most obvious scapegoat.” 

Bitfinex chief technology officer Paolo Ardoino also advocated for proactive guidance from regulators over enforcement, citing the example of European regulators. He told Cointelegraph that the “MiCA License is a good example of a regulator committing to establish a clear set of guidelines and actively working towards an encompassing framework that provides companies with a solid operational foundation and provides room for feedback.”

“We see regulators taking a proactive approach to digital assets in Hong Kong, Singapore, Dubai and El Salvador. The concern has to be that regulators who are less open in providing feedback will push away companies and talent. There is an urgent need for inclusive and uniform regulations that not only foster innovation but also safeguard the welfare of customers and investors,” Ardoino added.

Parallel to FTX?

Binance’s legal trouble with regulators is nothing new, and over the years, the crypto exchange has faced multiple regulatory challenges in various regions. However, in the past, the crypto exchange has managed to get away with either a warning or a fine for its violations, but that has changed with the collapse of multiple crypto platforms and lending firms over the past few years. 

Although the downfall of FTX toward the end of 2022 deteriorated public trust in the crypto industry, Binance and Zhao garnered wider support for their transparency at the time. However, the new lawsuits and accusations of commingling funds have dealt a blow to public trust in the world’s largest crypto exchange.

Many in the crypto community were quick to draw parallels between FTX and Binance after the accusations of commingling of funds surfaced.

The exchange’s market depth declined over 78% for its U.S. entity, while its market share in the U.S. dropped below 1%.

Itai Avneri, deputy CEO of INX — an SEC-registered broker-dealer service for digital assets — told Cointelegraph that, while it is tough to predict outcomes for the exchange, it is clear that Binance was trading cryptocurrencies in the U.S. deemed securities by the SEC without a broker-dealer license:

“Binance has already lost a great deal of public trust, but it has also aided in the decreased public trust of the entire crypto industry, which has already been plagued with scandal. Customers are uncertain and don’t know who to trust, what to trade, and how to trade it.”

Avneri added further that there is a very clear regulatory path to registering digital securities that complies with the Securities Exchange Act of 1934. “It doesn’t matter how old those laws are — they are still relevant today. Binance chose to work around the rules and now is dealing with the implications of those shortcuts and other activities,” Anveri added.

He advised that, while the SEC is claiming that most cryptocurrencies are — in fact — securities, industry participants should register digital assets as such and find a path to list and trade them in a compliant way in the U.S. under current securities law.

Source: Twitter

Dave Birnbaum, director of product at Bitcoin-focused crypto trading platform Coinbits, told Cointelegraph that “it’s pretty clear that Binance.US will not survive this lawsuit. Emails have leaked that seem to show Binance compliance executives flaunting U.S. law — not a good look. The best case is Binance continues international operations and [Zhao] lives out his life without setting foot in the U.S. and going to prison.”

He added that Binance may have enough assets to weather the storm and continue non-U.S. operations; however, one key factor to keep an eye on is the value of Binance’s BNB token, which has taken a nosedive following the SEC charges.

Binance’s legal trouble in the U.S. dents its global goals

Binance has claimed that it is focused on becoming compliant with the newly passed Markets in Crypto-Assets (MiCA) legislation in the European Union over the course of the next 18 months.

However, Binance’s legal trouble in the U.S. may have put a dent in its global ambitions. In the weeks immediately following the SEC submitting its lawsuit, the exchange withdrew from the Dutch market after failing to obtain a virtual asset license from the regulators despite its multiple attempts.

Binance claimed that it had explored multiple alternative avenues to serve Dutch residents in compliance with local regulations. However, no such avenues offered a path to virtual asset service provider registration.

The global crypto exchange has also applied to cancel its registration in Cyprus after receiving a Class 3 registration, the highest level of service provision, as a Crypto Asset Services Provider (CASP) in the country. Binance claimed the move was made to focus on the larger EU market; however, a Reuters report claimed that, despite receiving a Class 3 registration, Binance never offered its services in the region.

Binance also applied to cancel registration for inactive United Kingdom businesses with the Financial Conduct Authority. The exchange told Cointelegraph that Binance Markets Limited has canceled its existing permissions, which were not in use and unrelated to crypto activities.

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Amid its plans to become MiCA compliant and enter the EU, reports about an ongoing investigation in France have surfaced. The investigation against the exchange is reportedly based on charges of “aggravated money laundering.”

While Binance claimed its recent cancellation of multiple registrations across European countries is to become MiCA-compliant, some have suggested that European states are working with the SEC to put pressure on Binance.

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