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03 October 2023

Factbox: Highlights from SEC complaint against crypto exchange Binance

By Reuters

The U.S. Securities and Exchange Commission (SEC) on Monday accused the world's largest crypto exchange, Binance, and its founder Changpeng Zhao, of operating an "elaborate scheme to evade U.S. federal securities laws."
The SEC charged Binance and Zhao with 13 offences, including operating an unregistered securities exchange and failing to restrict U.S. customers from its platform. The agency also alleged that Binance and Zhao secretly controlled customers’ assets, allowing them to commingle and divert customer funds.
In a blog post, Binance said: "We intend to defend our platform vigorously," adding that "because Binance is not a U.S. exchange, the SEC's actions are limited in reach."
"Any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong," Binance said.
Here are some of the highlights from the SEC's complaint:
The SEC's complaint alleged that billions of dollars in Binance customer funds were commingled in a account held by a Zhao-controlled firm called Merit Peak, in breach of U.S. rules that require customer money to be kept separate.
Merit Peak's U.S. bank account received over $20 billion that included customer funds both from the Binance platform and the platform of its U.S. affiliate Binance.US. Merit Peak then transferred the "vast majority of those funds" to an unidentified company, "in transfers that appear to relate to the purchase of" Binance's bespoke dollar-linked crypto-token BUSD.
"Sending Binance customer funds to Merit Peak placed those funds at risk, including of loss or theft, and was done without notice to customers," the SEC wrote in its complaint.
Reuters reported on May 23 that Binance commingled billions of dollars in client funds and corporate revenues in a bank account that Merit Peak held at U.S. lender Silvergate Bank. Binance then used the Merit Peak account to buy BUSD, Reuters reported. Binance denied this at the time.
The SEC alleged that Zhao and Binance diverted customer assets "as they please," including to a Switzerland-based trading firm called Sigma Chain, which is controlled by Zhao.
Merit Peak and Sigma Chain were used to transfer tens of billions of dollars involving Binance, Binance.US and other related entities, the SEC said. For example, the SEC said that in 2021 at least $145 million was transferred from Binance.US to a Sigma Chain account.
"From this account, Sigma Chain spent $11 million to purchase a yacht," the SEC said.
Zhao launched Binance in Shanghai in 2017. Since then, the exchange has said it does not have a headquarters and has declined to give the location of its main Binance.com exchange. Binance's holding company is based in the Cayman Islands.
Though Zhao publicly said that Binance restricted U.S. customers from trading on the platform, the SEC alleged that the exchange in reality subverted its own controls to allow them to continue doing so. As such, Zhao designed and implemented a plan to "surreptitiously evade U.S. laws."
"As Binance’s Chief Compliance Officer admitted, 'We do not want [Binance].com to be regulated ever,'" the SEC wrote in its complaint.
In 2019, Binance announced a partnership with a U.S. company called BAM trading that would launch the Binance.US platform to serve American clients in compliance with U.S. laws. However, the SEC said that Zhao directed Binance.US even though the U.S. entity has long said it operates independently.
Zhao instructed Binance.US to onboard Sigma Chain and Merit Peak as market makers on the Binance.US platform, the SEC said. Both firms were operated by Binance employees, including one that had authority over Binance.US's U.S. dollar bank accounts.
Before the SEC complaint was made public, Reuters, citing bank records, reported on Monday that Zhao's head of back office was the primary operator for five of Binance.US's bank accounts, including one that held American customer funds.
The SEC said that from at least September 2019 to June 2022, Sigma Chain "engaged in wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform." Sigma Chain held dozens of user accounts on Binance.US through which it "fraudulently inflated trading."
"Sigma Chain’s and Merit Peak’s activity on the Binance.US Platform, and their undisclosed relationship with Zhao and Binance, have involved and continue to present conflicts between Zhao’s financial interests and those of Binance.US Platform’s customers."