Binance, the world’s largest cryptocurrency exchange, has been sued by the Securities and Exchange Commission (SEC) for allegedly mishandling customer funds and running an unregulated stock exchange for wealthy Americans.
The company and its founder, Changpeng Zhao, face 13 federal charges in total.
Authorities say that Zhao ordered “billions of dollars” in customer funds to be transferred to a separate account also operated by him, and that he subsequently lied to regulators about Binance’s security systems to detect this sort of manipulative trading.
The SEC alleged that despite Zhao saying that Binance would not allow American customers to conduct transactions on the platform per federal regulations, the company secretly allowed “high-value U.S. customers” to access the platform.
Authorities claim Zhao helped create a system whereby these customers could use VPNs to hide their U.S. location, business practices that Binance had previously used with Chinese customers.
Zhao reportedly transferred these funds to help artificially inflate the trading value of Sigma Chain, a blockchain research company owned by him. Other funds were transferred to a separate Zhao-owned marketing firm called Merit Peak.
The defendants showed a “blatant disregard” of federal law, the SEC said.
“Our team is all standing by, ensuring systems are stable, including withdrawals, and deposits,” Zhao tweeted after the SEC filing.
He also tweeted “4,” which CNBC describes as “a popular refrain in Binance’s community urging users to ignore fear, uncertainty, and doubt, or ‘FUD.’”
In a statement, Binance denied any wrongdoing and lashed out at the SEC for clamping down on the crypto industry.
“We now join a number of other crypto projects facing similarly misguided actions from the SEC, and we will vigorously defend our business and the industry,” the statement read.
The SEC said that Binance generated $11.7 billion between June 2018 through July 2021, with much of that revenue coming from U.S. customer transaction fees.
Investors were quick to respond, with the value of BNB, Binance’s own cryptocurrency, falling nearly 10% by 12 p.m. ET, according to NASDAQ.
The View From Binance's Chief Compliance Officer
Binance’s unnamed former Chief Compliance Officer at one point appeared to admit to another compliance officer that the company was aware of the illegal activity, according to the SEC lawsuit.
“We are operating as a fking unlicensed securities exchange in the U.S.A, bro,” he said in Dec. 2018.
Binance has already been at the center of massive scrutiny in recent months.
The Justice Department is currently investigating whether the trading firm was involved in money laundering operations, including holding assets from Russian entities despite worldwide sanctions, which lead to a separate lawsuit from the Commodity Futures Trading Commission (CFTC).
One of Binance's biggest competitors, FTX, collapsed last year, after it was discovered that founder Sam Bankman-Fried had mishandled customer funds to artificially inflate the value of certain cryptocurrencies. Bankman-Fried, who was previously a Semafor investor, now faces multiple criminal charges, including wire fraud.