Federal regulators recently filed a lawsuit against the world’s largest crypto exchange. They’re accusing the platform of running an illegal operation in the United States, taking billions of dollars from customers and commingling them. Binance and CEO Changpeng Zhao are both named in the filing.
The Securities and Exchange Commission (SEC) outlined 13 charges against Binance and Zhao. The charges include artificially inflating trading volumes, diverting consumer funds, and failing to restrict American traders from the platform.
In the lawsuit, the SEC also claims that Binance and Zhao secretly controlled consumer accounts, allowing those funds to commingle while diverting the amounts to other areas without supervision or permission.
Wash Trading Is Suspected by the SEC in the Binance Case
From 2019 to June 2022, a trading firm controlled and owned by Zhao engaged in wash trading practices. This activity artificially inflated the trading volume of certain crypto assets on Binance within the US trading platforms.
The SEC alleges that Binance created separate American-based entities as part of a scheme to evade the federal securities laws in the United States.
The trading firm, called Sigma Chain, used $11 million from an account to purchase a yacht.
Overall, the issues with Binance include calculated evasion, conflicts of interest, and no disclosure of activities to consumers. In the filing, the SEC calls it a “web of deception.”
Binance stated in a blog post that they intend to defend their platform vigorously after the SEC filed the lawsuit. They claim that the SEC’s reach has limitations because their business model isn’t a US exchange.
“All user assets on Binance and Binance affiliate platforms, including Binance.us, are safe and secure,” the company stated.
Huge Drops in Crypto Value Occurred After the SEC Lawsuit
Once news of the lawsuit became public, Binance’s cryptocurrency (BNB) fell in value by more than 5%. It’s the fourth-largest in terms of market size.
Bitcoin was also affected by the news of the SEC lawsuit, seeing its value fall by as much as 6%. That brought the crypto to its lowest in nearly 90 days.
Experts believe the SEC’s allegations could cripple Binance, with other crypto industry platforms expecting similar litigation if they operate within the United States. The spot market share for the platform has fallen five percentage points, but is still processing trades worth an estimated $65 billion daily.
The SEC litigation is one of three legal fronts that Binance currently faces. The Justice Department is investigating the company for sanctions violations and suspected money laundering, with the Commodity Futures Trading Commission (CFTC) filing a lawsuit in March 2023 claiming the platform is operating an illegal exchange with a sham compliance program.
Binance’s holding company is based in the Cayman Islands, although the business was initially founded in Shanghai by Zhao.
The lesson learned here is that customers in crypto markets must still take a “Buyer Beware” approach to their investing activities. It is a highly volatile opportunity, but expecting losses differs from having your funds managed inappropriately. There is no timeframe for a resolution of the Binance case.