The Securities and Exchange Commission (SEC) on Monday charged Binance Holdings, its U.S.-based affiliate BAM Trading Services, and their founder Changpeng Zhao with a series of securities law violations.

The agency announced 13 charges in its case regarding the world’s largest cryptocurrency asset trading platform, including:

  • Operating unregistered exchanges, broker-dealers, and clearing agencies;
  • Misrepresenting trading controls and oversight on the Binance.US platform; and
  • Unregistered offer and sale of securities and crypto assets, including an exchange token, stablecoin, crypto-lending products, and a staking-as-a-service program.

Zhao was found liable by the SEC as a control person for Binance and BAM Trading’s alleged registration violations.

The agency is seeking disgorgement, injunctions, and potential civil penalties as part of its litigation.

The details: Since at least July 2017, Binance.com and Binance.US have operated as exchanges, brokers, dealers, and clearing agencies, earning “at least $11.6 billion in revenue from, among other things, transaction fees from U.S. customers,” the SEC noted in its release.

Zhao and Binance publicly claimed U.S. customers were restricted from trading on Binance.com but secretly allowed high-value U.S. customers to continue utilizing the platform, according to the agency. While Zhao and Binance publicly stated Binance.US was an independent trading platform for U.S. investors, they maintained control of its operations behind the scenes, per the SEC’s complaint, filed in U.S. District Court for the District of Columbia.

Further, the SEC accused Zhao and Binance of exercising control over customer assets and diverting them as they pleased, including to an entity called Sigma Chain owned by Zhao. The complaint alleged BAM Trading and BAM Management misled investors about nonexistent trading controls on the Binance.US platform, while Sigma Chain engaged in manipulative trading practices to artificially inflate trading volume.

Binance and Zhao “enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk,” the SEC said in its complaint. Another entity Zhao owned, Merit Peak Limited, was used to conceal the commingling of billions of dollars of investor assets, the agency added.

Related case: The Commodity Futures Trading Commission (CFTC) in March charged Binance and Zhao with operating an illegal digital assets exchange.

Also named as a defendant in that case was former Binance Chief Compliance Officer Samuel Lim for allegedly aiding and abetting the exchange’s alleged violations of CFTC regulations. The CFTC cited internal communications alleged to be from Lim that appeared to acknowledge and encourage illegal activity on the platform.

Though Lim is not named as a defendant in the SEC’s case or identified in the agency’s complaint, his alleged messages were cited on multiple occasions within the complaint.

Company response: In a blog post, Binance said it would “vigorously” defend itself, claiming the SEC’s actions are part of an “effort to rush to claim jurisdictional ground from other regulators” and that Binance is “now caught in the middle of a U.S. regulatory tug-of-war.”

“Digital asset laws remain largely undeveloped in much of the world, and regulation by enforcement is not the best path forward,” the company said. “An effective regulatory framework demands collaborative, transparent, and thoughtful policy engagement—a path the SEC has abandoned.”

Shortly after the SEC’s announcement Monday, Binance endured significant customer fund outflows, according to a report from CoinDesk.

Jeff Dale is the Digital Editor of Compliance Week. He previously worked as a copy editor with the Boston Herald and Patriot Ledger in Quincy, Mass., and is a former city editor of The Hour Publishing Co. in Norwalk, Conn.View full Profile

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