Accusing Binance of misleading customers and misusing funds, the SEC said the company was able to control customer assets and move them around as it pleased. Binance allegedly diverted some of those funds to a separate entity Zhao owned, Sigma Chain, which the SEC said was “engaged in manipulative trading” to artificially boost the trading volume on Binance.US — a platform established in 2019 for U.S. users that was supposedly independent from Binance proper.
The complaint cites a Jan. 2021 message from the Sales Director at BAM Trading (a U.S.-based Binance affiliate) to the company’s CEOs and other employees, which listed 20 Binance.US account numbers: “fyi these are ALL sigma chain,” the Sales Director wrote. One employee reportedly responded, “woah.”
The SEC also claimed Binance and co. surreptitiously commingled billions of dollars of investor money, sending it to another third party, Merit Peak Limited — which Zhao also owned.
In a statement, SEC Chair Gary Gensler said, “Through 13 charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law. As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied.”
When reached for comment, a rep for Binance pointed to a post on the company’s blog. It stated that “any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong,” and that “all user assets on Binance and Binance affiliate platforms… are safe and secure.”
News of the SEC lawsuit broke just a few hours after reports emerged speculating on a possible succession plan at Binance, with Zhou reportedly looking to step back from the exchange, while also decreasing his ownership. (It appears likely, though it’s not confirmed, that Richard Teng — who was tapped to oversee Binance’s regional markets outside the U.S. — is being primed for the job.)
As Rolling Stone recently reported, Zhou is arguably the dominant player in crypto, and among the 60 richest people in the world. Despite his stature, he’s largely been able to keep a low profile — but that’s changed significantly in recent months, especially after the high-profile collapse of Binance’s former main rival, FTX, and the indictment of its co-founder Sam Bankman-Fried (who’s pleaded not guilty to numerous fraud and campaign finance charges).
As Maryland Sen. Chris Van Hollen told Rolling Stone, “Clearly CZ has been lurking in the shadows. It’s hard to put a finger on where [Binance is] operating, what they’re doing.” He added: “We just went through the [Silicon Valley Bank] collapse, and that was a regulated bank, at least there was some review process. In [Binance’s] case, we know nothing. This is a black box. So I worry about the potential for it to go down. A lot of people could lose a lot of money.”
In its new lawsuit, the SEC also targeted Binance’s alleged attempts to skirt U.S. laws, which other regulators have also expressed concern about (the Commodity Futures Trading Commission sued Binance back in March over the same issue). Back in 2019, Binance (which is based overseas) launched a U.S. arm called Binance.US; they said U.S. customers would be restricted from using the original Binance platform, and that Binance and Binance.US were independent from each other.
In the lead up to launching Binance.US, company execs appeared to recognize they were already walking on precarious legal ground by operating in the United States. According to the complaint, in Dec. 2018, Binance’s COO told a compliance officer at the company, “we are operating as a fking unlicensed securities exchange in the USA bro.”
But even after launching Binance.US, the SEC alleges that Binance was determined to keep “high-value U.S. customers” trading on the original platform. Furthermore, it was alleged that Binance.US and Binance weren’t so independent, with the SEC saying Zaho and Binance “secretly controlled” Binance.US operations behind the scenes.
The complaint says Zhao told Binance to implement a plan that would “encourage customers to circumvent Binance’s geographic blocking of U.S.-based IP addresses by using a VPN service.” Specifically, the SEC says Binance reached out to its top 22 “VIP customers,” and its Chief Marketing Officer reported back that 19 were ready to change their IP addresses and “Know Your Customer” identity information.
As for other VIP customers, Zhao reportedly told Binance senior officials in a June 2019 meeting, “We do need to let users know that they can change their KYC on Binance.com and continue to use it. But the message, the message needs to be finessed very carefully because whatever we send will be public. We cannot be held accountable for it.”
Binance appeared to touch on this issue in its blog post, asserting that it’s always “cooperated with the SEC’s investigations,” while also casting doubt on whether the agency actually has any jurisdiction.
“We will continue to cooperate with regulators and policymakers in the U.S. and across the globe because that is the right thing to do,” the post read. “And Binance remains committed to productive engagement to ensure the next generation of cryptocurrency regulation fosters innovation while implementing and ensuring important consumer protections. Because Binance is not a U.S. exchange, the SEC’s actions are limited in reach. Still, we stand with digital asset market participants in the U.S. in opposition to the SEC’s latest overreach, and we are prepared to fight it to the full extent of the law.”
Gensler, however, was blunt, stating, “They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
This story was updated at 2:40 p.m. ET with additional details from the SEC complaint against Binance.