Crypto exchange Binance and its chief executive officer Changpeng Zhao are being sued by US regulator the Securities and Exchange Commission.
Zhao, known as CZ, is the founder of the world’s largest cryptocurrency exchange Binance and has an estimated net worth of $US10.5 billion ($16 billion).
Experts warn that the lawsuit has the potential to cripple Binance and will send shockwaves through the crypto industry.
The SEC cited a “blatant disregard of the federal securities laws” and said that CZ and Binance had “enriched themselves by billions of US dollars” while putting the assets of investors at “significant risk”.
Specifically, the civil case alleges that CZ and Binance “unlawfully solicited US investors to buy, sell, and trade crypto asset securities through unregistered trading platforms available online at Binance.com”.
The SEC claims that Binance – under CZ’s leadership – unlawfully operated an exchange and acted as a broker-dealer and clearing agency, without registering with the commission.
Binance was also accused of unlawfully offering and selling crypto assets including the Binance coin BNB and stablecoin BUSD. The SEC also flagged that the spruiking of Binance’s profit-generating programs “BNB Vault” and “SimpleEarn” was unlawful.
“In so doing, they have deprived investors of material information, including the risks and trends that affect the enterprise and an investment in these securities,” the SEC said in the court filing.
The SEC alleged CZ and Binance had “designed and implemented a multi-step plan to surreptitiously evade US laws” since 2018, quoting Binance’s Chief Compliance Officer as saying, “we do not want [Binance].com to be regulated ever.”
It’s alleged that Binance and CZ created BAM Management and BAM Trading, and purported that they were independent entities controlling Binance, but that CZ and Binance were effectively acting as shadow directors of BAM’s US operations.
As part of that plan, Binance and CZ allegedly publicly claimed that Binance.com did not service US persons – but that behind the scenes Binance and CZ actively attempted to ensure their most valuable US customers continued to trade on the platform.
In the process, the defendants allegedly put the safety of billions of dollars of US investor capital at risk.
It’s claimed they transferred investors’ crypto and fiat assets “as they pleased” – and commingled and diverted the assets in ways that registered brokers, dealers, exchanges and clearing agents would not be able to legally do.
The defendants also allegedly failed to have rules in place to prevent “fraudulent and manipulative acts”.
“The supposed controls were virtually non-existent, and those that did exist did not
monitor for or protect against ‘wash trading’ or self-dealing, which was occurring on the
Binance,” the SEC stated.
Binance and CZ are being sued for multiple violations of the Securities Act and the Exchange Act.
The SEC is seeking an injunction on Binance and CZ to prevent further violations and for the court to order the defendants disgorge their “ill-gotten gains with prejudgement interest”.
The body also wants them banned from controlling entities that deal with interstate commerce or from participating in the issuance, purchase, offer, or sale of any security, including any crypto asset security.
SEC chairman Gary Gensler said CZ and Binance had engaged in an “extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.”
Another US regulator, the Commodity Futures Trading Commission, filed a civil lawsuit against CZ and Binance in March.
Binance said in a lengthy statement that it was disappointed with the SEC’s decision to file a complaint against the company and that it had “actively co-operated with the SEC’s investigations”.
“We intend to defend our platform vigorously,” a spokesman for Binance said.
The company denied its customers’ assets were ever at risk.
Binance also warned that the SEC’s actions would undermine “America’s role as a global hub for financial innovation and leadership.”
Read Binance’s full statement here.
The world’s most popular crypto bitcoin crashed about 6.7 per cent after the lawsuit was announced, the biggest drop in three months.
The entire crypto marked dropped by about 5 to 10 per cent as the news made headlines.
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