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News/Breaking: Binance and CEO CZ Face Legal Battle with SEC

Breaking: Binance and CEO CZ Face Legal Battle with SEC

Jun 5 2023

12 months ago3 minutes read

U.S. Securities and Exchange Commission (SEC) Files Lawsuit Against Binance and CEO CZ

Written by Van

The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Binance, one of the largest cryptocurrency exchanges in the world, and its CEO Changpeng Zhao (CZ). The SEC alleges that Binance operated as an unlicensed stock exchange and violated federal securities laws.

This lawsuit comes on the heels of previous allegations made by the U.S. regulator Commodity Futures Trading Commission (CFTC) in March. The CFTC accused Binance and CZ of offering unregistered crypto derivatives products in the United States. Now, the SEC has piled on with its own set of charges, creating a legal quagmire for the cryptocurrency exchange.

So far, representatives from Binance and the SEC have not provided any comments on the matter. The crypto community eagerly awaits their responses and the unfolding of this legal battle.


CZ's Response and Market Impact

Upon hearing the news, CZ took to Twitter to address the situation. In his tweet, he used the term "FUD," which stands for fear, uncertainty, and doubt. CZ's tweet suggests that he believes the allegations against Binance are baseless and aimed at spreading negative sentiments.

However, the news has already had an impact on the cryptocurrency market. The price of Bitcoin, the most prominent digital currency, dropped to $26,534 following the announcement of the lawsuit. At the time of writing, it has briefly recovered to $26,800, representing a 1.6% drop.

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Unpacking the Allegations

The SEC's lawsuit alleges that Binance violated U.S. securities rules by operating an unlicensed stock exchange. To better understand the implications of this lawsuit and its potential impact, it is important to examine the details of the allegations. The SEC claims that:

  1. Binance facilitated the trading of securities on its platform without registering as a national securities exchange.
  2. Binance failed to register as a broker-dealer, despite offering users the ability to trade securities.
  3. The exchange allowed users to buy and sell tokenized versions of stocks, which the SEC argues are securities and therefore subject to regulation.

If the SEC's lawsuit proves successful, it could have significant implications for Binance and its CEO, Changpeng Zhao. They could potentially face restrictions on conducting business in the United States. Gary Gensler, the Chair of the SEC, criticized Binance and its entities for evading the law, lack of disclosure, and conflicts of interest.

Binance's Alleged Unlawful Operations in the U.S.

The SEC's lawsuit alleges that Binance unlawfully operated in the United States by claiming that its U.S. platform operated independently. The regulator claims that Binance's chief compliance officer admitted to operating as an unlicensed securities exchange in the country. 

Additionally, Binance's U.S. arm, Binance.US, is accused of allowing wash trading by an undisclosed trading firm owned by CEO Changpeng Zhao.


Tokens Named as Securities in the Lawsuit

In the lawsuit, the SEC has named 12 tokens as securities in its case against Binance, its CEO, and Binance U.S. The tokens mentioned in the lawsuit are: 

Notably, the SEC did not include ETH (Ether) in the list of securities.


Updated: Binance and CZ's Next Response and Market Impact

Following the news of the lawsuit, Binance's CEO, Changpeng Zhao, took to social media to address the situation. He stated that a response to the SEC's claims would be issued once they have reviewed the complaint. The market reacted to the news, with Bitcoin's price falling by almost $900, dropping from $27,300 to $26,300.

Binance has issued a statement in response to the SEC's lawsuit. The company intends to vigorously defend itself against the SEC's claims. Binance criticized the SEC's enforcement approach and claimed that the regulator relies on blunt weapons instead of adopting a more nuanced approach. 

The exchange denied the allegations that its practices put customer funds at risk and assured users that their assets are safe. Binance argued that the SEC's actions are limited in reach since the exchange is not based in the United States.


Withdrawals from Binance and Market Impact

The news of the SEC lawsuit against Binance has led to a surge in withdrawals from the cryptocurrency exchange. Traders are withdrawing funds at the highest level since the banking crisis in March. Binance experienced approximately $503 million in net outflows on Monday, with over $1 billion in digital assets being withdrawn compared to $546 million in deposits.

The outflows from Binance continue to dominate the inflows, with DefiLlama data showing a negative netflow of $1.4 billion on the Ethereum blockchain over the past 24 hours. The lawsuit has had a significant impact on the market, with Bitcoin and other tokens experiencing price declines. The total crypto market cap lost over $50 billion at one point and is now under $1.1 trillion.

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Source: DefiLlama

CryptoQuant also recorded a negative netflow of 11,380 BTC on Monday. Today, the Bitcoin netflow on Binance decreased but is still approaching -1,300 coins.

Bitcoin Exchange Netflow (Total) - Binance.webp
Source: CryptoQuant

Impact on Other Companies

The SEC's lawsuit against Binance is reverberating throughout the cryptocurrency industry. Coinbase, another major cryptocurrency exchange, saw its shares decline by 10.3% following the news. The decline in Coinbase shares is attributed to the expectation that U.S. regulation will classify many cryptocurrencies as securities. 

Other companies, including MicroStrategy, Riot Blockchain, Marathon Digital, and Bitfarms, also experienced significant declines in their stock prices.


Updated: SEC Seeks to Freeze Binance.US Assets

The U.S. Securities and Exchange Commission (SEC) has filed an emergency motion seeking to freeze the assets of Binance.US, the American arm of Binance. The motion is part of the SEC's ongoing lawsuit against Binance, its CEO Changpeng Zhao, and Binance.US. 

The SEC aims to obtain a temporary restraining order, which includes freezing Binance.US assets, repatriating fiat and cryptocurrency held by U.S. customers, and imposing conditions on discovery.

Binance.US, however, reassures its users that their assets remain safe and secure. The platform states that it is fully operational with normal deposits and withdrawals. The impact of the SEC's emergency motion on customers' ability to withdraw funds is not expected to be immediate and will require approval from a district judge.


Concerns and Defenses in the Crypto Community

On social media platform Twitter, the crypto community has rallied to defend Binance and fight against the fear, uncertainty, and doubt (FUD) created by the SEC's actions. 

Many users express their support for Binance and criticize the SEC's approach. They argue that the agency is favoring central bank digital currencies (CBDCs) over cryptocurrencies and hindering the progress of the crypto industry in the United States. Some users even voice their distrust towards the SEC and its intentions.


Outflows from Binance and Market Influence

The news of the SEC's lawsuit against Binance has led to a significant outflow of assets from the exchange. After the lawsuit broke, approximately $2.68 billion worth of assets were withdrawn from Binance on the Ethereum blockchain, and a total of $3 billion was withdrawn across multiple chains. 

Despite these withdrawals, Binance still holds around $54 billion in assets and is capable of managing the situation. Today, it is seeing a net outflow of $492 million, according to Nansen.

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Source: Nansen

Binance CEO's Response and Wealth Impact

Changpeng Zhao, the CEO of Binance, doubts the SEC's intentions and suggests that the agency is protecting itself and political interests. He questions the motivations behind the lawsuit and criticizes the SEC's enforcement approach. As the legal battle unfolds, Zhao's wealth has taken a hit, shrinking by $1.4 billion in just two days. His net worth now stands at approximately $26 billion.


SEC Investigation and Evidence

The SEC's lawsuit against Binance.US is the culmination of an investigation that began in 2020. Court filings reveal evidence of alleged profiteering amounting to hundreds of millions of dollars by Binance.US. 

The investigation focused on possible violations of federal securities laws by BAM Trading Services Inc, the entity operating as Binance.US. BAM Trading reportedly generated $411 million in revenue and $225 million in gross profit over slightly over four years.


Impact on Bitcoin Trading and Premium

The SEC's lawsuit against Binance.US has had an impact on Bitcoin trading. On Binance.US, Bitcoin was trading at a premium of nearly $400 compared to other exchanges. This suggests that users may be trying to quickly withdraw their assets from the exchange in case the SEC freezes its assets. The premium also reflects concerns about the potential disruption of operations on Binance.US.


Halt of Binance's South Korean Acquisition

Binance's plans to acquire Gopax, a South Korean crypto platform, have been halted by the South Korean Financial Service Committee (FSC). The FSC took this action in response to the SEC's enforcement action against Binance. 

The FSC finds it difficult to accept the acquisition request at this time due to the allegations of law breaches against Binance. The acquisition would have marked Binance's re-entry into the South Korean crypto market.


Brian Brooks' Role 

Brian Brooks, the former CEO of Binance.US, has shed light on his involvement in the SEC's case against Binance and its executives. Brooks clarified that he did not work for Binance.com and considered himself to be in conversations with Changpeng Zhao as the board chair of BAM Trading. He resigned from Binance.US due to differences over strategic direction.


SEC Alleges Fund Transfers and Commingling

In the latest development, the U.S. Securities and Exchange Commission (SEC) has alleged that Binance sent approximately $20 billion of commingled funds to a foreign affiliate of Paxos, the stablecoin issuer, in 2021. The SEC's claims suggest that Binance engaged in transactions involving various Zhao-owned companies through accounts at defunct Silvergate and Signature Banks.

According to the SEC, Binance.US and several other Binance-related accounts transferred millions of dollars from Silvergate Bank accounts to Merit Peak Ltd, a British Virgin Islands company beneficially owned by Binance CEO Changpeng Zhao. 

Merit Peak received a total of $22 billion from these Binance-related accounts, including $1.2 billion from Binance US, between 2019 and 2021. Subsequently, the trading firm transferred $21.6 billion to a foreign affiliate of Paxos.

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Source: SEC Court Filing

This declaration by the SEC supports previous reports that indicated Binance had commingled users' funds in bank accounts at Silvergate Bank. Paxos, as the issuer of Binance USD (BUSD) stablecoin, finds itself connected to these allegations. It is worth noting that in February, New York regulators ordered Paxos to cease issuing additional BUSD.

Both Binance and Paxos have rejected the SEC's allegations. The response from these entities adds another layer of complexity to the ongoing legal battle, leaving the industry and the crypto community eagerly anticipating further developments in this high-stakes dispute.


Robinhood Contemplates Delisting Tokens Amid SEC Actions

Meanwhile, Robinhood, a popular trading platform, is considering delisting tokens named in recent SEC enforcement actions against Binance and Coinbase. The platform's Chief Legal Compliance Officer, Dan Gallagher, stated that they are reviewing the SEC's analysis to determine the appropriate actions. 

Gallagher points out that the broker-dealer license held by Robinhood may not allow trading of tokens deemed unregistered securities by the SEC. The lack of disclosure standards for these projects also poses challenges to their relisting.

These latest developments add more complexity and uncertainty to the ongoing legal battle between Binance, its entities, and the SEC. The impact on the cryptocurrency market and the future of Binance's operations in the United States remain topics of interest and concern within the crypto community.

Updated: Starting from June 27, 2023, at 6:59 PM ET, Robinhood has made the decision to discontinue support for SOL, ADA, and MATIC due to regulatory considerations.


Updated: SEC Alleges Misappropriation of Customer Funds

The U.S. Securities and Exchange Commission (SEC) has alleged that Binance CEO Changpeng 'CZ' Zhao and Guangying 'Helina' Chen received billions of dollars of customer funds through their holding company. 

According to the SEC, the funds were transferred to firms controlled by Zhao through an intermediary holding company called Key Vision Development Limited. The SEC's claims are supported by testimony and evidence provided by Sachin Verma, an accountant employed by the SEC.

The SEC alleges that approximately $12 billion was sent to Zhao and $162 million to a company controlled by Chen in Singapore. The majority of these funds are now held in offshore accounts. 

This new development adds another layer of complexity to the ongoing legal battle, as the SEC asserts that Binance mixed customer deposits and company funds. Binance, however, denies these allegations and states that a company called Merit Peak is used by CZ to trade his personal wealth.

The SEC's investigation into Binance has been ongoing since at least 2020, and the agency alleges that Binance held custody of its U.S. affiliate's assets until December 2022, despite claiming they were separate entities. 

The SEC and Binance are scheduled to have a court date on June 13 regarding the SEC's request for a restraining order. This latest revelation further intensifies the legal dispute and raises additional concerns about the handling of customer funds.

In the latest movement, CZ has stated that the accusations were false. 

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CZ Addresses Rumors of Death

Binance CEO Changpeng Zhao, popularly known as CZ, has dismissed rumors circulating about his death and refuted claims of being shot 27 times or engaging with an American inspection agency. These rumors gained traction recently, following similar instances of fake news about CZ's death in March 2023, which he promptly debunked.

The source of these recent false reports about CZ's death remains unclear, leaving room for speculation. It could be a result of a mistake or a malicious attempt to spread fear or manipulate token prices. CZ's swift response reaffirms his presence and dedication to addressing the challenges faced by Binance amidst the ongoing legal battles.


SEC's Lawsuit Alleges Shady Activities in Malta

In the U.S. Securities and Exchange Commission (SEC)’s lawsuit against Binance, it accused the exchange of engaging in questionable activities in Malta between 2018 and 2019. Binance's chief, Changpeng Zhao (CZ), has been summoned to Malta, although he clarifies that he won't have to appear in person.

The SEC's filing reveals that Binance moved nearly $70 billion through its accounts at Silvergate Bank and Signature Bank from 2019 to early 2023. Silvergate Bank facilitated over $50 billion for Binance, while Signature Bank facilitated over $19 billion. The filing highlights Binance's preference for weak regulations in Malta, which promoted itself as a blockchain-friendly destination.

The upcoming trial is expected to shed light on Binance's activities during its time in Malta, particularly those involving U.S. investors and institutions. The SEC's lawsuit underscores the regulatory challenges Binance is currently facing and raises further concerns about its compliance with financial regulations.


Binance US Implements Changes Under SEC Pressure

Binance's U.S. subsidiary is making significant changes in response to legal pressure from the SEC. Initially, over 100 advanced trading pairs were set to be removed from the platform, including popular pairs like AAVE/USDTCOMP/USDT, EOS/USDT, and BCH/BTC. 

These removals are a direct consequence of the SEC's freezing of Binance US's assets. However, the exchange changed its mind and keep all USDT Advanced Trading pairs due to “community feedback.” Binance US has not indicated whether the removed trading pairs will be reintroduced in the future.

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Source: Binance US

Additionally, Binance US has temporarily paused its over-the-counter (OTC) trading portal. The OTC desk will remain inactive for the coming weeks and months, further adjusting to the legal and regulatory landscape. These measures are part of the SEC's restraining order against Binance US, which also mandates the repatriation of customer assets within 10 days.

The SEC's lawsuit alleges that customer assets were "commingled" within a Zhao-owned entity called Merit Peak Limited. To comply with the restraining order, Binance, Zhao, and the Binance Entities must be removed as signatories or authorized persons within five days. Within 30 days, all customer funds must be held in wallets controlled by new private keys and administrative keys.

It is worth noting that six months ago, Binance US encountered a scarcity of Tether (USDT) and had to temporarily pause withdrawals of USDT and USDC. Then, substantial USDT deposits from Sigma Chain, owned by Binance CEO Changpeng Zhao (CZ), replenished Binance US's wallets during the liquidity crisis. Nonetheless, concerns were raised about the exchange's solvency and reliability, leading to regulatory scrutiny regarding potential manipulation and conflicts of interest.

This incident shed light on potential operational resilience gaps within Binance US. The recent changes imposed by the SEC and the uncertainties surrounding CZ's willingness to intervene in unfavorable market conditions further highlight the challenges faced by the exchange in maintaining stability and regulatory compliance.


Binance US Suspends USD Deposits and Withdrawals

Binance US, the American branch of the popular cryptocurrency exchange, has announced the suspension of USD deposits and withdrawals, effective from June 13. Customers have been notified of potential pauses in fiat withdrawal channels, and delays in withdrawing USD funds are expected as a result of the ongoing legal battle with the SEC.

The SEC's aggressive tactics against Binance US and its banking partners have forced the exchange to suspend its fiat services. However, Binance US will continue to operate as a crypto-only exchange, with all other features remaining intact. The exchange assures users that their funds are safe, emphasizing that 1:1 reserves are maintained for all customer assets.

Binance US is committed to vigorously defending itself against the SEC's allegations. The exchange aims to ensure a thriving market for digital assets in America, despite the regulatory challenges it currently faces. The suspension of USD deposits and withdrawals is a temporary measure taken in response to the SEC's actions, and Binance US remains committed to providing a secure and reliable trading experience for its users.


SEC Filing Reveals Binance.US's Financial Performance

According to a filing made by the SEC, Binance.US reported a loss of $181 million in 2022. The challenging market conditions in the cryptocurrency industry played a significant role in the financial struggles of Binance.US, despite receiving $132 million in funding from its parent company, BAM Management.

In contrast, Binance.US experienced a more favorable financial performance in 2021, generating approximately $150 million in revenue thanks to surging crypto prices and increased investor enthusiasm. However, the exchange faced a loss of nearly $400,000 in its first year of operation in 2020.

The disclosure of Binance.US's financial data underscores the complexity of operating a cryptocurrency exchange in a rapidly evolving market. The SEC's lawsuit against Binance and its affiliates has shed light on the financial challenges faced by Binance.US and the broader implications of the regulatory landscape on the profitability and sustainability of crypto exchanges.


Alameda Research's Involvement in Binance.US OTC Trades

The SEC's lawsuit against Binance and its affiliates has revealed a previously undisclosed relationship between Binance.US and Alameda Research. Alameda Research, a prominent crypto trading firm, served as the primary counterparty for Binance.US's over-the-counter (OTC) trades between May 2020 and February 2022.

Binance.US's OTC desk facilitated over $654 million in trades in 2021, primarily catering to institutional traders seeking large-volume crypto asset and fiat pair trades. During this period, Alameda Research frequently acted as a counterparty for these trades.

The inclusion of Alameda Research in the SEC's complaint raises concerns about the compliance practices of crypto companies and exchanges. It is noteworthy that Alameda Research and its CEO Caroline Ellison are already facing legal troubles, including Ellison's guilty plea to charges of conspiracy to commit wire fraud and securities fraud. 


FAQ about Cryptocurrency Regulation

Q: How does cryptocurrency regulation impact the market?

A: Cryptocurrency regulation can have both short-term and long-term impacts on the market. Here are some ways in which it can affect the market:

  • Market Volatility: News of regulatory actions or proposed regulations can lead to short-term market volatility as investors react to uncertainty and adjust their positions accordingly.
  • Investor Confidence: Clear and well-implemented regulations can enhance investor confidence in the cryptocurrency market, attracting more participants and potentially leading to increased adoption.
  • Market Maturation: As regulations are established and enforced, the market tends to mature. This can result in increased stability, reduced fraud, and improved investor protection.

Q: How does cryptocurrency regulation address money laundering and terrorism financing?

Cryptocurrency regulations combat money laundering and terrorism financing through:

  • KYC and AML Procedures: Regulated entities are required to implement robust Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. This helps prevent illicit activities by ensuring the identities of users are verified and suspicious transactions are reported.
  • Compliance Obligations: Regulated entities must comply with reporting obligations, including suspicious transaction reporting, to help authorities track and investigate potential money laundering or terrorism financing activities.

Conclusion

As the cryptocurrency industry continues to evolve, finding the right balance between regulation and innovation will be key to fostering a healthy and thriving ecosystem. Regulatory clarity, investor protection, and responsible innovation should go hand in hand to ensure the long-term sustainability of the market.

Note: This is a developing story, and further updates on the lawsuit and its impact will be provided as new information emerges.

This article has been refined and enhanced by ChatGPT.

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