The Securities and Exchange Commission has accused Binance, the world’s largest cryptocurrency exchange, of mishandling customer funds as well as lying to regulators and investors about its operations in a sweeping case filed in federal court on Monday.
The Wall Street regulator said Binance had been mixing billions of dollars in customer funds and secretly sending them to a separate company called Merit Peak Limited, which is controlled by Binance’s founder, Changpeng Zhao.
The charges included misleading investors about the adequacy of its systems to detect and control manipulative trading and about its efforts to restrict U.S. investors from trading on its unregulated platform. Regulators said in the civil lawsuit, filed in Federal District Court in Washington, that Binance and Mr. Zhao “enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk.”
Regulators have long seen Binance as a major target in their quest to bring to heel an industry built around an explicitly anti-government ethos. In its court filing, the S.E.C. cited a 2018 email from Binance’s chief compliance officer saying “we do not want [Binance.com] to be regulated ever.”
The charges against the biggest crypto exchange were the latest actions by U.S. regulators and prosecutors to rein in the Wild West of crypto trading and force major players in the space to come into compliance with U.S. laws.
Binance was already under increasing pressure. The Justice Department is investigating the exchange for money-laundering violations. Binance lost its outside auditing firm when Mazars announced that it would no longer do business with crypto companies late last year. The company has also seen its control of the crypto market shrink.
To improve its reputation, Binance has hired a slew of new compliance officials, including a former federal prosecutor who now heads its compliance operation.
“We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk,” said Gurbir S. Grewal, director of the S.E.C.’s enforcement division.
The nation’s top securities regulator filed 13 charges against Binance and Mr. Zhao, better known in the crypto world as “C.Z.” The S.E.C. is taking action a little over a month after the Commodities Futures Trading Commission filed its own civil enforcement action against Binance and Mr. Zhao.
Binance representatives had no immediate comment.
The C.F.T.C. is seeking to bar Mr. Zhao from doing business that falls under its jurisdiction for life. The agency also wants to permanently banish Binance from the United States.
The S.E.C. and C.F.T.C. often coordinate the filing of enforcement actions when they are investigating the same company, but the agencies have been engaged in a turf battle to determine which would emerge as the primary regulator of crypto trading.
The S.E.C.’s complaint accuses of Binance of recruiting U.S. customers even when the exchange was not supposed to operate in the United States. “On the surface, we cannot be seen to have U.S. users but in reality, we should get them through other creative means,” a Binance executive wrote in an internal message excerpted in the complaint.
When Binance took steps to submit to a U.S. regulatory regimen, it did so disingenuously, the filing said. It created an American company that it said was completely separate from its offshore parent but in which, regulators said, “behind the scenes” Mr. Zhao and other senior Binance leaders were “intimately involved.” That led one executive to remark that “the entire team feels like they’ve been duped into being a puppet,” according to the complaint.
The S.E.C. said that Mr. Zhao gave instructions to encourage so-called V.I.P. customers to bypass systems meant to restrict U.S. customers’ access to the platform. “Binance’s plan to retain lucrative U.S. investors while pretending to restrict them was a success,” the complaint said.
The moves against Binance and Mr. Zhao come months after the filing of criminal charges against Sam Bankman-Fried, the founder of FTX, which had been a big crypto trading rival until FTX imploded and filed for bankruptcy last November.
Some of the allegations in the complaint echoed the behavior that brought down FTX, leading to criminal charges against Mr. Bankman-Fried for using customers’ deposits to conduct other business operations and make political and charitable donations. According to the complaint against Binance, the bank account of Merit Peak, the trading firm controlled by Mr. Zhao, has received more than $20 billion which included customer funds.
FTX had used a trading firm called Alameda Research, controlled by Mr. Bankman-Fried, to improperly divert and use customer money.
“Sending Binance customer funds to Merit Peak placed those funds at risk, including of loss or theft, and was done without notice to customers,” the complaint said.
Matthew Goldstein covers Wall Street and white-collar crime and housing issues. @mattgoldstein26
Emily Flitter covers finance. She is the author of “The White Wall: How Big Finance Bankrupts Black America.” @FlitterOnFraud
David Yaffe-Bellany covers cryptocurrencies and financial technology. He graduated from Yale University and previously reported in Texas, Ohio, Connecticut and Washington, D.C. @yaffebellany
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