The Securities and Exchange Commission (SEC) filed 13 charges on Monday against Binary, which is the largest crypto exchange in the world, and its cofounder Changpeng Zhao. They allege that they both mixed billions of dollar worth of funds from users and sent them to an European company controlled Zhao.
The U.S. regulator claimed that Zhao and Binance worked to undermine “their controls” in order to allow U.S. high-net worth investors and customers to trade on Binance’s unregulated exchange.
A senior executive is alleged to have told a compliance officer the company operated as an —— unlicensed securities exchange.
The complaint claims that Binance used Binance.US to shield the main company, Zhao, from law enforcement and to insulate Binance.
The complaint stated that Binance generated $11.6 billion of revenue between June 2018 and July 2021. Most of this revenue came from transaction charges. The SEC alleges that since its founding, Binance has worked “at first overtly, then furtively,” to attract U.S. clients, under the control and direction of its founder Zhao.
The SEC claimed that Binance was aware of the presence of tens and thousands of US customers, but did not act, despite the federal law prohibiting the sale and offer of securities without registration. The SEC claims that Binance’s compliance in 2019 was mostly a show.
The SEC claims that Zhao created an evasion scheme for high-net worth customers. This included using a VPN to conceal their U.S. address and submitting compliance documentation to obscure the country of their origin.
CNBC reported about Binance employees encouraging users to circumvent the exchange’s Know Your Customer system through VPNs.
“We need to inform users that they can continue to use Binance.com after changing their KYC. The message must be carefully crafted because it will be made public. Zhao told his team that they could not be held responsible for the message.
Zhao responded to the charges made on Twitter with “4”, a Binance community refrain that encourages users to ignore “FUD” or fear, uncertainty and doubt.
The SEC claimed that Binance and Zhao had violated “critical provisions” of federal security laws including self-dealing and manipulation of the market through Merit Peak Limited and Sigma Chain which Zhao owned and controlled.
The SEC claimed that Merit Peak was a British Virgin Islands company and one of the first market makers on Binance’s U.S. platform. Zhao is the beneficial owner of the company.
The complaint was filed after the CFTC brought similar charges to the crypto exchange. It alleged that the crypto exchange failed to prevent U.S. clients from accessing the site.
Zhao tweeted: “We will respond once we receive the complaint.” “Media get the information before we do.”
The SEC claimed that the defendants had a “blatant disregard for” federal law. The complaint contained a “high level” breakdown of Binance’s ownership structure. Zhao and his holding vehicle allegedly controlled 100% of Binance.US and Binance.
In a press release, SEC chair Gary Gensler stated that Zhao and Binance entities were involved in a web of deceptions, conflicts of interests, non-disclosure, and calculated evasions of the law.
