The Securities and Exchange Commission, already embroiled in a fundamental dispute with cryptocurrency firms on matters of turf and regulation, is bringing action against the world’s largest exchange. In a case filed in federal court Monday, the agency accuses Binance of shoddy funds management and lying to investors and regulators.
The filing of the case was first reported by the New York Times.
The action comes against the backdrop of an overarching dispute between the SEC and the cryptocurrency industry. The agency, in the words of Chairman Gary Gensler, views cryptocurrencies as securities and thus subject to its regulations. The industry has countered that such regulation will drive it out of the United States.
In a recent appearance before a House oversight committee, Gensler told lawmakers that “I’m trying to drive it to compliance, and if they’re not complying with the laws, then they shouldn’t be offering their products to U.S. investors.”
Binance, in particular, has been hostile toward the reach of regulation. In the case filing, the SEC cited a 2018 email from Binance’s chief compliance officer, who wrote: “We do not want (Binance.com) to be regulated ever.”
The Heart of the Accusations
In the case filing, the SEC accuses Binance of the following:
- Mixing billions of dollars in customer money and shuttling it off to another company, Merit Peak Limited, owned by Binance founder Changpeng Zhao.
- Misleading investors about the efficacy of its detection and control of manipulative trading.
- Continuing to recruit U.S. customers despite not being permitted to operate in the country.
Binance and Zhao “enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk,” the lawsuit said.
Binance Under Pressure
The case is the latest blow to Binance, which has been laboring under increased scrutiny from across the U.S. regulatory and legal landscape.
The Justice Department is looking into suspicions of money laundering by the exchange. Late last year, auditor Mazars announced that it was parting ways with cryptocurrency companies generally, affecting Binance. And the exchange’s share of the market has contracted.
The SEC’s action, which includes 13 charges against Binance and Zhao, comes on the heels of a civil enforcement action by the Commodities Futures Trading Commission in late March.
At the time, the CTFC said, “This should be a warning to anyone in the digital asset world that the CTFC will not tolerate willful avoidance of U.S. law.”
Interestingly, the SEC and the CTFC are mired in their own tussle over crypto—namely, which agency is the preeminent regulator. The SEC’s view is that crypto assets are securities, whereas the CTFC considers them commodities.
It’s regulatory murkiness that those in the industry are eager to see resolved.
“Binance and its CEO have been scrutinized for some time, but the lack of regulatory clarity continues to affect U.S. players, even those who are trying to comply with regulations,” said Joel Hugentobler, Analyst of Cryptocurrency at Javelin Strategy & Research. “At the end of the day, everyone knows fraud has to be addressed, but we have another example here where ‘crypto’ is not the issue; it’s potential bad actors. I don’t see this Binance issue changing the overall demand for crypto in general over the longer term.”
Overview by Craig Lancaster, Analyst/Content Specialist, Financial Services and Payments at Javelin Strategy & Research.