SEC sues Binance, CZ: Why the crypto exchange calls lawsuit "misguided"

The US Securities and Exchange Commission (SEC) has filed a lawsuit against Binance, the world's largest cryptocurrency exchange, and its CEO Changpeng Zhao (CZ), alleging that they violated federal securities laws.

The SEC considers all crypto except Bitcoin (BTC) as security. As such, the lawsuit claimed that Binance, Binance.US, and Zhao offered unregistered securities in the form of BNB crypto tokens and Binance-linked BUSD stablecoins to the general public.

The suit also alleges that Binance's staking service violated securities laws.

Binance responded by saying that "unilaterally labelling certain tokens and services as securities—even ones over which other US authorities have asserted jurisdiction" compounds the problem of the SEC's "misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry." 

The charges extended beyond Binance and Zhao, as BAM Trading, the company operating Binance.US, is also facing similar allegations.

The SEC said that Binance.US failed to register as a clearing agency, broker, and exchange. Furthermore, the lawsuit alleged that Binance allowed the mingling of customer funds and suggested Zhao secretly controlled Binance.US, with a Zhao-owned entity artificially inflating Binance.US' trading volume.

“Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC Chair Gary Gensler in a press release.

“As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied," he added.

Notably, the SEC repeatedly claimed that Binance allowed US persons, including citizens and residents, to trade on its platform despite stating otherwise.

Gensler claimed Binance also attempted to evade US securities laws by "announcing sham controls that they disregarded behind the scenes" so they could keep high-value US customers on its platforms.

In response, Zhao took to Twitter to dismiss the allegations with a single word: "4." This is part of a popular expression in the Binance community, encouraging users to disregard fear, uncertainty, and doubt (FUD).

Binance said, "We are disappointed that the US Securities and Exchange Commission chose to file a complaint today against Binance seeking, among other remedies, purported emergency relief. From the start, we have actively cooperated with the SEC’s investigations and have worked hard to answer their questions and address their concerns."

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Lack of registrations

The SEC’s complaint was filed in the US District Court for the District of Columbia, and it alleged that since July 2017, Binance.com and Binance.US operated as exchanges, brokers, dealers, and clearing agencies. It alleged they earned at least $11.6 billion in revenue from, among other things, transaction fees from US customers.

In its complaint, the SEC stated that Binance "should have registered as an exchange, broker-dealer, and clearing agency," and that with respect to Binance.US, "Binance and BAM Trading should have registered as an exchange and as clearing agencies."

It added that BAM Trading should have registered as a broker-dealer. Lastly, it alleged that Zhao is liable as a "control person for Binance’s and BAM Trading’s respective registration violations."

Gurbir S Grewal, Director of the SEC’s Division of Enforcement, claimed Zhao and Binance not only knew the rules of the road but "they also consciously chose to evade them and put their customers and investors at risk—all in an effort to maximise their own profits."

Binance added, "We will continue to cooperate with regulators and policymakers in the US and across the globe because that is the right thing to do."

Shortly after the lawsuit was filed, cryptocurrency prices began to dip, with Bitcoin (BTC-USD) experiencing a 2.6% decline, dropping to $26,480, while Binance Coin (BNB-USD) saw a decrease of 6.6% to $286.29, as of shortly before 12:00 pm ET (9:30 pm IST). Ethereum (ETH-USD) retreated by 2.4% to $1,850.

A lawsuit against the world's largest crypto exchange can affect India's crypto market, especially since large amounts of trading volumes have left Indian exchanges and moved to international platforms like Binance.

As per an Esya Centre report, Indian users moved over $3.8 billion in trading volume from domestic to international crypto exchanges such as Binance and Coinbase after the country announced its crypto tax regulations in February 2022.

A total of $3.85 billion was shifted from February-October 2022.