The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Binance and its CEO, Changpeng Zhao. The regulatory body accuses the largest cryptocurrency exchange of fraudulent handling of customer funds and willful violation of securities regulations.
At the end of March, the US Commodity Futures Trading Commission (CFTC) also filed a lawsuit against Binance, the leading global cryptocurrency exchange, and its founder Changpeng Zhao (known in crypto circles as "CZ"), alleging violations of trading regulations. The CFTC accused Binance at that time of deliberately deceiving the authorities. Now, Binance faces scrutiny from another US regulator, the SEC.
SEC allegations against Binance
The U.S. Securities and Exchange Commission (SEC) has brought a series of charges against Binance, the world's largest cryptocurrency exchange, and its CEO Changpeng Zhao. The 136-page lawsuit was filed in a federal court in Washington, D.C. Alongside allegations of mishandling customer funds, the exchange is accused of misleading investors and regulatory authorities, as well as violating securities regulations. The SEC claims that Binance created separate U.S. entities as part of an elaborate scheme to circumvent U.S. securities laws, citing a number of practices.
"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." - SEC chairman Gary Gensler
The background to this is that Binance operates internationally as Binance.com and in the United States as Binance.US. Similar to other cryptocurrency exchanges, these entities were supposed to remain strictly separate. The SEC alleges that Binance allowed U.S. customers to access the exchange through Binance.com, despite the ban. Additionally, the SEC's lawsuit asserts that Binance subsidiaries commingled user funds worth billions of dollars and transferred them to a European company controlled by CZ, Changpeng Zhao.
Twelve new tokens classified as securities
Furthermore, the SEC accuses Binance of offering unregistered securities in the form of crypto assets for trading. Specifically, the regulatory body mentions twelve tokens: Binance's BNB and BUSD, as well as SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI - some of the largest cryptocurrencies by market capitalization. The SEC provides a brief explanation for each of these assets, outlining why they should be classified as securities according to the Howey Test, introduced in 1946.
According to the Howey Test, an investment contract exists when money is invested in a common enterprise with the expectation of profits derived solely from the efforts of others. In other words, if an investor puts money into a project with the anticipation of making a profit, and that profit depends on the actions of others, it can be considered an investment contract.
The SEC points to token burns (the destruction of tokens) and staking as key arguments for classifying these assets as securities. Additionally, the efforts made by the respective foundations behind cryptocurrencies such as Solana and Cardano indicate that investors expect profits based on the efforts of others. Most of the mentioned tokens are also tradable on other cryptocurrency exchanges. Therefore, it would not be surprising if the SEC brings further lawsuits.
Update 2:00 PM: The SEC has filed a lawsuit against the cryptocurrency exchange Coinbase. The company is also accused of operating an unregistered securities exchange.
Binance's response to the SEC's allegations
In response to the SEC's lawsuit, Binance stated on its company blog that they are willing to collaborate with regulatory authorities and policymakers in the United States. The cryptocurrency exchange claims to have already made unsuccessful attempts to reach a settlement with the agency regarding the recent allegations. While Binance takes the accusations seriously, they strongly deny the SEC's claims and are prepared to defend themselves in court.
Similar to its competitor Coinbase, Binance concluded its statement with a defiant tone against the SEC. According to the cryptocurrency exchange, the SEC's goal is not to protect investors but rather to generate headlines. Otherwise, the agency would have engaged in a dialogue with Binance instead of resorting directly to a lawsuit. The exchange intends to work with industry partners to protect blockchain technology from misguided lawsuits. Given the platform's billion-dollar revenues, the legal dispute is expected to result in another lengthy process.
"All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure, and we will vigorously defend against any allegations to the contrary. Rather, the SEC’s actions here appear to be in service of an effort to rush to claim jurisdictional ground from other regulators – and investors do not appear to be the SEC’s priority." - Statement Binance
