SEC Accuses Crypto Giant Binance of Misusing Billions in Customer Funds

The Securities and Exchange Commission ramped up the pressure on Binance, bringing 13 charges against the world’s largest cryptocurrency exchange and its founder/CEO Changpeng “CZ” Zhao.

Accusing Binance of misleading customers and misusing funds, the SEC said the company was able to control customer assets and move them around as it pleased. Binance allegedly diverted some of those funds to a separate entity Zhao owned, Sigma Chain, which the SEC said was “engaged in manipulative trading” to artificially boost the trading volume on Binance. 

The SEC also claimed Binance and co. surreptitiously commingled billions of dollars of investor money, sending it to another third party, Merit Peak Limited — which Zhao also owned. 

In a statement, SEC Chair Gary Gensler said, “Through 13 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. 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.”

When reached for comment, a rep for Binance pointed to a post on the company’s blog. It stated that “any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong,” and that “all user assets on Binance and Binance affiliate platforms… are safe and secure.” 

News of the SEC lawsuit broke just a few hours after reports emerged speculating on a possible succession plan at Binance, with Zhou reportedly looking to step back from the exchange, while also decreasing his ownership. (It appears likely, though it’s not confirmed, that Richard Teng — who was tapped to oversee Binance’s regional markets outside the U.S. — is being primed for the job.)

As Rolling Stone recently reported, Zhou is arguably the dominant player in crypto, and among the 60 richest people in the world. Despite his stature, he’s largely been able to keep a low profile — but that’s changed significantly in recent months, especially after the high-profile collapse of Binance’s former main rival, FTX, and the indictment of its co-founder Sam Bankman-Fried (who’s pleaded not guilty to numerous fraud and campaign finance charges). 

As Maryland Sen. Chris Van Hollen told Rolling Stone, “Clearly CZ has been lurking in the shadows. It’s hard to put a finger on where [Binance is] operating, what they’re doing.” He added: “We just went through the [Silicon Valley Bank] collapse, and that was a regulated bank, at least there was some review process. In [Binance’s] case, we know nothing. This is a black box. So I worry about the potential for it to go down. A lot of people could lose a lot of money.”

In its new lawsuit, the SEC also targeted Binance’s alleged attempts to skirt U.S. laws, which other regulators have also expressed concern about (the Commodity Futures Trading Commission sued Binance back in March over the same issue). Back in 2019, Binance (which is based overseas) launched a U.S. arm called Binance.US; they said U.S. customers would be restricted from using the original Binance platform, and that Binance and Binance.US were independent from each other. 

But the SEC alleges that Binance secretly allowed “high-value U.S. customers” to keep trading on the original Binance platform (users in the U.S. could get around the Binance block by using a VPN). Furthermore, it was alleged that Binance.US and Binance weren’t so independent, with the SEC saying Zaho and Binance “secretly controlled” Binance.US operations behind the scenes. 

Binance appeared to touch on this issue in its blog post, asserting that it’s always “cooperated with the SEC’s investigations,” while also casting doubt on whether the agency actually has any jurisdiction.

“We will continue to cooperate with regulators and policymakers in the U.S. and across the globe because that is the right thing to do,” the post read. “And Binance remains committed to productive engagement to ensure the next generation of cryptocurrency regulation fosters innovation while implementing and ensuring important consumer protections.  Because Binance is not a U.S. exchange, the SEC’s actions are limited in reach. Still, we stand with digital asset market participants in the U.S. in opposition to the SEC’s latest overreach, and we are prepared to fight it to the full extent of the law.”

Gensler, however, was blunt, stating, “They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”