US financial regulator alleges US clients of Binance have $2.2 billion at risk, after lawsuits against Coinbase and Binance
Earlier this week it was reported that a senior Binance executive allegedly had primary control over five bank accounts belonging to the cryptocurrency firm’s supposedly independent US affiliate.
Silvergate Bank records showed that it authorised Binance executive Guangying Chen, a close associate of Zhao, to operate the five accounts in 2019 and 2020, according to the report.
This allegedly allowed Chen and her deputies to move funds held in the bank accounts, while Binance.US employees had to ask Chen’s team to process payments, including to cover their own payroll, according to company messages referred to in the report.
Because Binance had been banned in the US in 2019, it and other investors formed the US firm, a supposedly independent entity that would comply with all US laws.
On Tuesday the US SEC filed “an emergency action application seeking a temporary restraining order freezing assets, directing defendants to repatriate assets held for the benefit of customers of the Binance US crypto trading platform, and seeking other emergency relief against Binance Holdings Limited, BAM Trading Services Inc., BAM Management US Holdings, Inc., and their founder, Changpeng Zhao, to ensure that Binance.US customers’ assets are protected and remain in the United States through the resolution of the SEC’s pending litigation of this matter.”
That came after the SEC on Monday filed a lawsuit in a federal court in Washington, DC, which listed 13 charges against Binance, Zhao and the operator of its purportedly independent US Exchange.
The SEC alleges that, while Zhao and Binance publicly claimed that US customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their own controls to secretly allow high-value US customers to continue trading on the Binance.com platform.
Further, the SEC alleges that, while Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for US investors, Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes.
The SEC also alleged that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain.
The SEC’s complaint further alleges that BAM Trading and BAM Management US Holdings, Inc. (“BAM Management”) misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume.
Further, the Complaint alleges that the defendants concealed the fact that it was commingling billions of dollars of investor assets and sending them to a third party, Merit Peak Limited, that is also owned by Zhao.
“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.
“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,” said Gensler.
“They attempted to evade US securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value US customers on their platforms,” said Gensler. “The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
Meanwhile the SEC also took charged Coinbase, alleging it was “operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency.”
The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.
According to the SEC’s complaint, since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law.
“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” said the SEC’s Gary Gensler.
“In other parts of our securities markets, these functions are separate. Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC,” said Gensler.
“Further, as we allege, Coinbase never registered its staking-as-a-service program as required by the securities laws, again depriving investors of critical disclosure and other protections,” Gensler concluded.
The news of the SEC charges against Coinbase, as well the SEC allegation that Binance and its CEO Changpeng Zhao ‘mishandled billions of dollars’, prompted a reaction from Mona El Isa, who left Goldman Sachs to start the first decentralised asset management protocol, Enzyme.
“The issues that can arise from cryptocurrency are not new – as proven by the infamous demise of the Lehman Brothers and the Bernie Madoff scandal,” said Mona El Isa. “Legacy finance relies on trusting an organisation or individual to deliver on your investment instructions.”
“Centralised crypto companies – like Binance – don’t demonstrate any meaningful proof of reserves, so there’s an implied trust that assets are custodied appropriately,” said El Isa.
“Transparency over custody would have allowed the market to better discriminate good from bad practices, effectively monitoring much of the activity that was going on and mitigating potential issues,” said El Isa. “This argument supports the fact that decentralised, transparent on-chain funds could actually be much more secure than opaque CeFi funds. As DeFi can provide 24/7 auditable transparency, removing the need for trust.”
“My drive to set up Enzyme came from having experienced my own frustrations at the lack of automation and transparency in traditional asset management in a previous life,” said El Isa. “The operational, risk and administrative work around running a fund in CeFi is brutally burdensome and it’s no surprise that risks get missed within such opaque systems.”
“Enzyme maintains sophisticated on-chain data pipelines that ensures data is auditable and trustworthy without needing to rely on intermediaries,” said El Isa. “This enables a radically new future based on the principles of transparency and auditability.”