- The World’s Largest Cryptocurrency Exchange Was Sued By The SEC On Monday
- Binance and its CEO Zhao Changpeng have hit back, denying any wrongdoing
- Our Head of Research Dan Ashmore examines what that means for cryptocurrencies and who is to blame.
In a development that surprises no one, the SEC has filed a lawsuit against Binance and its CEO, Zhao Changpeng.
Before I explain what it means for cryptocurrencies, let’s take a quick guess at what this lawsuit means. An overview of the SEC is as follows. Complaint “Defendants have enriched themselves by billions of dollars while exposing investors’ assets to significant risk,” the defendants said Monday.
The allegations are numerous, but the most obvious is the SEC allegation that Binance deliberately operated in the United States despite Zhao and Binance’s repeated claims that American consumers could not trade on the exchange. (Instead, a Binance.US subsidiary was established for the United States). Customers increased in September 2019 after parent company Binance.com claimed to be leaving the US).
“Zhao and Binance actually subverted their own controls and secretly allowed high-value US customers to continue trading on the Binance.com platform,” the SEC said. It added that it secretly controlled the operation of the .US platform behind the scenes.”” The lawsuit names certain companies and subsidiaries as Binance-affiliated companies and accuses them of further violations. One is the Zhao-controlled Sigma Chain, which has been accused of engaging in “manipulated trading” to boost Binance’s trading volume.
The SEC also accused Binance of commingling and arbitrarily moving customer funds. “In the absence of regulatory oversight, the defendants were free to transfer, and indeed transfer, investors’ crypto and fiat assets as they wished, sometimes mixing or misappropriating them in a properly registered manner. “The brokers, dealers, exchanges and clearing houses that did this could not have done it.” “
Then there is the crux of the matter: the question that has haunted cryptocurrencies for some time. What is a security? While there are certainly gray areas in cryptocurrencies, especially stablecoins, the vast majority of tokens on the market are inevitably considered securities from a legal standpoint. There is a reality.
At the end of the day, that’s all that really matters. Binance seems to be more aware of this than anyone else. One of the citations mentioned in the lawsuit is that in 2018, Binance’s chief compliance officer (anonymous) sent a message to a colleague saying, “We operate as an unlicensed stock exchange in the United States.” . The SEC appears to agree.
Binance evades regulations
The CCO is also quoted elsewhere in the lawsuit as claiming that “(Binance).com never wanted to be regulated.” To this day, Binance.com claims to have no headquarters and has repeatedly skirmished with regulators.
In May, the Commodity Futures Trading Commission Paid Binance has “deliberately circumvented federal law and operated an illegal digital asset derivatives exchange.” The complaint further accused Binance of “failing to implement basic compliance procedures to prevent and detect terrorist financing and money laundering.”
This came a month after the SEC sued Paxos, the New York-based issuer of the Binance-branded stablecoin BUSD.I wrote more about what it means for cryptocurrencies hereBut securities law violations also triggered the SEC.
There are more. According to Bloomberg, the U.S. Department of Justice’s National Security Division is also investigating whether Binance allowed Russian customers to access the exchange, which it believes violates U.S. sanctions following the invasion of Ukraine. It is said that it will be
All these cases and allegations mean the SEC lawsuit is not surprising, especially given the broad regulatory crackdown on the industry in the U.S. – SEC Chairman Gary Gensler last month summed up the enforcement, accusing the industry of “massive violations.” The agency’s take on this space.
Is Binance to blame?
Many crypto fans have automatically sided with Binance. For me, this is irrelevant. Over the years, I have repeatedly argued that Binance has been operating in an intentionally opaque manner that has harmed the crypto industry as a whole. Not only that, but it goes against one of the pillars of cryptocurrency: transparency and reducing the need to blindly trust centralized third parties. These are his two main reasons why Satoshi Nakamoto as we know him developed blockchain.
Of note is the issue of proving reserves, which exploded to the surface after the incident. Collapse of FTX in November. Binance claimed to be leading an industry-wide move to be more open to its customers. However, their reserve certification report did not mention any debt at all. Instead, CEO Zhao said: twitter “We are not in debt to anyone,” we insist, “debt is harder.” You can ask around. ”
Only in the cryptocurrency world will I see a CEO assuring customers on Twitter that a proper audit is not required to prove the safety of their funds. Needless to say, this comes just weeks after FTX CEO Sam Bankman-Fried did something similar and promised that “FTX will be fine.” Assets are fine” and “FTX has enough assets to cover all of our clients’ holdings. tweet has been deleted.
“Centralized cryptocurrency companies like Binance don’t show meaningful evidence of reserves, so there is an implicit trust that assets are properly stored,” says Enzyme, a decentralized asset management protocol. Founder Mona El-Isa says:
And that’s the problem – no one knows what goes on behind the scenes at Binance. When the auditing firm Mothers, which oversaw Binance’s reserve proof reports, announced it was suspending work with the exchange due to “how these reports are perceived by the public,” This truth struck me. Mathers also summarized how useless these reports are if debt is not included. The Reserve Attestation Report “does not constitute an endorsement or audit opinion on the subject matter. Instead, they provide limited findings based on agreed-upon procedures performed on the subject matter at historical points in time.” I am reporting.”
What’s next for cryptocurrencies?
Markets fell on the news. Bitcoin dropped 5.1% to $25,600 and is currently trading at $25.800. Ether fell 3.6% while Binance’s native token BNB fell 8%. Coinbase shares fell 10%.
The news may not come as much of a surprise, but it’s another body blow for an industry that has been disrupted by regulators so far this year. Given that the United States continues to be the world’s financial center, it is becoming increasingly clear that US cryptocurrencies will flow offshore, which poses a major problem for the industry.
You might argue that the cryptocurrency world is decentralized, and some of it is decentralized, but the reality is that people still rely on these centralizations to participate in the blockchain world. You need a platform that is Therefore, there is great concern that many of these companies may be forced offshore as the rails to cross the realm of fiat currency become increasingly inaccessible.
Yes, it is still possible to use cryptocurrencies, but it will be much more inconvenient. It’s just for retail. The biggest issue concerns institutional investors, with cryptocurrencies battling for legitimacy after a tumultuous year plagued by scandals. Whether you agree with regulators or not, the reality is institutional capital must comply, and lawsuits like this move cryptocurrencies further away from Wall Street and the regular attraction of trade finance capital.
I wrote last week On how Binance’s dominance has diminished in response to all these issues. But despite this drop, the company is still an absolute behemoth, with a huge 48% share of trading volume, making it by far the largest company in the space. Cryptocurrencies collapsed with Luna, Celius and FTX. If anything happened to Binance, it would be devastating.
For now, Binance will continue to fight back with regulators. Zhao posted a poll on Twitter on Tuesday, asking the internet, “Which protects you better?” The answers were the SEC and Binance. At the time of this writing, the response was that he was 85% in favor of her Binance.
In response to Gary Gensler’s tweet, he “alleges, through 13 indictments, that Zhao and Binance entities engaged in widespread deception, conflicts of interest, lack of disclosure, and calculated circumvention of the law. ‘ said. “Did (Gensler) ever read the comments under his posts from consumers that he should have protected?” he exclaimed.
I have a hard time feeling sorry for Binance, even though I think some of the regulatory crackdowns are a bit heavy-handed. I have lamented many times how Binance’s denial of transparency is holding back the entire crypto industry. The Proof of Reserves Report mentioned above was absolutely pathetic and the farthest thing imaginable from a formal audit. They don’t owe anyone money, so why don’t they disclose their debts?
And in January, it was forced to apologize for mistakenly mixing collateral assets with client assets. “Collateral assets had previously been mistakenly moved to this wallet and referenced accordingly on the B token collateral proof page,” a spokesperson told Bloomberg. “Binance is aware of this mistake and is in the process of transferring these assets to a dedicated collateral wallet,” the spokesperson added. The story seems to have faded and gone wrong, but regulators should protect against exactly this kind of thing.
This is a company with a market share of about 67% and a trading volume of $5.29 trillion in 2022. It has to get better, and the day has come. Because, in a little more polite terms than the compliance officer mentioned above, this is an unregulated stock exchange from a legal standpoint. And they know it, even if they don’t agree with it.
This is a blow to the cryptocurrency, with lawsuits mounting despite tweets and statements from Binance and Zhao denying wrongdoing. The company maintains minimal transparency and continues to operate through a web of subsidiaries and offshore entities with no physical location. No amount of tweets, no amount of intense polls blaming lawmakers, can change this situation.
Cryptocurrencies are taking a hit, in part because of the missteps of these big centralized companies.