US regulatory authorities, the Securities and Exchange Commission (SEC), filed a lawsuit against Binance and its CEO, Changpeng Zhao, on Monday 5 June on charges of "trick network," which further pressured the world's largest cryptocurrency exchange and sent bitcoin prices to their lowest level in nearly three months.
SEC lawsuits, filed in federal courts in Washington, DC, include 13 counts against Binance, Zhao, and the operators of the United States exchange that should be independent.
The SEC suspects that Binance is artificially exaggerated trading volume, diverting customer funds, failing to restrict US customers from its platform, and misleading investors about controlling their market surveillance.
The SEC also claims that Binance and Zhao, founders of the stock exchange billionaire and one of the famous figures in the crypto industry, secretly control customer assets, allow them to mix and divert investor funds "like they are."
Binance created a separate entity in the US "as part of a complicated scheme to circumvent the federal law of US securities," the SEC claims, citing a number of practices first reported by Reuters in a series of investigations into the exchange published this year and 2022.
From nearly three years ago to June 2022, the trading company owned and controlled by Zhao, Sigma Chain, was involved in the practice of wash trading that artificially raised the trading volume of crypto asset securities on the Binance.US platform, the SEC claimed. Sigma Chain spent 11 million US dollars (Rp164 billion) from an account on a cruise ship, the SEC said.
"We claim that Zhao and Binance entities are involved in a broad network of deceptions, conflicts of interest, lack of disclosure, and calculated legal evasion," SEC chairman Gary Gensler said in a statement.
In a blog post, Binance said: "We intend to keep our platform hard," and added that "because Binance is not a US exchange, this SEC action has limitations within its reach."
"All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and protected," the blog post wrote.
In a statement, Binance said it had been "actively cooperating" with the SEC "from the start" and "disagreed" with the SEC's accusations. Binance has been trying to find "a reasonable resolution" with the SEC, but the agency "at the last moment" issued a new request and brought the case to court. Binance said the SEC's actions appeared to be an attempt to "claim the jurisdictional authority of other regulators."
Binance.US, which was eventually controlled by Zhao, said in a tweet that this lawsuit "was baseless on the fact, law, or the Commission's own precedent."
Bitcoin, the world's largest cryptocurrency, fell to 6% after this news emerged, hitting its lowest level in nearly three months. Binance's own BNB cryptocurrency, which is the fourth largest cryptocurrency by market cap, fell by more than 5%.
Market participants say that the SEC's allegations could hinder Binance, with these lawsuits likely to impact the crypto industry in general. Binance dominated crypto trading last year processing transactions worth around US$65 billion (Rp969 trillion) per day.
A report from CCData in March showed that Binance's market share in the spot market declined in March for the first time in five months to 57.7% from 62.0% in February. However, its derivative trading volume has increased.
"I think there's a big risk here that this could damage Binance," said Ed Moya, senior market analyst at Oanda.
This legal issue is the latest legal issue for Binance, which was also sued by US Commodity Futures Trading Commission (CFTC) in March for allegedly running an "illegal" exchange and a false compliance program. Zhao called the allegations "incomplete factual reading."
Binance is also under investigation by the US Department of Justice over alleged money laundering and sanctions violations, according to people familiar with the investigation.
Binance's parent company is based in the Cayman Islands. Binance was founded in Shanghai in 2017 by CEO Zhao, a Canadian citizen born and raised in China until the age of 12. The exchange claims it does not have a head office and refuses to mention the main location of their Binance.com exchange.
The SEC suspects that Zhao designed and carried out a plan to "quietly circumvent US law." The authority said that Binance's chief compliance officer admitted that: "We don't want [Binance].com to be regulated one day." The SEC said that Zhao directed Binance.US even though the US entity had long claimed to operate independently.
The SEC says that Binance's billions of dollars in customer funds are mixed with company funds, violating US law, in a bank account controlled by Zhao, then transferred to a trading company, Merit Peak, which is also controlled by Zhao.
Last month, Reuters reported that a senior Binance executive was the main operator for five bank accounts belonging to BAM Trading, the Binance.US operator, including accounts hosting American customer funds.
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