13 Key Points to Understand the SEC’s Lawsuit Against Binance and Changpeng Zhao

13 Key Points on SEC's Lawsuit Against Binance and Changpeng Zhao

Compiled by: BlockingNews

On the evening of June 5th, Beijing time, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against cryptocurrency exchange Binance Holdings Limited (“Binance”), BAM Trading Services Inc. (“BAM Trading”), BAM Management US Holdings Inc. (“BAM Management”), and Changpeng Zhao.

In a 136-page complaint, what did the SEC focus on about Binance? This article summarizes 13 key points:

1. The SEC stated that the reason for suing Binance is that Binance blatantly disregarded federal securities laws and the investor and market protections these laws are meant to provide, and the defendants received billions of dollars in profits while exposing investors to significant risks.

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2. The defendants were involved in the sale and offering of numerous crypto asset securities and other investment plans that were not registered with the SEC through the Binance.com (“Binance.com Platform”) and Binance.US (“Binance.US Platform”), collectively referred to as the “Binance Platform.” Defendants BAM Trading and BAM Management deceived stock, retail, and institutional investors by claiming to monitor and control manipulative trading on the Binance.US platform when in fact such trading was virtually nonexistent.

3. The SEC believes that, under the leadership and control of Changpeng Zhao, Binance and BAM Trading did not apply for registration with the SEC, but provided three basic securities market functions – exchanges, broker-dealers, and clearing agencies – illegally on the Binance Platform. The SEC alleges that the defendants were acutely aware that U.S. laws required registration for these functions, but chose not to register and thus evade critical regulatory oversight intended to protect investors and the market.

4. Secondly, the SEC stated that Binance and BAM Trading engaged in the illegal sale and offering of unregistered crypto asset securities, including Binance’s own “BNB” and “BUSD” crypto assets, as well as Binance’s “BNB Vault,” “Simple Earn,” and so-called “staking” investment plans offered on the Binance Platform. The regulator believes that Binance deprived investors of the right to disclose important information when providing such services, including risks and trends affecting the enterprise and investments in these securities.

5. During the time when BAM Management raised approximately $200 million from private investors, BAM Trading and BAM Management made false statements to investors, claiming that the Binance.US platform attracted a large volume of trades from retail and institutional investors, amounting to billions of dollars.

6. From around 2018, to evade registration requirements under U.S. federal securities laws, the relevant defendants, under the control of Zhao Changpeng, designed and implemented a multi-step plan to secretly evade U.S. law. Binance’s Chief Compliance Officer (CCO) previously admitted: “We don’t want to be in a place where we [Binance] could be held liable if we don’t do something”.

7. As part of the plan to evade U.S. regulation of Zhao Changpeng, Binance, and the Binance.com platform, Zhao Changpeng and Binance created two entities in the U.S., BAM Management and BAM Trading, publicly claiming that these two entities independently controlled the operation of the Binance.US platform. However, behind the scenes, Zhao Changpeng and Binance were closely involved in guiding the business operations of BAM Trading in the U.S., and providing and maintaining the cryptocurrency asset services required for the operation of the Binance.US platform. Employees of BAM Trading referred to Zhao Changpeng and Binance’s control over BAM Trading’s operations for the Binance.US platform as a “handcuff,” often hindering BAM Trading employees from understanding and freely carrying out their operational work for the Binance.US platform – to the point where in November 2020, BAM Trading’s then-CEO told Binance’s CFO that “her entire team felt like they were being lied to and turned into a shield.”

8. As part of the plan to protect themselves from U.S. regulation, Zhao Changpeng and Binance have always publicly claimed that the Binance.com platform does not serve Americans, but for some high-value American clients, Binance has been trying to serve them, but has deliberately concealed this. In 2019, when Binance.US was launched, Binance announced that it was implementing controls to prevent U.S. customers from accessing the Binance.com platform, but in fact, Binance did the opposite. Zhao Changpeng instructed Binance to assist certain high-value American customers in evading regulatory controls and secretly took measures, as Zhao Changpeng himself admitted, that Binance did not want to “take responsibility” for these actions. Binance’s CCO also previously admitted that “on the surface, Binance has no U.S. users, but in reality, Binance should find other creative ways to attract them.” Indeed, Zhao Changpeng said the “purpose” was to “reduce Binance’s losses while not letting U.S. regulators find trouble.”

9. The US Securities and Exchange Commission believes that the relevant defendants intentionally evaded US regulation while providing securities-related services to US customers, putting billions of dollars of US investor capital at risk and subject to manipulation by Binance and Changpeng Zhao. Due to the lack of regulation, the relevant defendants were able to freely transfer investors’ cryptocurrency and fiat assets according to their own wishes, sometimes mixing and transferring these assets in ways that properly registered brokers, dealers, exchanges, and clearing agencies cannot. For example, tens of billions of dollars in customer funds from two Binance platforms are mixed and transferred to third parties involved in the buying and selling of cryptocurrency assets through accounts owned and controlled by Changpeng Zhao and Binance.

10. The US Securities and Exchange Commission believes that the relevant defendants are well aware of the importance of implementing trading supervision and control for cryptocurrency investors. In 2019, Changpeng Zhao said, “Reputation is the most important asset for any exchange! Would users entrust their funds to them if the exchange falsified trading volume?”

11. BAM Trading and BAM Management, the defendants, have claimed to have implemented measures to prevent manipulation of trading on the Binance.US platform.

12. The relevant defendants failed to implement trading monitoring or manipulation control promised by BAM Trading and BAM Management on the Binance.US platform. Therefore, the relevant defendants did not meet the basic requirements for registration as an exchange, which is to establish rules to prevent fraud and manipulation, and did not have the ability to achieve this. The US Securities and Exchange Commission believes that the so-called trading controls do not actually exist, and that the controls that do exist do not monitor or prevent “false trading” or “self-trading” on the Binance.US platform.

It is worth noting that from at least September 2019 to June 2022, Sigma Chain AG (“Sigma Chain”), a trading company owned and controlled by Changpeng Zhao, engaged in wash trading, artificially inflating the trading volume of cryptocurrency securities on the Binance.US platform.

13. The US Congress enacted the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) for the purpose of regulating the offer and sale of securities and the national securities markets in the United States through registration and regulation, including a series of requirements such as information disclosure, record keeping, inspections, and mitigation of conflicts of interest. Binance, under the control of Zhao Changpeng, and BAM Trading have engaged in and will continue to engage in the offer and sale of unregistered crypto asset securities, and have conducted unregistered crypto asset securities transactions on the Binance platform, combined with core securities market functions, while intentionally avoiding registration. In the process of executing the operation, the defendants in question avoided the disclosure and other requirements that the US Congress and the US Securities and Exchange Commission have developed over the past few decades to protect the capital markets and investors, thereby violating (and continuing to violate) the law.

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