Today the Securities and Exchange Commission (SEC) sued the cryptocurrency exchange Binance, its U.S. affiliate and its founder Changpeng Zhao (CZ). Amongst a raft of claims regarding securities violations, it alleges it failed to register as a securities exchange, broker dealer, and clearing agency and issued an unregistered security (BNB).
Former acting Comptroller of the Currency Brian Brooks was briefly CEO of Binance.US for four months in 2021 before resigning. The SEC’s lawsuit cites testimony from Brooks.
Its allegations also repeat claims filed in March by the CFTC that Binance put up a sham appearance of preventing U.S. customers from trading on the international Binance.com exchange.
More than a year ago, the Wall Street Journal reported that the SEC was probing CZ affiliates Merit Peak and Swiss-based Sigma Chain. The SEC filing alleges that market maker Signa Chain was engaged in wash trading that inflated volumes on Binance.US. It adds that the undisclosed relationships with Merit Peak and Sigma Chain represented a conflict of interest.
“To the extent that these two liquidity providers were significant sources of liquidity, meaning that our customers couldn’t, you know, clear orders without the presence of those makers on our platform, I thought that was a real problem,” Brian Brooks testified.
“It suggested that the company was, in fact, heavily dependent on CZ, not just as a control person but also as an economic counterparty and that is problematic, so I thought we needed to look into deplatforming them.”
He also testified that what “became clear to me at a certain point was CZ was the CEO of BAM Trading (Binance.US), not me.”
It’s alleged that $20 billion of transfers went through Merit Peak’s U.S. bank account, which was used as a pass through account for customer funds, putting the money at risk. Most of the funds were then used to buy Binance USD stablecoins.
There are extensive allegations of commingling of customer funds.
“We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk – all in an effort to maximize their own profits,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
In February, Paxos, the issuer of the Binance USD (BUSD) stablecoin, was instructed to stop new issuance by the New York State Department of Financial Services (NYDFS). Potentially this was a precursor to the litigation and there were concerns about the stablecoin losing its peg. The current market capitalization of BUSD of around $5 billion is less than a third of the February figure. It briefly lost its peg when the SEC announced the litigation but has since recovered.
