SEC Accuses Binance of Mishandling Funds and Lying to Regulators

Nov 14, 2023

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The S.E.C. said the world's largest cryptocurrency exchange mixed billions of dollars in customer funds and secretly sent them to a separate company controlled by Binance's founder, Changpeng Zhao.

By Matthew Goldstein, Emily Flitter and David Yaffe-Bellany

The Securities and Exchange Commission on Monday accused Binance, the world's largest cryptocurrency exchange, of mishandling customer funds and lying to American regulators and investors about its operations, in a sweeping case that has the potential to remake the landscape of power and wealth within crypto.

The S.E.C.'s lawsuit was the second time this year that federal regulators have accused Binance of evading laws designed to protect investors in the United States. Regulators have long seen the exchange, which has said it does $65 billion in average daily trading volume, as a major target in their quest to bring to heel a crypto industry that has been built around an explicitly anti-government ethos.

In the 136-page complaint, the S.E.C. said Binance had mixed billions of dollars in customer funds and secretly sent them to a separate company, Merit Peak Limited, which is controlled by Binance's founder, Changpeng Zhao.

The complaint also said Binance had misled investors about the adequacy of its systems to detect and control manipulative trading and about its efforts to restrict U.S. users from trading on its international platform. U.S.-based customers were supposed to have access only to an ostensibly separate company formed specifically to operate within the United States, called Binance.US.

Binance and Mr. Zhao "enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk," regulators said in the civil lawsuit, which was filed in Federal District Court in Washington.

In a blog post on Monday, Binance said its leaders had been trying to negotiate a settlement with regulators and were "disappointed" and "disheartened" by the S.E.C.'s decision to bring a case. The company said the case was a "misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry" and added that it would fight back "vigorously."

Binance also charged that the S.E.C. had rushed to court to file the lawsuit, noting that last week regulators had served "a new set of 26 document requests" to the company.

The charges were the latest actions by U.S. regulators and prosecutors to rein in the Wild West of crypto trading and force major players in the space to come into compliance with U.S. laws. Sam Bankman-Fried, the founder of FTX, which had been a big crypto trading rival of Binance's until it filed for bankruptcy in November, faces an October trial for fraud and other charges. In recent months, the S.E.C. has also levied fines and other penalties against crypto lending firms.

The S.E.C. has taken the position that most crypto tokens issued by exchanges like Binance and FTX should be treated as securities under federal law.

"U.S. regulators are putting pretty huge speed bumps for Binance and are continuing to put the crypto world on notice," said Reena Aggarwal, a finance professor at Georgetown University.

Binance was already under increasing pressure. In March, the Commodity Futures Trading Commission filed its own civil enforcement action against Binance and Mr. Zhao. The Justice Department is also investigating the exchange for money-laundering violations. Binance lost its outside auditing firm late last year, and the company has seen its control of the crypto market shrink.

To improve its reputation, Binance has hired new compliance officials, including a former federal prosecutor who now heads its compliance operation.

The S.E.C. complaint "exposes the underbelly of crypto," and big global exchanges like Binance have "misled the public at large for years," said David Silver, a lawyer who has sued Binance several times.

In all, the S.E.C. filed 13 charges against Binance and Mr. Zhao, better known in the crypto world as C.Z. It is seeking restitution from Binance and wants to bar Mr. Zhao from serving as an officer or director for any registered entity in the United States that issues securities.

"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," said Gurbir S. Grewal, director of the S.E.C.'s enforcement division.

The C.F.T.C. is also seeking to bar Mr. Zhao for life from doing business that falls under its jurisdiction. The agency also wants to permanently banish Binance from the United States.

The S.E.C. and C.F.T.C. often coordinate the filing of enforcement actions when they are investigating the same company, but the agencies have been engaged in a turf battle to determine which would emerge as the primary regulator of crypto trading.

Binance has long been based outside the United States, offering high-risk trading options that are not legal for American customers. In 2019, it started a separate exchange in the United States that offered a smaller array of trading capabilities. The company said that the new exchange, Binance.US, would operate separately from Binance, under its own leadership.

But the S.E.C. said the separate entity was really intended as subterfuge to conceal the fact that Mr. Zhao and his associates were actively enabling U.S. customers to trade on Binance's much larger, unregulated offshore exchange.

The S.E.C.'s complaint accuses Binance of recruiting American customers to the international exchange, even though it was not supposed to operate in the United States. "On the surface, we cannot be seen to have U.S. users but in reality, we should get them through other creative means," a Binance executive wrote in an internal message excerpted in the complaint.

When Binance took steps to submit to a U.S. regulatory regimen, it did so disingenuously, the filing said. Binance.US was supposed to be separate from its offshore parent, but "behind the scenes," Mr. Zhao and other senior Binance leaders were "intimately involved," the complaint said. That led one executive to remark that "the entire team feels like they’ve been duped into being a puppet," according to the complaint.

The S.E.C. said Mr. Zhao gave instructions to encourage so-called V.I.P. customers to bypass systems meant to restrict U.S. customers’ access to the platform. "Binance's plan to retain lucrative U.S. investors while pretending to restrict them was a success," the complaint said.

Some of the allegations against Binance echoed the behavior that brought down FTX, leading to criminal charges against Mr. Bankman-Fried for using customers’ deposits to conduct other business operations and make political and charitable donations. According to the complaint against Binance, the bank account of Merit Peak, the trading firm controlled by Mr. Zhao, has received more than $20 billion, including customer funds.

FTX is accused of having used a trading firm called Alameda Research, controlled by Mr. Bankman-Fried, to improperly divert and use customer money.

"Sending Binance customer funds to Merit Peak placed those funds at risk, including of loss or theft, and was done without notice to customers," the complaint said.

Matthew Goldstein covers Wall Street and white-collar crime and housing issues. @mattgoldstein26

Emily Flitter covers finance. She is the author of "The White Wall: How Big Finance Bankrupts Black America." @FlitterOnFraud

David Yaffe-Bellany covers cryptocurrencies and financial technology. He graduated from Yale University and previously reported in Texas, Ohio, Connecticut and Washington, D.C. @yaffebellany

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