The SEC alleges mishandling of funds and lying to regulators

The Securities and Exchange Commission on Monday accused Finans, the world’s largest cryptocurrency exchange, of mishandling customer funds and lying to US regulators and investors about its operations.

The SEC’s case is the second time this year that federal regulators have accused the finance company of circumventing laws designed to protect investors in the United States. Regulators have long viewed the exchange, which it says has an average daily trading volume of $65 billion, as a prime target of the crypto industry built around an openly anti-government ethos.

In the 136-page complaint, the SEC alleges that Binance mixed billions of dollars in customer funds and secretly sent them to a separate company controlled by Binance’s founder, Changpeng Zhao, called Merit Peak Limited.

Finans also complained that it misled investors about the adequacy of its systems to detect and control manipulative trading and its efforts to prevent US users from trading on its international platform. US-based customers should only have access to a separate entity created to operate within the US called Binance.US.

Binance and Mr. Zhao “enriched themselves with billions of US dollars while putting investors’ assets at substantial risk,” regulators said in a civil suit filed in federal district court in Washington.

In a blog post on Monday, Binance said its leaders were trying to negotiate a settlement with regulators and were “disappointed” and “disappointed” by the SEC’s decision to bring a lawsuit. The company said the case was a “wrongful and deliberate refusal to provide much-needed clarity and guidance to the digital assets industry” and said it would “vigorously” fight it.

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Binance also accused the SEC of rushing to court to file suit.

The charges are the latest move by US regulators and prosecutors to rein in the Wild West of crypto trading and force major players in the space to comply with US laws. Sam Bankman-Fried, the founder of FTX, which was Binance’s major crypto trading competitor until it filed for bankruptcy in November, faces an October trial on fraud and other charges. In recent months, the SEC has also levied fines and other penalties against crypto lending institutions.

The SEC has taken the position that most crypto tokens offered by exchanges such as Binance and FTX should be considered securities under federal law.

Reena Agarwal, a professor of finance at Georgetown University, said, “US regulators are providing very large speed bumps for finance and continue to monitor the crypto world.

Binance was already under increased pressure. In March, Commodity Futures Trading Commission Finance and Mr. filed its own civil enforcement action against Zhao. The Department of Justice is also investigating the exchange for money laundering violations. Binance lost its external audit firm late last year, and the company found itself in control of the crypto market. Summarize.

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

The SEC complaint “exposes the underbelly of crypto” and that large global exchanges like Binance “have misled the public for years,” said David Silver, a lawyer who has sued Binance several times.

All in all, the SEC said Binance and Mr. filed 13 charges against Zhao. States issuing bonds.

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“We allege that Chao and the finance companies not only knew the rules of the road, but that they consciously chose to avoid them, putting their clients and investors at risk,” said Gurbir S., director of the SEC’s Division of Enforcement. Grewal said.

The CFTC barred Mr. from conducting business within its jurisdiction. It seeks to ban Zhao for life. The agency wants Finance out of the U.S. permanently.

The SEC and CFTC are coordinating the filing of enforcement actions while investigating the same entity, but the agencies are engaged in a turf war to determine which will emerge as the primary regulator of crypto trading.

Binance has long been based out of the US, providing US customers with illegal high-risk trading options. In 2019, it launched a separate exchange in the US, offering small-cap trading capabilities. The new exchange, Binance.US, will operate separately from Binance under its own leadership, the company said.

But the SEC said Mr. It said the separate entity was designed to cover up the fact that Zhao and his associates were actively helping US customers trade on Binance’s largest, unregulated offshore exchange.

The SEC’s complaint accuses Binance of recruiting American customers to the international exchange, even though it is not supposed to operate in the United States. “On the surface, we can’t see that we have US users, but in reality, we need to get them through other creative means,” a Binance executive wrote in an internal message cited in the complaint.

When Binance took steps to comply with a US regulatory norm, it did so dishonestly, the filing said. Binance.US is supposed to be separate from its onshore parent, but “behind the scenes,” Mr. Zhao and other senior finance leaders were “closely involved,” the complaint said. The complaint led one executive to note that “the entire team feels like they’ve been manipulated into being a puppet.”

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Mr. The SEC said Zhao provided the instructions. “Binance’s plan to retain lucrative U.S. investors succeeded by pretending to control them,” the complaint said.

Some of the allegations against Finance echoed the behavior that brought down FTX, which Mr. According to the complaint on Binance, Mr. Merit Peak, the trading company controlled by Zhao, has more than $20 billion in bank accounts, including customer funds.

FTX is Mr. Alameda Research, a trading firm controlled by Bankman-Fried, was accused of misappropriating clients’ money.

“Binance’s transmission of customer funds to Merit Peak placed those funds at risk, including loss or theft, and was done without any notice to customers,” the complaint states.

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