The US Securities and Exchange Commission is suing the world’s largest crypto exchange Binance on 13 civil law counts – including alleged misappropriation of customer funds. There are also political interests behind it.
Changpeng Zhao is a kind, stocky man. Anyone who talks to him gets the feeling of being valued. Zhao, whom everyone just calls “CZ”, doesn’t seem like someone who is worth several billion dollars, flattens competitors one after the other – and on the other hand is said to have embezzled hundreds of millions of customer funds with his crypto exchange “Binance”.
But that’s exactly what the American Securities and Exchange Commission (SEC) is accusing him of. She has sued Binance, the world’s largest crypto exchange, on 13 civil counts, including for lack of transparency and conflicts of interest. The most serious allegation, however, is the misappropriation of customer funds – and thus similar to that against FTX founder Sam Bankman-Fried, whom CZ sharply attacked in November.
Trading volume artificially inflated
Binance is said to have mixed customer funds with a separate trading company from CZ. The SEC alleges that Binance and Zhao were in control of client funds, which allowed funds to be pooled or redirected. Billions of dollars were sent to a British Virgin Islands-registered crypto-asset trading company called Merit Peak. This is owned by CZ.
The assets were also allegedly diverted to another company owned and controlled by Zhao, Sigma Chain. According to the SEC, they operated “manipulative trading” and thus artificially increased the trading volume of the platform. Last but not least, Binance failed to keep US customers off the platform. Formally, American customers have to trade through the independent subsidiary Binance.US, because the parent company Binance, for example, trades illegal coins such as Binance’s own BNB coin. And according to the SEC, Zhao also pulls the strings at the US subsidiary.
“Zhao and the Binance companies are engaged in an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law,” said Gary Gensler, chairman of the SEC. Gensler has never been noticed as a big crypto friend. But even by his standards, the current statements about Binance are clear: “The public should beware of investing their hard-earned wealth with or on these illegal platforms.”
SEC is under political pressure
Binance and its founder CZ expressed disappointment with the actions of the SEC in an initial reaction. We take the allegations seriously, but reject them as unfounded. An official statement said that they would “defend themselves vigorously”. Founder CZ was very clear on Twitter: “I wonder if Gary Gensler reads the comments of the consumers he’s actually trying to protect.” Shortly thereafter, CZ launched a poll as to who protects users better: Binance or the SEC. 85 percent voted for Binance.
Both sides are taking a high risk – because they are under enormous pressure. SEC Chairman Gary Gensler was grilled in the House of Representatives a month ago. He was put in charge of the issues surrounding FTX and urged to crack down on crypto firms going forward. At the same time, Gensler is struggling with the US deposit insurance company FDIC over the question of who can take the even tougher pace. It is about responsibilities, power and financial resources.
But there is also a lot at stake for Binance, because the USA is by far the most important market for all participants. It is no coincidence that the SEC is now targeting Binance of all things. “No one at Binance knows where they are actually located and how to regulate them. That makes them vulnerable,” says one analyst behind closed doors. Nourdine Abderrahmane, partner at Lucht Propst Associates, is not exactly surprised that Binance is hit. What is remarkable, however, is the severity of the allegations: “The most serious allegation is that criminal activity was apparently involved. This can lead to institutional investors withdrawing their assets and a chain reaction occurring.”
He doesn’t want to speculate, says Abderrahmane, after all the findings are not yet certain. However, if Binance has actually embezzled customer funds, this should be seen as a sign of weakness. CZ has repeatedly stated how secure Binance is against regulatory intervention. But if, for example, he channeled US funds via Merit Peak into jurisdictions beyond the reach of American authorities, that shows how much CZ fears possible regulation. “The main driver should then be that he wanted to increase the trading volume on the main exchange,” says Abderrahmane.
Also Coinbase and Kraken in focus
On these points, Binance also differs from Coinbase, which was also sued by the SEC on Tuesday. “Coinbase is not about specific fraud allegations, but about the question of which cryptoassets they are actually allowed to trade in the USA and which are not. The problem can certainly be solved,” says the analyst, who wishes to remain anonymous. According to the expert, Coinbase has been working with US authorities for many years and wants to obtain every possible license. “Under no circumstances should Coinbase be compared to Binance. The same applies to Kraken, which is facing a lawsuit similar to Coinbase’s. These companies will have an easier time than Binance.”
However, other sources also say that Coinbase and the SEC have been fighting each other intensively for a long time. The trading platform responded to the threat of stricter regulation or tougher rule enforcement by announcing that it was looking for alternative company locations. The Bahamas and Dubai are said to be under discussion, and CEO Brian Armstrong recently traveled to Great Britain – a country that stands for “sensible crypto regulation”, as Armstrong announced on Twitter.
This article first appeared on Capital.
Source: Stern
