The U.S. Securities and Exchange Commission (SEC) charged Binance, its CEO Changpeng Zhao (CZ), and two other subsidiaries, BAM Trading Services ("BAM Trading"）、BAM Management US Holdings Inc.（"BAM Management"), accusing the defendants of violating U.S. securities exchange rules.
Prosecution documents up toPage 136, the content involves multi-dimensional perspectives, and there are some parts that are difficult to understand at first glance. Here, Odaily will give an in-depth interpretation of the important parts of the full text and some points that are easily missed, and try to analyze the information behind the text, the SECs understanding of Binance and the encryption industry, and the true intention of this regulatory action.
Quick overview: (If you have read the main points of regulatory documents before, you can skip reading the first two parts of this article)
The U.S. SEC sued Binance and its CEO Changpeng Zhao on June 5, local time in the United States, claiming that it improperly handled customer funds and defrauded regulators and investors.
Additionally, the SEC alleges that Binance mixed “billions of dollars” of customer funds and secretly transferred them to a separate company called Merit Peak Limited, which is controlled by Binance founder Changpeng Zhao.
The cryptocurrencies listed as securities include, but are not limited to, BNB, BUSD, and the following various cryptoassets: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI, according to the lawsuit.
The SEC’s summary of Binance’s violations reported by Odaily:
Binance is ignoring federal securities laws and their protections for investors.
Binance offers unregistered securities sales.
Binance defrauded investors and had the hallmarks of manipulative trading.
Binance evades U.S. regulation, quoting Binance COO, “We never want Binance to be regulated.”
Binance and Changpeng Zhao claim that BAM Trading independently controls the Binance.US platform, but is actually behind it.
Binance claims that Binance’s main body will not serve U.S. customers, but behind the scenes it helps high-net-worth U.S. customers bypass geographic restrictions (the prosecution case in March was also based on this reason).
Binance mixed billions of dollars in customer funds and secretly transferred them to a separate company called Merit Peak Limited, which is controlled by Binance founder Changpeng Zhao. This is something that regulated US exchanges cannot do.
Binance uses wash trading (also known as virtual trading, Wash Trading) to deliberately increase the trading volume of the Binance.US platform.
Binance did not disclose the relevant assets in accordance with the securities law.
A quick look at the SFCs appeal:
The final judgment sought by the SFC is as follows:
(a) permanently bar Defendants from continuing to violate the federal securities laws that are alleged to have been violated;
(b) order the defendant to repay his ill-gotten gains, with advance judgment interest;
(c) Permanently prohibit Defendants and any entities they control from utilizing, directly or indirectly, interstate commerce tools or means:
(i) engage in any offering, purchase, offer or sale of securities, including any cryptoasset securities, in an unregistered transaction;
(ii) deal in any securities, including any cryptoasset securities, on an unregistered exchange;
(iii) deal in any securities, including any cryptoasset securities, as a non-registered broker or dealer; and
(iv) trade in any securities, including any cryptoasset securities, in a non-registered clearing house capacity;
(d) impose a civil monetary penalty on the defendant; and
(e) Take appropriate or necessary equitable relief measures for the interests of investors as needed.
The China Securities Regulatory Commission could not understand the Chinese word for playing Tai Chi, so it claimed that Zhao Changpeng implemented the Tai Chi Plan in the face of supervision
In the lawsuit documents, the SFC listed several pieces of evidence that Zhao Changpeng and Binance evaded US supervision. Among them, the China Securities Regulatory Commission mentioned that the establishment of Binance.US was to isolate the risk of Binance subjects being subject to US supervision, and claimed that this was the Tai Chi Plan (The Tai Chi Plan) of Zhao Changpeng and Binance Advisors. According to the authors guess,It is likely that the China Securities Regulatory Commission could not understand the meaning of playing Tai Chi in the Chinese context from some Chinese sources, and thus misunderstood that the name of this subject isolation plan was Tai Chi.
The SFC also mentioned that Binance Advisors hopes that this “Tai Chi entity” should “publish a long and detailed Howey test [the test to determine whether an asset is a security] asset evaluation framework … to demonstrate the complexity of the Howey test.” ,” and then opened up a conversation with the SEC about “establishing or acquiring a broker/dealer or alternative trading system (ATS) with no expectation of success, merely to suspend potential enforcement action.”
The CSRC even boldly quoted the unofficial words of the CCO of Binance in the lawsuit documents, Brother, we are an unregistered exchange operating a TM in the United States.
At the same time, after the establishment of the US entity Binance.US, the SEC claimed that Changpeng Zhao and Binance are still instructing high-net-worth US customers to bypass geographic restrictions and KYC restrictions in various ways, so that they can use more liquid Binance entities Trading. The SEC also cites Changpeng Zhao: “We do need to let users know that they can change their KYC information on Binance.com and continue using the platform. However, this message needs to be written very carefully, because anything we send will be It is public. We are not responsible for this.” This reason is also the reason why Binance was sued by the CFTC in March, that is, the Binance entity should not provide services to US customers.
The China Securities Regulatory Commission believes that BAM Trading should not be influenced by the main body of Binance and Changpeng Zhao – the budget review for buying the company’s sweater is also not acceptable
The SEC filings show that Changpeng Zhao himself controls Binance and the Binance.US platform through a variety of direct and indirect shareholding structures, despite the platform’s claim to considerable independence. The diagram is as follows:
For at least most of 2021, BAM Trading employees will not have access to certain real-time trading data on the Binance.US platform without Changpeng Zhao’s personal approval, the SEC said. Moreover, Changpeng Zhao and Binance controlled BAM Trading’s bank accounts and finances. Until at least December 2020, BAM Trading employees have no control over BAM Trading’s bank accounts, including the accounts used to hold and transfer deposits from users of the Binance US platform.
At the same time, Changpeng Zhao is also responsible for approving various daily business expenses of BAM Trading. The Securities Regulatory Commission described in the document that at least before January 30, 2020, all BAM Trading expenditures exceeding US$30,000 required Changpeng Zhao’s approval. BAM Trading regularly seeks approval from Changpeng Zhao and Binance for day-to-day business expenses, including rent, franchise taxes, legal fees, Amazon Web Services (AWS) fees for hosting customer data on Binance’s U.S. platform, and even an $11,000 purchase of coins. Spending on Ann Brand hoodies.
Beginning around December 2020, Binance allowed personnel from BAM Trading to take over control of certain bank accounts at BAM Trading, but as of May 2023, Changpeng Zhao still had control over the custody of client funds on the Binance U.S. platform, the SEC said. Signatory rights to the BAM Trading account.
In this lawsuit document, the China Securities Regulatory Commission believes that although Zhao Changpeng established BAM Trading, he still should not exert influence on its management.
On Sigma Chain and Merit Peak: Suggesting Misappropriation of Funds Without Evidence
From the early days of the Binance US platform, Changpeng Zhao directed BAM Trading to take on two market makers he owned and controlled: Sigma Chain and Merit Peak, the SFC alleges. The two entities were run by several Binance employees working under the direction of Changpeng Zhao, including a Binance logistics manager who also had signatory authority over BAM Trading’s USD account until at least December 2020.
Merit Peak will trade on the platform from at least November 15, 2019 until June 10, 2021. Sigma Chain is a frequent spot trader on Binance US until April 2022, and it also continues to act as a counterparty to certain OTC trades and Convert and OCBS services on Binance US. The SFC alleges that the activities of Sigma Chain and Merit Peak on the Binance US platform and their undisclosed relationship with Changpeng Zhao and Binance involved a conflict between Changpeng Zhaos financial interests and the interests of Binance US platform clients.
For example, at least $145 million has been transferred from BAM Trading to Sigma Chain’s accounts in 2021, and an additional $45 million has been transferred from BAM Trading’s Trust Company B account to Sigma Chain’s accounts. From that account, Sigma Chain spent $11 million on a yacht.
The SEC’s description here seems to be implicitly suggesting that the yacht was purchased by embezzling Binance America’s user funds,Although it did not provide any substantive evidence.
The Securities Regulatory Commission claims that there is a tug-of-war between Binance US and Binance entities, and Binance responds
According to the SFC in this document, in January 2020, BAM Trading’s employees began compiling a list of “shackles” that require “Binance personnel to answer, access, approve, fund” functions, which shows that BAM Trading’s interest in Independence and lack of understanding of platform operations. They point out, for example, that there is a lack of respect and transparency between BAM Tradings compliance team between the Asian and US teams; that BAM Trading is not allowed to expand its financial team within the US; Internal Controls/IT Infrastructure has Better Understanding.
According to the document, BAM Trading CEO A explained to the Binance CFO shortly after the article was published,The whole team felt like they were puppets for BAM Trading staff.
The SFC document states that on December 3, 2020, BAM Trading CEO A reported to the Binance CFO that BAM Trading’s “daily battle” was to ask Binance’s clearing staff to “tell us about their day-to-day work and authority.” , but the Binance back office manager and another Binance employee were unwilling to share their screens, saying you dont need to know about our day-to-day work.
The document also stated that around March 2021, Changpeng Zhao decided to replace BAM Trading CEO A with BAM Trading CEO B, and he will officially take office in May 2021. Upon onboarding, BAM Trading CEO B realized that the relationship between Binance and BAM Trading was problematic, and he accepted the role on the condition that he be able to operate BAM Trading independently outside the control of Changpeng Zhao and Binance. Chief Executive Officer of BAM Trading Executive B has made several public statements stating that BAM Trading is not a stand-in for Binance.
The SFC claimed in the document that when BAM Trading CEO B took the CEO position, he quickly discovered that Binance actually exerted considerable control over the operations of BAM Trading and the Binance.US platform, and was unwilling to give up this. kind of control. As stated in his affidavit, BAM Trading CEO B “does not have any first-hand knowledge of the specifics of the [Binance] entity managing the [Binance.US platform’s] servers,” but he knows that “it is not [BAM Trading] . Likewise, he demonstrates that the matching engine is “probably owned and managed by some entity at [Binance], but I don’t know which entity, and that there are other servers that serve other functions.” He then concludes that the company faces “ The biggest risk is that we are heavily dependent on a bunch of technology in Asia.
(According to Odaily’s analysis, A and B are Catherine Coley and Brian Brooks respectively. Catherine Coley will serve as the CEO of Binance.US in 2020, and Brian Brooks will serve as the CEO of Binance.US in mid-2021. Inspector General of Banks.)
Binance strongly disagreed with the claim. The SECs actions here appear to be an attempt to rush jurisdiction from other regulators, and investors do not appear to be a priority for the SEC. Due to our size and global Notable, Binance is now an easy target, caught in a tug of war between U.S. regulators.
It looks like the SECs goal here was never to protect investors; if that was the case, the employees should have had a deep exchange of facts and worked hard on our efforts to demonstrate the security of the Binance.US platform. Instead, the SECs real intention here seems to be headlines.
Regarding unregistered securities (unregistered securities), the scope of jurisdiction has been expanded but doubts abound
The argument about U.S. exchanges offering unregistered securities, or whether crypto assets count as securities, has been raised several times in previous crypto-related cases. However, in this legal document, the China Securities Regulatory Commission seems to have expanded its recognition of the concept of securities.
In the lawsuit documents, the China Securities Regulatory Commission believes that the release of BNB and BUSD belongs to the category of securities, and uses concepts such as expected returns to attract investors. The China Securities Regulatory Commission spent a lot of time explaining the concepts of BNB and BUSD in the document, and how to determine the relevant expected returns from Binance Whitepaper. Based on this logic, the China Securities Regulatory Commission believes that Binance’s “Simple Earn” and “BNB Vault” and other related pledge concepts and products also belong to the category of securities.
At the same time, unlike the previous lawsuits, the China Securities Regulatory Commission believes that the other ten tokens SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS and COTI also belong to the category of securities, and it took quite a long time to describe Reasons why each token should be considered a security.
In particular, it is worth mentioning that,The SEC does not classify ETH as a security.In 2018, Gary Gensler himself said that the SEC does not consider Ethereum a security. During the April hearing, Gary Gensler also declined to answer the question of whether ethereum is a security. Although based on the same logic, the lawsuit documents that the public chain token Solana is a security. This inconsistent logic has many people on Twitter think it is a double standard.
It’s also worth noting that FTX appears to have never received a charge of offering unregistered securities from the SEC prior to the crash. Now, the accusations that Binance is facing have made some voices doubt in the market,Based on the relationship between SBF and Gary Gensler, the SECs move under the leadership of Gary Gensler may be revenge for Binances contribution to the FTX crash.
The Real Appeal Beyond Documents: Jurisdiction Competition or Prestige?
Some observers believe that the SEC may sue Binance for the purpose of competing with the US Commodity Futures Trading Commission (CFTC) for the jurisdiction of crypto assets. Notably, the CFTC also filed a lawsuit against Binance in March of this year, making similar allegations. Many of the allegations in the SEC lawsuit are similar to the CFTCs complaint, which may indicate overlapping areas of concern between the two agencies.
Regulatory responsibility and jurisdiction in the field of crypto assets has always been a complex issue, with possible competition and overlap between different agencies. Therefore, some observers believe thatThe SEC’s prosecution of Binance may be an attempt to strengthen its position in the regulation of crypto assets and compete with the CFTC for jurisdiction in this area.
Binance’s official response believes that Binance has become a vulnerable target because of its global popularity and brand influence, and may be caught in a tug-of-war among U.S. regulators, as this lawsuit may carry Liweis purpose. Binance wrote in its official response, “Nonetheless, we stand with U.S. digital asset market participants against the SEC’s excesses and are ready to fight it with all our might.”
