SEC Charges Crypto Trading Platform Binance and Its CEO with Violation of US Securities Laws | Practical Law

SEC Charges Crypto Trading Platform Binance and Its CEO with Violation of US Securities Laws | Practical Law

The SEC filed charges in the US District Court for the District of Columbia against the certain entities operating crypto-asset trading platform Binance.US and its founder and CEO, Changpeng Zhao, for violation of US securities laws, as well as operating as an unregistered broker-dealer, national securities exchange, and clearing agency.

SEC Charges Crypto Trading Platform Binance and Its CEO with Violation of US Securities Laws

by Practical Law Finance
Published on 07 Jun 2023USA (National/Federal)
The SEC filed charges in the US District Court for the District of Columbia against the certain entities operating crypto-asset trading platform Binance.US and its founder and CEO, Changpeng Zhao, for violation of US securities laws, as well as operating as an unregistered broker-dealer, national securities exchange, and clearing agency.
On June 5, 2023, the SEC filed a complaint in the US District Court for the District of Columbia (court) charging certain entities operating crypto-asset trading platform Binance.US and its founder and CEO, Changpeng Zhao (collectively, defendants), with:
  • Failure to register as broker-dealer. The SEC alleges violation of Section 15(a) of the Exchange Act (15 U.S.C. § 78o(a)) for the facilitation or inducement of the purchase or sale of securities without registering as a broker and without an exemption from such registration. Specifically, the SEC alleges that defendants operated as broker-dealers by unlawfully soliciting US investors to buy, sell, and trade crypto-asset securities through unregistered trading platforms available online at Binance.com and Binance.US (collectively, Binance platforms).
  • Failure to register as national securities exchange. The SEC alleges violation of Section 5 of the Securities Exchange Act of 1934, as amended (Exchange Act) (15 U.S.C. § 78e) for the use of an exchange to effect transactions in a security without registering as a national securities exchange under Section 6 of the Exchange Act absent an exemption from such registration. Specifically, the SEC alleges that defendants provided a marketplace to effect securities transactions – the Binance platforms – that customers accessed via the Binance.com website, a Binance mobile phone application, or a Binance-created programming interface application.
  • Failure to register as clearing agency. The SEC alleges violation of Section 17A(b) of the Exchange Act (15 U.S.C. § 78q-1(b)) for performing the functions of a clearing agency with respect to securities without registering in accordance with Section 17A(b) of the Exchange Act absent an exemption or exclusion from such registration. Specifically, the SEC alleges that the Binance platforms served as an intermediary in settling transactions in crypto-asset securities occurring on these platforms. The SEC alleges that these platforms also each acted as a custodian of securities by requiring customers to deposit their crypto-asset securities in wallets controlled by Binance Holdings Ltd. (Binance) and BAM Trading Services Inc. (BAM Trading) and creating a system for the central handling of securities under which crypto-asset securities deposited, held, traded, or accrued on the Binance platforms were treated as fungible and customer accounts were debited and credited by Binance and BAM Trading to settle customer transactions.
  • Unregistered offer and sale of crypto-asset securities. The SEC alleges violation of Sections 5(a) and 5(c) of the Securities Act of 1933, as amended (Securities Act) (15 U.S.C. §§ 77e(a) and 77e(c)) for the unlawful offer and sale of securities by effecting unregistered crypto-asset securities transactions on the Binance platforms, including offers and sales of Binance’s own crypto assets, called BNB and BUSD, Binance’s profit-generating programs called "BNB Vault" and "Simple Earn," and the offer and sale of BAM Trading’s staking-as-a-service program.
  • Fraud and failure to prevent manipulative trading. The SEC alleges violation of Section 17(a)(2) and (3) of the Securities Act (15 U.S.C. §§ 77q(a)(2) and 77q(a)(3)) for obtaining money or property by means of materially false and misleading statements. The complaint alleges that BAM Trading and BAM Management US Holdings Inc. (BAM Management) engaged in acts of fraud or deceit upon Binance.US customers and equity investors in BAM Management relating to failure to implement controls to prevent manipulative trading on the Binance.US platform.
According to the complaint, under the control of Zhao, defendants designed and implemented a multi-step plan to evade US law. As part of the plan, defendants:
  • Falsely claimed the operation of the Binance.US platform was independently controlled. However, Zhao and Binance participated in directing BAM Trading’s US business operations and providing and maintaining the crypto-asset services on the Binance.US platform.
  • Consistently claimed that the Binance.com platform did not serve US persons. However, Zhao directed Binance to assist certain high-value US customers in circumventing controls launched in 2019 to block US customers from the Binance.com platform.
According to the complaint, the efforts to evade US regulatory oversight put billions of dollars of US investor capital at risk because the defendants could and did:
  • Transfer investors’ crypto and fiat assets as they wished.
  • Commingle and divert investors' assets, for example, through accounts owned and controlled by Zhao and Binance. The complaint alleges that billions in customer funds were commingled among the Binance platforms in an account held by a Zhao-controlled entity, Merit Peak Limited, and the funds were subsequently transferred to a third party in connection with the purchase and sale of crypto assets.
The SEC seeks an order from the court barring Zhao from acting as an officer or director for any registered securities issuer, permanently enjoining Binance, BAM Trading, and Zhao from further violations of the Exchange Act and Securities Act, and for disgorgement and civil penalties.
Binance response. On June 5, 2023, Binance issued a response on its website to the SEC complaint, in which it expressed disappointment that the SEC chose to file a complaint against it in spite of its recent efforts to negotiate a settlement to resolve the SEC investigations. Binance cited the complaint as an example of the SEC's refusal to provide clarity and guidance to the digital asset industry.
While denying the complaint's allegations and indicating it will continue to cooperate with US and global regulators and policymakers, Binance asserts that it is caught in a regulatory tug of war and that the actual goal of the complaint is to garner headlines and claim jurisdictional ground for the SEC. Binance indicates it will work with its industry partners to defend this technology against "misguided lawsuits."
The Binance complaint was filed a day before the SEC brought a similar action against another major crypto exchange, Coinbase, filed on June 6, 2023, in the US District Court for the Southern District of New York (see Legal Update, SEC Charges Crypto Exchange Coinbase with Registration Failures). Along with the Binance action, the Coinbase action reflects the SEC's continued enforcement initiative focusing on major crypto-asset platforms accessing US markets.
SEC emergency action. On June 6, 2023, the SEC filed an emergency action application to the court seeking an order:
  • Freezing the assets of BAM Management and BAM Trading.
  • Directing defendants to repatriate assets held for the benefit of customers of the Binance.US platform.
  • Directing defendants to provide the SEC with a sworn accounting.
  • Prohibiting the destruction of relevant documents or tangible things.
  • Repatriating BAM Trading’s assets deposited overseas.
  • Requiring defendants to show cause why a preliminary injunction should not be entered.
  • Requiring expedited depositions, written discovery, and document productions in the 14-day period between entry of the temporary restraining order relating to the injunctive relief requested in the complaint and the hearing on that relief.
  • Authorizing alternative means of service on defendants Zhao and Binance because they are known for their disagreement with the premise of a headquarters or domicile and consequently have failed to identify one, and Zhao's whereabouts are often unknown.
See this Reuters article for further details on the SEC's complaint against Binance.
Update: On June 17, 2023, the court issued a consent order providing the relief requested by the SEC in its June 6, 2023 emergency action (see Legal Update, SEC Obtains Emergency Relief to Ensure Binance.US Customer Assets Remain in US).
Update: On August 15, 2023, BAM Trading Services Inc. and BAM Management US Holdings Inc. (collectively, BAM defendants) filed a motion for a protective order against the SEC seeking to limit the SEC's discovery requests under the June 2023 consent order (see Legal Update, SEC Obtains Emergency Relief to Ensure Binance.US Customer Assets Remain in US). BAM defendants argue that the SEC's information requests have been unduly burdensome and overbroad, including one request for all communications related to audits for select employees and executives from November 2022.
Update: On June 28, 2024, Judge Amy Berman Jackson of the US District Court for the District of Columbia denied the Binance motion to dismiss the SEC charges.
For more information on SEC regulation of digital assets, see Practice Note, Regulation of Crypto-Asset Securities in USA.
For further details on US crypto regulation, see Cryptocurrency and Virtual Currency Regulatory Tracker.