The SEC charges Binance and founder CZ with securities law violations; crypto market tumbles

The U.S. Securities and Exchange Commission (SEC) has filed 13 charges against the world’s largest crypto exchange Binance and its founder with violations of securities laws. Major cryptocurrencies and shares in crypto and blockchain-related companies tumbled on Monday immediately after the news.

According to a complaint filed by the SEC, the US regulator alleged that Zhao, the co-founder and CEO of the crypto exchange, along with his team, deliberately circumvented “their own controls” to enable high-net-worth U.S. investors and customers to continue trading on Binance’s unregulated international exchange.

SEC said that one of Binance’s senior executives allegedly told a compliance officer that the company was operating as a ”[f—ing] unlicensed securities exchange in the USA bro.”

“Among other things, the SEC alleges that, while Zhao and Binance publicly claimed that U.S. customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their own controls to secretly allow high-value U.S. customers to continue trading on the Binance.com platform. Further, the SEC alleges that, while Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for U.S. investors, Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes,” SEC said.

The complaint further alleges that Binance created Binance.US as a protective measure for the main company and its CEO, Zhao. The purpose was to potentially hinder and address law enforcement targets while also creating a level of separation for Binance.

The SEC highlighted that two former CEOs of Binance.US, Catherine Coley and Brian Brooks (though not specifically named in the complaint), expressed significant concerns regarding Zhao’s extent of control. Both individuals testified before federal regulators, shedding light on the matter.

“I’m not actually the one running this company and the mission that I believe I signed up for isn’t the mission. And as soon as I realized that, I left,” a former Binance.US CEO identified as “BAM CEO B” testified to the SEC.

The SEC also added that Binance and Zhao artificially inflated trading volumes and diverted customer funds, and also failed to restrict U.S. customers from its platform, and misled investors about market surveillance controls. The SEC said they also secretly controlled customers’ assets, allowing them to commingle and divert investor funds “as they please.”

Meanwhile, in a blog post, Binance said: “We intend to defend our platform vigorously,” adding that “because Binance is not a U.S. exchange, the SEC’s actions are limited in reach.”

The news sent shockwaves to crypto-related companies, causing fluctuations in their stock prices. Shares of Coinbase Global, a rival crypto exchange, experienced a significant drop of 11.6%. Similarly, Bitfarms Ltd, a blockchain farm operator, saw a decline of 5.8% in its stock value.

Crypto mining companies were also impacted, with Riot Platforms Inc falling by 8.2%, Marathon Digital (MARA.O) down by 8.7%, Hut 8 Mining decreasing by 3.9%, and Bit Digital experiencing an 8.1% drop. Additionally, the shares of MicroStrategy, a software firm and Bitcoin buyer, declined by 8.4%.

It’s worth noting that in March, Binance and Zhao faced a lawsuit filed by the U.S. Commodity Futures Trading Commission. The lawsuit alleged that they were operating an “illegal” exchange and had a “sham” compliance program, further adding to the legal challenges faced by the company.