Key Takeaways

• SEC files a lawsuit against Binance, claiming the company commingled customer funds and corporate funds.
• SEC filed 13 lawsuits in total against Binance, including evading US regulators.
• US US House of Representatives proposes a bill that will define SEC’s relationship with crypto exchanges.

The Securities and Exchange Commission (SEC) filed a lawsuit  against Binance, the world’s biggest crypto exchange platform for mishandling customer funds. The SEC claims that Binance transferred customer funds to corporate accounts run by Binance CEO and crypto mogul, Changpeng Zhao. The lawsuit is one of 13 filed by the SEC and U.S. Commodity Futures Trading Commission (CFTC), alleging a “web of deception.” The legal commotion has already rippled through the crypto markets as key cryptocurrencies have plunged.

Mixing Business And Pleasure

Binance.US was supposedly created to operate independently from Binance, falling under the supervision of US regulators. However, reports  show that Guangying Chen, a senior Binance executive, and close associate of Changpeng Zhao was given authorization by US lender Silvergate Bank to operate five Binance.US bank accounts, one of which held customer funds, during 2019 and 2020. 

The SEC claims that the elaborate scheme constructed by Binance and its founder, which resulted in Binance.US not having any control of its own finances, at least until 2021, was to evade US regulations, claiming a “web of deception.”

The complaint filed by the SEC against Binance alleges Binance sent customer funds, in the billions of dollars, to accounts controlled by a separate company, Merit Peak Limited, which is run by Binance’s founder, Changpeng Zhao. 

In the SEC’s lawsuit, they claim that Zhao and Binance transferred customer funds at will. Major transfers were made to a Switzerland-based trading firm under the name of Sigma Chain. Mert Peak and Sigma Chain were used by Zhao to transfer tens of billions of dollars from Binance, Binance.US, and other related entities. According to the SEC, in 2021 alone, $145 million were transferred from Binance.US to Sigma Chain. Records  also show that $11 million dollars from these Sigma Chain accounts were used to purchase a yacht.

A Web Of Lies

To under the Binance debacle, one must look at when the investigation started, who the key players are, and where the key indications of foul play lay. 

All threads lead to the events of mid-2019. Binance.US is launched by its operating firm, BAM Trading, run by then Chief Executive Catherine Coley. However, Zhao owned BAM through a list of offshore companies. Despite the fact that Binance.US was said to only operate as a US partner of Binance. A probe  alleges Zhao used Binance.US as a subsidiary to avoid US regulator oversight.

Messages between Binance.US show that Silvergate requested a signed banking resolution from Coley, effectively putting Chen in control of Binance.US finances. The resolution would authorize Chen to “open accounts, transact, and otherwise operate” accounts on behalf of BAM Trading. Chen then signs another agreement with Silvergate, placing her as the “Primary Admin User,” enabling her to withdraw funds from and deposit funds to 5 bank accounts:

• A customer deposit account
• A corporate client account that later transferred funds to Merit Peak
• Three other bank accounts

As a result, the SEC filed several lawsuits against Binance and its founder, claiming that the company diverted customer funds for corporate purposes. Other key claims include artificially inflating Binance’s trading volumes, failing to restrict US customers from its platform, and misleading investors regarding market surveillance control. 

Snowball Effect

Following the news of the Binance scandal, major cryptocurrencies saw a sharp drop in value. Bitcoin, the market’s leading currency saw a 6% drop, while Binance’s own cryptocurrency, BNB dropped by 5%. Other significant crypto drops include ETH, which decreased in value by over 3.5%.

Major crypto exchange crashes, such as FTX, 3AC, Celsius, and Binance, are now frequent enough to cause significant disturbance in not only the trust in the market but also the stability of the trading potential within it. Many customers are bound to hold on to their wallets, opting to trade on a smaller scale, fearing major corporate greed. Moreover, the pool of potential future crypto investors may be shrinking due to growing concerns about the safety and stability of the market. 

These events coincide with a new House debate  over the regulations needed to ensure the legitimacy and stability of such crypto exchanges. French Hill, a senator from Arkansas hammered down on the fact that the US is in dire need of stricter regulations that would prohibit exchanges such as Binance from siphoning funds from US clients and the economy. 

The bill proposed, falling under the guidelines of the SEC and CFTC would see crypto exchanges register themselves with the SEC as alternative trading systems (ATS), assigning them as all-in-one trade models. The idea behind the bill is inspired by the CFTC’s approval process for new futures contracts, relying on a self-certification strategy. As a result, crypto exchanges would operate under the supervision of regulations created by both the SEC and CFTC, granting US citizens and businesses more security in future crypto exchanges. 

Conclusion

Binance being the world’s biggest crypto exchange, trading over $11 billion daily, would obviously have a major impact on the crypto market, should it be taken down by US regulators. While that might be great news for runner-up exchanges such as Coinbase and Kraken, it would negatively impact the stability of the crypto exchange market in its entirety. First of all, Binance’s own token BNB would surely plummet in value. On top of that, other major cryptocurrencies such as BTC would see another significant drop due to the major hindrance to global trading activities. Finally, Binance’s fall would provide US regulators with a much-needed boost toward creating stricter crypto-related regulations, changing the landscape of the international crypto trading world.