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SEC vs. Binance: Agency Hunting for a Killer Blow with Evidence of an FTX-style Backdoor

Last Updated November 28, 2023 2:27 PM
James Morales
Last Updated November 28, 2023 2:27 PM

Key Takeaways

  • The SEC is looking for evidence that Binance.US commingled customer assets with corporate funds.
  • Binance lawyers denied the allegations and asked the court to consider dismissing the charges.
  • Magistrate Judge Zia Faruqui appears to be growing impatient with the SEC’s lack of hard evidence.

Having settled charges brought by the US Department of Justice (DoJ), Binance US’ legal team can now focus on its remaining legal challenge: a Securities and Exchange Commission (SEC) lawsuit accusing the firm of operating an illegal securities exchange.

The good news for Binance is that the SEC’s central charge looks increasingly weak in light of a precedent set by Ripple’s court victory over the regulator. The bad news is that the SEC is doubling down on the much more incendiary allegation that Binance may have misappropriated customers’ assets.

Binance Backdoor Could be a Trump Card for the SEC

In its complaint against the crypto exchange, the SEC claimed that tens of billions of dollars flowed between Binance and Binance US through two market makers owned by Changpeng Zhao (CZ) – Merit Peak and Sigma Chain.

According to the lawsuit , Binance.US and associated entities “were free to and did transfer investors’ crypto and fiat assets as [they] pleased, at times commingling and diverting them in ways that properly registered brokers, dealers, exchanges, and clearing agencies would not have been able to do.”

SEC Binance
  The SEC’s complaint attempts to unpick Binance’s corporate structure.

Following a court hearing on Monday, November 27, the Wall Street Journal reported  that the SEC is still looking for evidence that Binance and CZ may have a backdoor to control assets stored on the Binance.US platform.

In the wake of last year’s FTX-Alameda crisis, the idea of market makers being able to dip into an exchange’s crypto reserves would concern any user.

Should the SEC uncover evidence of similar practices at Binance, it could significantly undermine confidence in the crypto exchange, with potentially explosive consequences. 

Clock Ticking as the SEC Continues to Dig For Dirt

During Monday’s hearing, Binance’s lawyers asked Magistrate Judge Zia Faruqui to consider closing the case in light of the DoJ settlement, which saw Binance and CZ plead guilty to a string of compliance failings. 

Rejecting the backdoor charges outright, Binance attorney Matthew Laroche stated that “the SEC has no evidence that assets have been misused in any way.”

Although Faruqui didn’t immediately grant Binance’s request to cut the legal battle short, he kept the option on the table, acknowledging that the recent guilty pleas make it less likely that Zhao would now misuse US customers’ assets. 

Indicating that his patience with the SEC is wearing thin, the Judge said: “at some point, I have to make a leap of faith and say enough is enough.”

After months of wrestling over what evidence the SEC can reasonably request from Binance, Judge Faruqui requested that the two sides try to hash out their differences before reporting to the court on December 15.

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