Headline: The SEC goes after Binance
Body:
Ok, what you need to know here is that Binance has tried all this time to be an outsized example of how powerful a cryptocurrency firm can be. This is not surprising given the outsized personality of its founder Mr. Changpeng Zhao, going by the initials “C.Z.” The thing to keep in mind is that the 136-page complaint levies charges against 3 parties: Binance, BinanceUS and C.Z. himself. At its core, charges center around fraud and deceptive practices.
“Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” SEC Chair Gary Gensler said in a statement. Since the fall of FTX the accusations against Binance are the most sweeping yet. Binance has denied these allegations in a blog post. (I have to wonder if this is the death knell for them. I listen to a great podcast called Legal Eagle, and the attorney-host has repeatedly noted how communications written electronically are often the most potent evidence in many civil suits.)
Binance was founded in 2017, and setup a U.S. affiliate in 2019, though the U.S. government claims that they had been doing business in the U.S. since their inception. In point of fact, a 2018 e-mail was uncovered that confessed they had been doing business in the U.S. all along. Among the many accusations, the SEC is claiming that Binance is acting as an unregistered broker of securities, and C.Z. himself is being accused of artificially increasing trading volumes by using a trading firm he owns, to complete wash-sale like transactions. (These are when a firm sells, say 500 shares of Apple, only to buy 500 shares of Apple a week later.) In an interesting turn, the SEC chair, turned down a previous offer to be an advisor to Binance. Nor is this the end, there are rumors that the DoJ is considering their own prosecution as well. But in today’s filing, the S.E.C. says the company and its chief executive “subverted their own controls to secretly allow high-value U.S. customers” to trade on its international exchange.
Cryptocurrency exchange Binance and its U.S. affiliate were hit with more than $790 million in withdrawals in the 24 hours after the Securities and Exchange Commission (SEC) filed a lawsuit against them.
OK, I’m interested. Tell me some colorful details?
There is a part of the SEC suit that makes reference to the “Tai Chi” documents. These documents detailed a plan for Binance itself to officially move out of the U.S. sphere, while allowing them to keep control of an affiliate that would stay within the U.S. It goes further to quote Binance employees conversing on the topic of keeping their U.S. customers in the face of a move away from the U.S. Finally, it is alleged that Binance had access to the wallets and passwords of the Binance, US customers.
So, how mixed up is this?
Plenty. A few points to ponder:
- Gary Gensler, SEC Chair, was previously asked to be an advisor for Binance. (This was when he worked for MIT.)
- A former official in the Comptroller of the Currency office was a CEO for Binance, US, for a few months.
So, is the SEC the only federal agency after Binance?
No, there are many. Previously, the CFTC went after Binance for issuing their own coin, which looked to them, like a security. It seems that the SEC was cribbing off of their notes, because this is one of their chief accusations as well. Finally, the DoJ is rumored to have their own complaint coming against Binance.
All of this seems kind of confusing, doesn’t it?
Well, yes, it does. But, there were some very naked things happening too. In one instance, Sigma Chain (the trading firm) purchased an $11 Million yacht with customer funds. This is pretty blatant.
What are the penalties being sought against Binance?
OK, the first thing to note is that these are all civil charges and nobody appears to be going to prison, all sanctions are economic. That said, some of the penalties can be kind of severe. If convicted, Binance will have to pay restitution to its victims and face additional civil penalties. C.Z. himself might be barred from being an officer or director for any securities issuer.
The Verdict
Things do not look good for Binance. But, should we be surprised? I would argue no, because it follows a now too-familiar formula. Cryptocurrency firm forms an exchange, and they are fine, but then they branch out to have their own investment activities, and they are not so fine anymore. (Imagine if the company that ran the NYSE had its own trading firm?) But, in the world of crypto, we have seen this film before. FTX had its Alameda Research, Genesis had its own trading group added, and then they got into trouble. Now, Binance seems to be following in their foul footsteps.
The more interesting question, I think, is, is Coinbase any different than Binance in this regard? Ah, this is SUCH an interesting thing, that I shall have to follow up with another entry. Please stay tuned.
REFERENCES
SEC sues world’s largest crypto exchange – POLITICO
The SEC sues Binance, unveiling 13 charges in sweeping lawsuit : NPR
Binance Users Withdraw Almost $800 Million After SEC Lawsuit (investopedia.com)
Why is the SEC suing Binance BP.docx
REFERENCES
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.