The world's largest crypto exchange Binance and its CEO Changpeng Zhao operated a "web of deception" that included artificially inflating its trading volumes and diverting customer assets, the U.S. Securities and Exchange Commission alleged on Monday.
The agency on Monday sued Binance and Zhao for failing to restrict U.S. customers from its platform and misleading investors about its market surveillance controls, as well as for operating an unregistered securities exchange.
The SEC’s complaint, filed in federal court in Washington, D.C., also alleged that Binance and Zhao secretly control customers’ assets, allowing them to commingle and divert customer funds, and that Binance created separate U.S. entities “as part of an elaborate scheme to evade U.S. federal securities laws.”
The SEC also alleged that from at least September 2019 until June 2022, Sigma Chain, a trading firm owned and controlled by Zhao, engaged in wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US Platform.
"We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC Chair Gary Gensler said in a statement.
Binance did not immediately respond to a request for comment on the charges. In a tweet, Zhao said Binance would issue a response once it has reviewed the SEC's complaint, and said the exchange's team is "standing by, ensuring systems are stable, including withdrawals, and deposits."
Binance's cryptocurrency BNB, the world's fourth largest by market size, dropped more than 5% on the news.
The move is the latest in a series of legal woes for Binance, which was also sued by the U.S. Commodity Futures Trading Commission (CFTC) in March for operating what the regulator alleged were an "illegal" exchange and a "sham" compliance program, with Zhao calling those charges "disappointing” and an “incomplete recitation of facts.”
Binance is also under investigation by the Justice Department for suspected money laundering and sanctions violations, according to people familiar with the probe.
The world's biggest crypto exchange, Binance was founded in Shanghai in 2017 by CEO Changpeng Zhao, a Canadian citizen born and raised until the age of 12 in China.
While its holding company is based in the Cayman Islands, Binance says it does not have a headquarters and has declined to state the location of its main Binance.com exchange.
Binance's global trading platform, Binance.com dominates the crypto trading landscape, last year processing trades worth about $65 billion a day with up to 70% of the market.
The firm has processed at least $10 billion in payments for criminals and companies seeking to evade U.S. sanctions, Reuters has previously reported.
Reuters also reported on May 23 that Binance commingled its customers’ funds with its corporate revenues in Silvergate Bank account belonging to trading firm Merit Peak, in breach of U.S. financial rules that require client money to be kept separate.
Binance denied mixing customer deposits and company funds, saying that users who sent money to the account were not making deposits but rather buying Binance’s bespoke dollar-linked crypto token.
(Reporting by Jonathan Stempel in New York, Hannah Lang in Washington and Tom Wilson in London, Editing by Nick Zieminski)