The Securities and Exchange Commission filed 13 charges against Binance, the world’s largest crypto exchange, and its co-founder Changpeng Zhao, on Monday alleging that both comingled billions of dollars worth of user funds and sent them to a European company controlled by Zhao.
The U.S. regulator alleged that Zhao and his exchange worked to subvert “their own controls” to allow high-net-worth U.S. investors and customers to continue trading on Binance’s unregulated international exchange.
One senior executive allegedly told a compliance officer that the company was operating as a f—— “unlicensed securities exchange in the USA bro.”
The complaint alleges that Binance created Binance.US as a shield for the main company and Zhao, to “reveal, retard, and resolve” law enforcement targets and insulate Binance.
Binance earned $11.6 billion in revenue, most of which came from transaction fees, from June 2018 through July 2021, the complaint said. Since its inception, the exchange has “at first overtly and later furtively” worked to entice U.S. customers, at the direction and control of its founder Zhao, the SEC alleged.
Binance knew that tens of thousands of customers were in the U.S. but chose not to act, the SEC alleged, despite federal law barring the unregistered offer and sale of securities. Binance’s ultimate compliance, in 2019, was largely a public show, the SEC complaint continues.
The SEC alleges that Zhao ordered the creation of an evasion plan for high-net-worth customers, using a VPN service to hide their U.S. location and submitting compliance documents to obscure their country of origin.
CNBC previously reported on how Binance employees encouraged users to evade the exchange’s Know Your Customer systems through VPNs.
“We do need to let users know that they can change their KYC on Binance.com and continue to use it. But the message, the message needs to be finessed very carefully because whatever we send will be public. We cannot be held accountable for it,” Zhao allegedly told his top team in 2019.
Zhao dismissed the charges on Twitter by saying “4,” a popular refrain in Binance’s community urging users to ignore fear, uncertainty, and doubt, or “FUD.”
The SEC alleged that Binance and Zhao violated “critical” provisions of federal security laws, including self-dealing and market manipulation, through Merit Peak Limited and Sigma Chain, both of which Zhao controlled and owned.
Merit Peak, a British Virgin Islands-based company, was one of the “earliest market makers” on Binance’s U.S. platform, the SEC alleged. Zhao is the company’s beneficial owner.
The complaint comes after the CFTC filed similar charges against the crypto exchange, alleging that it failed to prevent U.S. customers from accessing it.
“We will issue a response once we see the complaint,” Zhao said on Twitter. “Media gets the info before we do.”
The defendants showed a “blatant disregard” of federal law, the SEC alleged. The complaint included a “high-level” breakdown of Binance’s ownership structure, with Zhao and his holding vehicles allegedly controlling 100% of Binance and Binance.US’ various entities.
“Through thirteen charges, 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 release.