The U.S. Securities and Exchange Commission charged cryptocurrency exchange Binance and its founder, Changpeng Zhao, with a range of securities violations on Monday.
This has struck a blow at the heart of crypto and the effect is rippling across markets.
Bitcoin was down more than 5% in afternoon trading to about $25,700. Shares of
Coinbase Global
(ticker: COIN), the big publicly traded crypto exchange, were off 12% to about $57.
The SEC’s action is a landmark move by regulators against one of the most important players in digital assets. Binance is, by far, the world’s largest crypto exchange, and Zhao—known in the industry as “CZ”—is arguably the industry’s single-most influential individual, playing a key role in the collapse of rival FTX last year.
The SEC alleges that while Binance and Zhao publicly claimed that U.S. customers were restricted from using Binance—the core, offshore trading venue—the group is alleged to have bent controls to allow continued access to high-value customers. The agency also alleges that while Binance.U.S. was positioned as an independent, U.S.-based platform, in reality it was secretly controlled by Binance and Zhao.
SEC chairman Gary Gensler said in a statement: “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.”
The agency also claims that Binance exercises control of assets held on its platform, “permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned,” and that this has been concealed.
Until at least 2021, the complaint said, accounts in the name of Binance entities, beneficially owned by CZ, sent billions of dollars of customer assets to U.S.-based bank accounts in the name of an entity called Merit Peak. The use of Merit Peak as an intermediary “presented an undisclosed counterparty risk for investors,” the SEC said.
For traders, this allegations are likely to be shocking. The alleged commingling of customer money between FTX and an affiliated hedge fund, Alameda Research, controlled by Sam Bankman-Fried, was integral to the meltdown of that crypto exchange last November. Amid the market turmoil that ensued in the wake of FTX’s collapse, more funds flowed into Binance in what was seen as a flight to quality.
Binance said in a statement that it is “disappointed” in the SEC’s actions and will “vigorously defend our business and the industry.” The company added that it disagrees with the SEC’s allegations that Binance operated as an unregistered securities exchange or illegally offered and sold securities.
Binance added that all “user” assets on Binance and affiliated platforms, including Binance.US, “are safe and secure.” The company said it has restructured its business to help comply with regulatory requirements, and spent $80 million on “external compliance partners” over the last two years.
Binance is a pillar of the digital asset economy, in some months commanding almost two-third of all crypto trading volumes, though it has recently shed some of its market share. A crisis at Binance threatens to undo remarkable gains for Bitcoin, up almost two-thirds this year.
The news is also likely to have a negative impact on
Coinbase.
While Binance has operated offshore for years and dodged requests from lawmakers to open up about its finances, Coinbase has positioned itself as crypto’s answer to a blue-chip stock that plays by the rules. But Coinbase revealed in March that the SEC had sent it a so-called Wells notice, a warning the agency may sue the exchange. After Monday’s developments at Binance, investors will have heightened concerns.
Write to Jack Denton at jack.denton@barrons.com
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