5 key points in the lawsuit between the SEC and Binance.

According to Cointelegraph , the allegations focus on Binance deceiving investors about risk control, falsifying trading volume, concealing critical operational data, and violating U.S. securities laws. To avoid regulatory scrutiny, Binance created weak controls and failed to comply with them in order to retain U.S. customers.

Offering of unregistered securities

SEC Chairman Gary Gensler stated that Changpeng Zhao (CZ) operated Binance.com and Binance.US as an exchange, broker, and dealer since July 2017. The SEC complaint alleges that Binance earned at least $11.6 billion through various means, including transaction fees collected from U.S. customers.

The regulator stated that Binance.com must be registered as a clearinghouse, broker, and exchange, while Binance.US and BAM Trading must register as clearinghouses and exchanges, respectively. Additionally, BAM Trading is accused of offering and selling staking programs as a service without registration and is required by the SEC to register as a broker.

The controversial practice of allowing US customers to use Binance.com.

In 2017, CZ launched Binance in Shanghai, China, but the exchange has been evasive about the location of its main office. Binance's parent company is located in the Cayman Islands, making its organizational structure more complex. The SEC stated that although Binance publicly announced a ban on US customers accessing Binance.com from June 2019, the exchange secretly allowed Americans to continue using the platform, demonstrating a deliberate disregard for US securities laws. Furthermore, Binance created a large number of accounts for customers who had provided KYC (Know Your Customer) credentials. Based on IP addresses and other information, some users accessing the platform are believed to be from the US.

CZ is in control.

Binance and BAM Trading announced a partnership in 2019 to launch Binance.US – a separate platform serving only US customers. Contrary to Binance.US's claims of independent operation, the SEC maintains that CZ remains the primary person responsible for the company.

According to the SEC, CZ ordered Binance.US to include Sigma Chain and Merit Peak as market makers, notably both of which were operated by Binance employees. Merit Peak allegedly provided decentralized trading services on behalf of Binance. On Binance.com, Merit Peak acted as a user counterparty, and on Binance.US, it provided market-making services.

Since at least 2021, Binance entities under CZ's control have transferred billions of dollars worth of customer assets to US bank accounts held by Merit Peak. These funds were then transferred to Trust Company A (a limited-purpose trust company in New York). This transaction is believed to be related to the issuance of the Binance USD (BUSD) stablecoin. Many Binance.US bank accounts, including one containing funds from US customers, have the head of the support office as the chief operator. This has raised questions regarding the transparency of Binance's operations and fund distribution.

Despite pressure from the SEC, Binance has stated its readiness to fight the allegations.

Wash trades are conducted on the Binance.US platform.

Wash trading is a process where traders repeatedly buy and sell the same asset to manipulate the market.

The SEC alleges that BAM Trading and BAM Management misled both customers and equity investors about the effectiveness of market oversight and measures to identify and prevent manipulative trading on the platform. However, wash trading on Binance.US is very common.

Even before the platform's launch, senior officials and staff at BAM Trading were well aware of the potential for wash trades. In a letter to the CEO of BAM and senior executives at Binance, the Binance co-founder and head of the order matching engine team expressed concerns about the possibility of the transaction processing system allowing customers to trade against themselves.

A significant amount of wash trading occurred through accounts connected to Sigma Chain. Many active Sigma Chain accounts on Binance.US were linked to BAM Trading and BAM Management. Wash trading continued between Sigma Chain accounts after the platform's introduction in 2019 until at least June 2022. The SEC stated that after introducing COTI on Binance.US on April 6, 2022, Sigma Chain quickly engaged in wash trading. Strategically, platform launches, new security introductions, and funding rounds all occur during periods of greatest vulnerability for investors.

Misappropriation of client assets and misuse of funds.

CZ and Binance are accused by the SEC of diverting customer assets, sending funds to Sigma Chain. The agency claims Merit Peak and Sigma Chain were used to transfer tens of billions of dollars between Binance, Binance.US, and other connected entities. Notably, the SEC revealed that Sigma Chain spent $11 million to purchase a yacht.

Additionally, the SEC alleges that Merit Peak's US bank account was used as a money transfer account to receive approximately $20 billion from both Binance platforms, including customer funds. Merit Peak is alleged to have transferred a large portion of this money to trust company A for the purpose of purchasing BUSD. The non-transparent transfer of consumer funds creates a serious risk of loss or theft. The extent of the alleged embezzlement and diversion of customer assets will be examined in more detail as the investigation progresses.

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