On Monday, the Securities and Exchange Commission charged Binance and its founder, Changpeng Zhao, with a number of securities offences.
This has dealt a blow to the heart of cryptocurrency, and the repercussions are being felt throughout markets.
In afternoon trade, Bitcoin was down more than 5% to over $25,700. Coinbase Global (ticker: COIN), the largest publicly traded crypto exchange, saw its shares fall 12% to around $57.
The SEC’s action marks a watershed moment for regulators as they take on one of the most important companies in digital assets. Binance is by far the largest crypto exchange in the world, and Zhao—dubbed “CZ” in the industry—is perhaps the industry’s single most important man, having played a crucial part in the collapse of rival FTX last year.
While Binance and Zhao publicly asserted that U.S. consumers were barred from utilizing Binance—the primary, offshore trading venue—the SEC contends that the organization bent controls to maintain access to high-value customers. The agency also claims that, although being positioned as an independent, US-based platform, Binance and Zhao secretly controlled it.
According to SEC Chairman Gary Gensler, “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 argues that Binance has authority over assets housed on its platform, “allowing them to commingle or divert customer assets as they please, including to an entity Zhao owned,” and that this has been hidden.
According to the complaint, until at least 2021, accounts in the name of Binance businesses, which are beneficially controlled by CZ, transferred billions of dollars in 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,” according to the SEC.
These charges are likely to be alarming to traders. The alleged misappropriation of customer funds by FTX and an allied hedge fund, Alameda Research, owned by Sam Bankman-Fried, was essential to the collapse of that cryptocurrency exchange last November. During the market instability that followed FTX’s demise, more capital rushed into Binance in what was perceived as a flight to quality.
In a statement, Binance said it is “disappointed” with the SEC’s actions and will “vigorously defend our business and the industry.” The business also stated that it rejects the SEC’s claims that Binance operated as an unregistered securities exchange or illegally offered and sold securities.
Binance went on to say that all “user” assets on Binance and connected platforms, including Binance.US, “are safe and secure.” The corporation stated that it has restructured its business to help with regulatory compliance and has spent $80 million on “external compliance partners” during the last two years.
Binance is a foundation of the digital asset economy, commanding about two-thirds of all crypto trading volumes in some months, though it has recently lost some market share. A problem at Binance threatens to reverse Bitcoin’s spectacular gains of nearly two-thirds this year.
Coinbase is also likely to suffer as a result of the announcement. While Binance has been operating abroad for years and has refused to address lawmakers’ questions about its finances, Coinbase has positioned itself as crypto’s answer to a blue-chip firm that follows the laws. However, Coinbase reported in March that the SEC had served it a Wells notice, which is a warning that the agency may sue the exchange. Investors will be concerned following the events at Binance on Monday.