The lawsuit that threatens to take down Binance: ‘We’re operating an unlicensed broker in the US, bro’

The world of cryptocurrencies is almost a million miles away from ours. It has its own jargon, its own humor and a particular way of understanding investment, which has created a whole community around those assets. This Monday, the Securities Exchange Commission (SEC), the U.S. market regulator, hit the nail on the head when it declared that, in spite of appearances, what the crypto universe lacks is its own law, distinct from international law. On Tuesday, before the SEC also sued Coinbase (the world’s second-largest cryptocurrency trader, and the leading listed platform), the regulator filed 13 charges against Binance, a platform that in 2021 traded $9.58 billion, according to data from the U.S. authorities. The SEC’s investigation has demonstrated that these platforms believed they could act above the law, to the point that Binance’s head of compliance admitted to another compliance officer at the firm in December 2018 that they were “operating as a fucking unlicensed broker in the United States, bro.” The internal communication has been included in the SEC’s indictment documentation.

Among the crimes that this real whale of the cryptocurrency world is alleged to have committed, according to the SEC, are: commingling and diverting customer funds, simulating fictitious market operations, circumventing U.S. federal laws by operating underhand schemes, falsifying accounts, and the outright deceit of investors. The SEC notes that billions from investors would have ended up in an account owned by Merit Peak, a company ultimately controlled by Changpen Zhao, CEO and founder of Binance. In essence, what the SEC alleges about Binance is that the platform knew full well what rules were to be followed and, instead of trying to comply with them, proceeded to bypass them in a deliberate and premeditated way, thus harming investors.

“Zhao and Binance fully understood that they were violating numerous U.S. laws, including marketplace law, and that those systematic violations put their business at existential risk,” the document reads. It is a business that is far from small. The SEC estimates that between June 2018 and July 2021, Binance would have had profits of $11.6 billion, most of it coming from transaction fees.

Founded in China in 2017 by Changpeng Zhao, Binance scaled to become a titan within the crypto universe. By advertising its blogs, its website and social networks, with the premise of offering the opportunity to buy and sell hundreds of cryptoassets, it was making a niche for itself. According to internal company documents cited by the SEC, as of August 2019, Binance had 1.47 million users in the U.S. That same year, the company had more than 3,500 U.S. whales: big-spending customers who were not only profitable for the platform, but crucial to trading liquidity, which, in turn encouraged more users to trade.

In 2019, precisely the same year to which the internal documents refer, Binance ceased to be available to U.S. investors. At least, that’s what the regulators said, and that is what Binance itself claimed, while, as the SEC has set out in the extensive documentation accompanying the lawsuit, it offered its customers ways to bypass the limitation. The platform allegedly encouraged the use of VPNs (networks that allow users to hide the identity of the browser, allowing them to falsely change their connection’s geographical location), and produced a document with instructions on how to retain these VIP customers from the U.S.

At the same time, Binance contacted a company called Binance Consulting. This legal risk consultancy advised the company on several ways to circumvent the regulation. Among them was to create a subsidiary in the United States and disassociate it from Binance by disguising the relationship as one of merely providing technology services. Subsequent to the issuance of this recommendation, BAM Trading, an allegedly independent firm dedicated to offering Binance.US services, was born. The SEC states that BAM Trading was wholly owned by BAM Management, which in turn was 81% owned by Changpeng Zhao. “Binance operates through a network of subsidiaries or related companies, in multiple jurisdictions, all related to Zhao as a beneficial owner,” the SEC summarized.

According to the regulator, this network of companies was used extensively to move money to and from the Binance platform. “Until at least 2021, Binance-related entities of which Zhao was the ultimate owner diverted billions of dollars from customers to U.S. bank accounts in the name of Merit Peak, which in turn were transferred to Trust Company A, in apparent connection with the issuance of Binance’s stablecoin, called BUSD. The use of Merit Peak as an intermediary to transfer money from the platform’s clients to the purchase of BUSD represented a risk of which they failed to warn investors,” the regulator explained.

According to the investigation, not only were funds used to support the platform’s stablecoin, but there was a business network whose role was to move fictitious money for different purposes. The aforementioned Merit Peak was one of the two key pieces in the scheme that directly enabled Binance to operate in the United States; the other being an entity called Sigma Chain. The SEC alleges that one and the same man was behind both: Changpeng Zhao. “As BAM’s CEO testified under oath: ‘The extent to which these two liquidity providers were important, in a manner of speaking, our customers without the presence of those market makers on our platform would have had a real problem. I suggested that the company was, in fact, very dependent on Zhao, not only as a control person, but also as an economic counterpart and that’s problematic, so I thought we should look at excluding him from the platform,’” he said.

The document claims that these companies were also used to create fictitious trading between 2019 and 2022, thereby corrupting the volume traded on the platform. “For example, on September 25, 2019, the day after the Binance.US platform opened for trading, wash trades between Sigma Chain accounts and other accounts owned by Zhao or associated with senior employees at Binance made up more than 99% of the initial hour of trading volume in at least one cryptocurrency,” the regulator says.

Thus, according to the SEC, the accounts of Merit Peak and Sigma Chain moved tens of billions of dollars related to BAM Trading, Binance, and other entities. But the money did not just go to the platform. “In 2021, at least $145 million was transferred from BAM Trading to a Sigma Chain account. From this account, Sigma Chain spent $11 million on a yacht,” the inquiries reveal.

Once the lawsuit, filed in the District Court for the District of Columbia, has been presented, a judicial proceeding is initiated that will determine whether the SEC’s allegations about Binance are accurate. For the time being, the regulator is requesting a series of precautionary measures. “The Commission respectfully requests that the Court order temporary injunctive relief, including, but not limited to, freezing of assets, a verified accounting, repatriation of assets, expedited discovery, preservation of documents and information, prohibition of destruction of evidence, appointment of a receiver, alternative notice, and/or such other equitable relief as the Court deems just and proper.” As final motions to the court, the SEC requests that Binance and any related companies be prohibited from offering their services in the United States, as well as the payment of penalties.

In a statement, Binance has strongly denied the charges against it. In addition to emphasizing his cooperation with the authorities at all times, the company has accused the SEC of having chosen confrontation over reflection and of being more concerned with making headlines than with investors. “And to be clear: the allegations that user assets have ever been at risk on the Binance.US platform are simply wrong, and there is no justification for the Staff’s action considering that the Staff has had ample time to conduct its investigation. All user assets on Binance and Binance’s affiliated platforms, including Binance.US, are safe and secure, and we will vigorously defend ourselves against any allegations to the contrary,” reads the company’s statement.

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