Media spot parallels between the SEC’s case against Binance and the FTX saga

The SEC‘s charges against Binance are analogous to those brought by the agency against the beleaguered FTX cryptocurrency exchange and its subsidiary Alameda Research, including the commingling of company and customer assets, improper use of user funds and potential manipulation of the market for its own tokens. The Block reports.

The Block reporters studied the SEC’s 136-page complaint and the arguments cited therein, including testimony from former senior Binance.US executives and internal emails.

As in the FTX case, regulators allege that Binance attracted U.S. customers despite operating offshore and not registering in the United States, and that it effectively did not separate its trading operations across jurisdictions in order to evade existing regulatory requirements.

The SEC has sought a court order for an immediate, “verified” accounting of Binance and Binance.US finances, freezing and repatriation of assets, preservation of documents and the appointment of a receiver for Binance’s assets.

The CFTC against, which also points to serious executive misconduct and violations of the law, potentially leading to a ban on the exchange and its CEO Changpeng Zhao (CZ) from operating in the United States.

Binance has said it is prepared to “vigorously” resist pressure from the regulator and settle the matter out of court.

Movement of client funds

The SEC alleges that billions of dollars of customer funds from Binance and its U.S. affiliate Binance.US were commingled on the account of bankrupt American bank Silvergate Bank, the Zhao-controlled entity.

These assets were used to purchase the platform’s associated stablecoin, BUSD.

“Using Merit Peak as an intermediary to transfer customers’ funds to buy BUSD posed an undisclosed counterparty risk to investors,” the complaint states.

The regulator noted that Merit Peak’s bank account at the now-bankrupt American bank Silvergate Bank received more than $20 billion, including customer funds from both Binance platforms. The sum was then moved to an unnamed trust “in transfers believed to be connected with the purchase of BUSD.”

SEC also asserts that Binance.US market-makers — Merit Peak and another Zhao-owned firm Sigma Chain — were involved in “transferring tens of billions of dollars with the participation of BAM Trading, Binance and related entities.” Among these assets were customer funds, the Commission contends.

“In the absence of regulatory oversight the Defendants […] freely transferred crypto and fiat investor assets at their own discretion, sometimes commingling and redirecting them in ways that properly registered brokers, dealers, exchanges and clearing houses could not,” the complaint says.

According to the SEC, in 2021, from a bank account owned by Binance.US, at least $190 million was transferred to Sigma Chain. Not all funds were used for BUSD purchases or potential market manipulation, as Sigma Chain also bought a yacht for $11 billion.

Similar arguments by SEC and CFTC

Similarly to the CFTC’s findings, SEC lawyers say Binance violated U.S. law by operating in the United States without prior clearance. The attraction of American customers in circumvention of regulation was central to the platform’s business strategy, they add.

The complaint includes a December 2018 email from Binance’s chief compliance officer to a compliance staffer in which the former writes: “We operate as an unregistered securities exchange in the United States, bro.”

The document also cites a 2019 internal meeting in which top management are told of the need to hide the true geographic origin of U.S. customers, as they provide a substantial portion of trading volume.

The SEC contends that, thanks to constant monitoring, Binance knew where customers were logging in from and understood that blocking Americans would deal a serious blow to its business. By August 2019 the exchange was serving more than 1.47 million U.S. customers without any restrictions.

Mixing of assets by Binance and Binance.US

Publicly Binance sought to distance itself from Binance.US, but in practice controlled the subsidiary, casting doubt on compliance on both sides, the Commission says.

Testimony from former Binance.US chief operating officer and former Binance executives shows that Binance staff ran the majority of operations at the American company. The regulator also points to the platform’s “opaque” corporate structure.

Similar charges were also brought against FTX, accused of effectively controlling FTX.US and its sprawling network of affiliated entities.

Employee testimony

In its charges the SEC emphasizes not only corporate correspondence but also testimony from former exchange executives without naming them. However, given the dates of their tenure, The Block suggested the references are to former Binance.US CEOs Catherine Coley and Brian Brooks.

Brooks, under oath, noted that the U.S. subsidiary could not operate without liquidity provided by Zhao-linked investment funds Merit Peak and Sigma Chain. He also expressed concern about their indispensable role in the platform’s functioning.

“[Through these two liquidity providers] the company was actually heavily dependent on CZ not only as a controlling person but as an economic counterparty, and that is problematic, so I thought we should look into removing them from the platform,” Brooks said.

He also considered the degree of ties between Binance and the parent BAM Trading to be a problem.

Coley testified to Binance.US’s “significant opacity” of trading data and that CZ did not explain how to separate operating data for the main platform and the U.S. subsidiary.

Money laundering through Binance

Despite the CFTC and SEC charges alleging non-compliance with U.S. anti-money-laundering laws, neither agency directly oversees this area.

The Treasury, which handles this matter, in May began an investigation into Binance Holdings Ltd.’s parent over possible sanctions violations against Russia. However, to date no formal charges against the exchange or its top management have followed.

Media outlets have suggested that, if the CFTC and SEC succeed in court, much of the evidence in the civil suits could be used to underpin separate enforcement actions by the Treasury and the Justice Department.

In the March CFTC complaint, Lima’s internal message about Hamas transactions is cited, in which he acknowledges the platform’s use by criminals.

“Come on, [obviously], they are here for criminal purposes,” Lima allegedly told another employee in a 2020 chat.

In response, his interlocutor admitted that “we see trouble, but we look the other way.”

The SEC has, as noted, brought 13 charges against Binance, including unregistered offers and sales of the BNB and BUSD tokens, the Simple Earn and BNB Vault products and staking.

In March 2023 the CFTC filed a suit for violations of derivatives trading rules without proper registration.

Earlier Binance denied Reuters’ report of the commingling of user funds and revenues in 2020 and 2021.