The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against the cryptocurrency trading platform Binance, its CEO Changpeng Zhao, and Binance US on June 5, 2023.
The SEC accused Binance of operating an illegal exchange in the U.S., mishandling customer funds, and lying to regulators.
The lawsuit specifically alleges that Binance misused customer funds in some cases by diverting them to a trading entity controlled by Zhao, called Sigma Chain, and moved billions of dollars to another company controlled by Zhao called Merit Peak.
It also claims Sigma Chain engaged in manipulative trading practices that artificially inflated Binance’s trading volume. The SEC states that Binance publicly claimed the company was created as a separate, independent trading platform for U.S. investors, while it was secretly controlled by Zhao and his team.
The allegations bear resemblance to similar charges against Binance’s former competitor, FTX, and its founder Sam Bankman-Fried.
The SEC has explicitly referred to 12 tokens as securities in this lawsuit, including BNB (Binance’s native token), Binance USD stablecoin (BUSD), Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos Hub (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS), and Coti (COTI).
In the lawsuit, the SEC stated, “Since the Binance Platforms launched, Defendants have made available for trading on them crypto assets that are offered and sold as investment contracts, and thus as securities,” adding that the list is not exhaustive.
Interestingly, Ethereum (ETH) did not feature as a security in the lawsuit, despite SEC Chair Gary Gensler’s earlier declaration that all cryptocurrencies other than Bitcoin could be viewed as securities.
This has implications for Binance and potentially other exchanges that offer these tokens. Following the news of the lawsuit, the prices of these tokens, as well as Bitcoin, declined.
This SEC enforcement action follows a similar suit filed in March by the Commodity Futures Trading Commission against Binance.
In the larger context, the SEC has been cracking down on cryptocurrency companies, with several facing lawsuits in recent months, including Beaxy and Kraken.
The SEC has also been focusing on amending the definition of “exchange” under Exchange Act Rule 3b-16 to include platforms that trade crypto assets, including decentralized finance (DeFi) platforms. This suggests that crypto companies won’t be given a separate set of regulations but will be folded into existing securities regulations.
As of June 5, 2023, the price of Bitcoin is approximately $25,760, down 5.23% today and Ethereum is around $1,816 down 4,34% today.
