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The United States SEC sued Binance, the world’s largest cryptocurrency exchange, and its founder, Changpeng Zhao, for allegedly operating a “fraudulent network”

U.S. regulators indicted Binance Inc and its CEO Changpeng Zhao on Monday (June 5) for allegedly operating a “fraudulent network”, further pressure on the world’s largest cryptocurrency exchange Bitcoin fell to its lowest point in nearly three months.

File photo Changpeng Zhao, founder of Binance
File photo: Changpeng Zhao, founder of Binance

The U.S. Securities and Exchange Commission (SEC) filed a lawsuit in a federal court in Washington, D.C., outlining 13 charges against Binance, Changpeng Zhao, and the company’s U.S. exchange operator, which it claims is independent.

The SEC accused Binance of artificially inflating its trading volume, diverting customer funds, failing to restrict U.S. customers from accessing its platform, and misleading investors about its market surveillance.

The SEC also alleges that Binance and its billionaire founder, Changpeng Zhao, one of the cryptocurrency industry’s most prominent tycoons, secretly control clients’ assets, mixing and moving investor funds “at will.”

Binance established a separate U.S. entity “as part of an elaborate scheme to circumvent U.S. federal securities laws,” the committee said. The SEC mentioned some practices of Binance. The practices were first reported by Reuters in a series of investigations into the exchange published in 2022 and this year.

The SEC also alleges that, from approximately three years ago until June 2022, Sigma Chain, a trading firm owned and controlled by Changpeng Zhao, engaged in so-called wash trading that artificially exaggerated the trading of crypto asset securities on the Binance.US platform quantity.

“We allege that Changpeng Zhao and Binance entities engaged in a broad web of fraud, conflicts of interest, lack of disclosure, and careful circumvention of the law,” SEC Chairman Gary Gensler said in a statement. 

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Binance said in a blog post “We intend to vigorously defend our platform,” said Zhong, adding that “because Binance is not a U.S. exchange, the reach of the SEC action is limited.” Wen’s blog post said: “Binance and Binance-affiliated platforms — including Binance US — all user assets are safe and secure.”

Binance US, which is controlled by Changpeng Zhao, said in a tweet that the legal action was “unreasonable in terms of fact, law, and the committee’s own precedent.”

Bitcoin, the world’s largest cryptocurrency, fell 6% to its lowest point in nearly three months following the news. Binance’s own cryptocurrency, Binance Coin (BNB), which has the world’s fourth-largest market size, fell more than 5%.

Market participants said that the SEC’s allegations may hinder the development of Binance, and the lawsuit may also cause knock-on effects in the encryption industry. Binance dominates cryptocurrency exchanges, processing about $65 billion worth of transactions per day last year, capturing as much as 70 percent of the market.

“I think there’s a big risk that this could have a serious impact on Binance,” Ed Moya, senior market analyst at foreign exchange broker Oanda, told Reuters. Legal Dilemma

SEC’s lawsuit is the latest in a string of legal headaches for Binance, which was also sued in March by the U.S. Commodity Futures Trading Commission (CFTC), which the regulator said operated an “illegal” exchange and a “bogus” compliance program. Changpeng Zhao called these “incomplete accounts of the facts.”

Binance is also currently under investigation by the U.S. Department of Justice (DOJ) for alleged money laundering and sanctions violations, according to people familiar with the matter.

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Binance Holdings was founded in Shanghai in 2017 by founder and CEO Changpeng Zhao, a Canadian citizen who was born in China and stayed there until he was 12. Currently, Binance’s holding company is based in the Cayman Islands. However, the exchange said it has no headquarters and declined to reveal the location of its main exchange, Binance.com.

The SEC alleges that Changpeng Zhao devised and implemented a scheme to “covertly circumvent U.S. laws.” The SEC alleges that Binance’s chief compliance officer admitted, “We don’t want (Binance).com to be subject to any regulation.” The SEC also said that while Binance US has long claimed to operate independently, CZ was in fact leading the transaction Place.

Billions of dollars in Binance customer funds were mixed with company funds — in violation of U.S. law — in bank accounts of entities controlled by Changpeng Zhao and then transferred to exchanges also controlled by Changpeng Zhao, the SEC said Company Merit Peak.

Binance has denied mixing customer and company funds, saying that users who send money to the account are not depositing funds but buying Binance’s custom dollar-pegged cryptographic tokens.

The SEC’s lawsuit followed a Reuters report on Monday that a Binance executive was primarily responsible for running five bank accounts of Binance’s U.S. operator, BAM Trading, one of which contained funds from U.S. customers.

The executive had “signatory authority over BAM Trading’s U.S. dollar accounts” until at least December 2020, the SEC wrote.

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