SEC: what Binance risks with the lawsuits

Tuesday, June 6, 2023

After several months of investigation, the US Securities and Exchange Commission has decided to take legal action against the world's largest internet platform and its founder. The penalties could potentially be very heavy.

The sword of Damocles that has been hanging over the head of Binance and its founder Changpeng Zhao for months has finally fallen.

After months of investigation, the US securities regulator announced on Monday that it would be taking legal action against the world's largest platform. If the US subsidiary is concerned, so is the global entity.

"(Changpeng) Zhao and entities of Binance were guilty of a series of deceptions, conflicts of interest, lack of transparency and a calculated circumvention of the law", SEC chairman Gary Gensler said in a statement posted on social networks.

"They misled investors about their internal control practices and manipulated trading volumes while actively disguising the company's organisation," added the SEC boss, who has been waging a major offensive on cryptos since FTX's collapse in November 2022.

In total, the 136-page court document lists 13 breaches. The most important are:

1/ Violation of the law on financial securities

According to the SEC, Binance has been marketing digital assets, cryptocurrencies and tokens, which are in reality "financial securities", for years. Yet the regulations on the subject are clear: to sell financial securities, an operator must comply with a number of rules, such as being registered with the regulator as an issuer of financial securities or having prospectuses for financial products, things that Binance US obviously never had.

2/ Targeting US customers with Binance "monde"

Officially, Binance has a US branch that allows it to sell its services in the US. Except that, according to the SEC, Binance's US customers were managed by both the US branch, which is regulated and headed by Brian Shroder, and the global entity, which is headed by Changpeng Zhao.

Also according to the SEC, Binance knew that some of its US customers were carrying out transactions on the Binance.com even though it was not registered with the US authorities.

3/ Binance's opacity

Binance is accused of having mixed some of its funds with two of its customers in its accounts. The SEC is talking about several hundred million dollars. Reuters had already published information on this subject a few weeks ago, which Binance denied, but the document published today seems to corroborate it.

Also according to the SEC, some of Binance's customer funds would have benefited Changpeng Zhao via one of the companies he owns: Merit Peak.

👉 What are Binance and CZ risking?

The process is still in its early stages, but the penalties could go quite far. "The US justice system doesn't have a scale. It all depends on the seriousness of the facts, the extent of the damage and, above all, the intentional nature of the offences", explains a lawyer.

Firstly on a financial level: in this type of case, companies pay penalties on the income they have wrongly generated in the United States, and even outside. Now, according to the SEC, Binance has been in breach of US law since 2018, in other words almost since the start of its business, which was launched in... 2017.

Based on this information, and given the level of the company's business volume, the fine could reach several billion dollars, or even more. In a statement, Binance denied the charges and explained that they were waiting to learn more before reacting.

Then on a more operational level: beyond the financial impact of the sanctions, the US justice system can take coercive measures against the US entity, such as closing it down for violating the law or imposing operating conditions that make it almost impossible to do business.

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This analysis is not investment advice. It has been prepared without taking into account your personal situation, particularly your financial situation, risk profile, and investment objectives.

Before investing in any product, investors should fully understand the risks involved and consult their own legal, tax, financial, and accounting advisors.

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