U.S. Authorities Sue Binance and Founder Zhao for Deceptive Practices

On Monday, U.S. authorities filed a lawsuit against Binance, the world’s largest cryptocurrency exchange, and its CEO, Changpeng Zhao, alleging deceptive practices that led to a significant drop in the price of Bitcoin. The U.S. Securities and Exchange Commission (SEC) brought forward 13 accusations in a federal court lawsuit filed in Washington, D.C., targeting Binance, Zhao, and the operator of its supposedly independent U.S. exchange.

Among the SEC’s allegations is that Binance misled investors about its market monitoring procedures and exaggerated its trading volumes. The complaint further claims that Binance and its founder surreptitiously controlled client assets, allowing them to manipulate and redirect investor funds as they pleased. The SEC also contends that Binance established several U.S. subsidiaries as part of an elaborate scheme to evade federal securities laws, a series of practices initially exposed in Reuters’ investigations in 2022 and 2023.

The lawsuit specifically highlights Sigma Chain, a trading firm owned by Zhao, engaging in wash trading to artificially inflate the trading volume of crypto asset securities on Binance. The SEC asserts that Sigma Chain squandered $11 million of investor funds on a boat.

Additionally, the SEC suggests that the U.S. platform is implicated in these activities. SEC Chair Gary Gensler condemned Binance and Zhao, stating, “We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.”

Binance responds to the accusations

In response, Binance defended its platform vigorously, emphasizing that the SEC’s actions are limited in reach since Binance is not a U.S. exchange. The exchange assured users that their funds remained secure and expressed disagreement with the SEC’s assertions. Binance claimed to have cooperated with the SEC and attempted to reach a reasonable resolution, but the SEC presented new demands at the last moment, leading to the lawsuit. Binance characterized the SEC’s moves as an attempt to assert jurisdictional authority beyond its scope.

 

Effects of the lawsuit on the markets

Following the announcement of the lawsuit, Bitcoin’s price plummeted by 6%, reaching its lowest level in over three months. The fourth-largest cryptocurrency by market cap, Binance Coin (BNB), also experienced a decline of over 5%.

Market participants have expressed concerns about the potential impact of the SEC’s allegations on Binance and the broader cryptocurrency market. As the largest cryptocurrency exchange, Binance handles a daily trading volume of $65 billion. Recent data shows a decline in Binance’s spot market share across major exchanges, raising further apprehension. Ed Moya, a senior market analyst at Oanda, warned that these developments could be detrimental to Binance’s operations.

It’s worth noting that Binance has faced a series of lawsuits, including the recent legal action by the U.S. Commodity Futures Trading Commission (CFTC) in March. Zhao has criticized the lawsuits, describing the recitation of facts in the latest complaint as incomplete. 

SEC adds more tokens to its securities list

According to another recent report, the Securities and Exchange Commission (SEC) has classified over $115 billion worth of cryptocurrency as unregistered securities. The current estimated figure for “unregistered securities” emerged following the SEC’s recent action against Binance, where a few additional digital assets were included in this category.

The report reveals that on Monday, the regulatory body added twelve tokens to the list of unregistered securities after a thorough investigation spanning several years. The newly identified tokens encompass Binance Coin (BNB), Binance USD (BUSD), Solana (SOL), Cardano (ADA), Polygon (MATIC), Cosmos (ATOM), The Sandbox (SAND), Decentraland (MANA), Axie Infinity (AXS), and COTI (COTI).

The impact of this development falls primarily on Coinbase, Kraken, and other exchanges based in the United States. These exchanges now face the dilemma of whether to delist the affected tokens, and it also poses challenges for US market makers who might need to cease their activities related to these tokens due to their classification as securities.

Furthermore, the SEC has designated additional prominent cryptocurrencies like Ripple’s XRP and LBRY’s LBC as unregistered securities. In light of these actions, SEC Chair Gary Gensler has notified.

Conclusion

The legal battles surrounding Binance and its founder as well as the new securities listings are likely to have significant implications for the future of the exchange and the cryptocurrency industry as a whole. The development has already seen a general dip in the crypto space with most digital assets recording drops in their price valuations. 

This drop can be attributed to fear uncertainty and doubt (FUD) and investor panic that might have developed from the developments as investors watch out for Binance’s fate in the legal wrangle. Binance has witnessed massive sell offs since the release of the news by the US watchdog.