In a major development, the U.S. Securities and Exchange Commission (SEC) has lodged a comprehensive lawsuit against Binance, the world’s largest cryptocurrency exchange. The lawsuit, which details 13 separate charges, was filed in federal court on Monday, June 5, and accuses Binance of mismanagement of customer funds and deception towards regulators and investors about its operations.

“Through thirteen charges, 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,” SEC Chair Gary Gensler said.

“As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied.”

The lawsuit

According to the SEC, Binance has been accused of intermingling customer funds amounting to billions of dollars and covertly transferring them to a distinct company, Merit Peak Limited. This company is reportedly under the control of Binance’s founder, Changpeng Zhao, who is widely known in the cryptocurrency world as “C.Z.”

The charges against Binance extend to allegations of misleading investors about the robustness of its systems designed to identify and curb manipulative trading. The SEC further asserts that Binance failed to implement adequate measures to prevent U.S. investors from accessing its unregulated exchange.

The legal complaint also states that the SEC has identified several individual tokens which it believes to be securities, which include BNB, BUSD, SOL, ADA, MATIC, FIL, ATOM, ALGO, COTI, SAND (The Sandbox), MANA (Decentraland), AXS (Axie Infinity).

Binance responds

Taking to Twitter to address the allegations, Zhao indicated that he had not yet received the complaint and that the company would respond once it does. Initially, their team said that they were “standing by, ensuring systems are stable, including withdrawals and deposits.”

Zhao eventually tweeted out the company’s official response to the allegations, claiming that the SEC aims to “unilaterally define” the shape of the crypto market.

“We are disappointed that the U.S. Securities and Exchange Commission chose to file a complaint today against Binance,” the company explained in a blog post addressing the issue. “From the start, we have actively cooperated with the SEC’s investigations and have worked hard to answer their questions and address their concerns.”

“Unfortunately, the SEC’s refusal to productively engage with us is just another example of the Commission’s misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry,” the post continued.

“Today’s action is another in a line of examples where, as with other crypto projects facing similar suits, the Commission has determined to regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology.”

What this means for Binance

This lawsuit against Binance is the latest in a series of actions by U.S. regulators ostensibly aimed at bringing order to a largely unregulated cryptocurrency trading space. While regulators’ seeming objective is to ensure that major players in the industry adhere to U.S. laws, there has been much debate and dissent, even within the SEC’s own leadership, as to whether or not the organization’s “regulation by enforcement” policy is either effective or fair.

Binance, much like its competitor Coinbase, has been grappling with mounting legal pressure in the face of this approach. The Justice Department is currently investigating the former for potential money-laundering violations. Additionally, Binance’s external auditing firm, Mazars, severed ties with the company following its decision to cease business with cryptocurrency companies last year. Binance’s dominance in the cryptocurrency market has also been waning, though it remains the number one exchange by volume in the market.

In an attempt to maintain its reputation and avoid complications with the SEC, Binance has brought on board several new compliance officials in the last year, including a former federal prosecutor who is now leading its compliance operation.

In the SEC statement announcing the charges, Gurbir S. Grewal, director of the SEC’s enforcement division, stated, “We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk.”

The action by the SEC comes just over a month after the Commodities Futures Trading Commission (CFTC) initiated its own civil enforcement action against Binance and Zhao, in which the CFTC is seeking a lifetime ban on Zhao from conducting business within its jurisdiction. It also aims to permanently expel Binance from the United States.

Proposed freeze

Following the lawsuit’s issuance, the SEC issued an emergency motion to freeze assets held by Binance.US on Tuesday. The proposed freeze would affect BAM Management US Holdings and BAM Trading Services, two companies involved in Binance.US’s operations.

The motion also requests “the repatriation and other specified relief concerning the custody and control of fiat currency and crypto assets deposited, held, traded, and/or accrued by customers on the Binance.US crypto asset trading platform,” which would involve transferring assets back to the United States.

Should the motion be granted, Binance would have to justify to the court why an injunction (causing it to cease operations) should not be issued. It would also prevent Binance defendants named in the lawsuit from concealing or destroying relevant records. The motion indicates that the SEC wishes to expedite the legal process on the grounds that Binance is, by the very behavior it is being accused of, willing to engage in illegal actions.

Editor’s note: This article was written by an nft now staff member in collaboration with OpenAI’s GPT-4.

This article was breaking, and has been updated with additional information on the proposed asset freeze.

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