SEC Files Lawsuit Against Binance: Impact on Crypto Market

In a significant development for the cryptocurrency world, the Securities and Exchanges Commission (SEC) has launched a lawsuit against Binance, the world’s largest cryptocurrency exchange. The allegations include operating an unregistered national securities exchange, broker-dealer, and clearing agency, as well as misusing user funds and offering unregistered securities. The news sparked panic selling, leading to a 7% drop in Bitcoin and a 4% drop in Ethereum.

SEC Lawsuit Shakes Binance and Crypto Market

Binance, the renowned crypto exchange, is now confronting a civil lawsuit filed by the US securities regulator. This legal action has caused a 5% decrease in the overall market cap of cryptocurrencies overnight. The lawsuit’s primary claim revolves around Binance operating as an unregistered national securities exchange, broker-dealer, and clearing agency. What makes this case profound is the SEC’s assertion that several crypto assets, including BNB, BUSD, SOL, ADA, and MATIC, should be classified as securities under US law. This classification has raised concerns among exchanges and other platforms, which might result in the delisting of these tokens due to fears of regulatory repercussions. Additionally, the SEC accuses Binance of offering and selling unregistered securities, focusing specifically on BUSD, BNB, and certain lending and staking programs. Furthermore, the SEC alleges that Binance engaged in the commingling of customer funds, involving billions of dollars, through entities controlled by the exchange’s CEO, Changpeng Zhao.

Commingling of Assets

According to the 136-page filing, Binance utilized accounts held by two entities controlled by Zhao, Merit Peak and Sigma Chain, to transfer tens of billions of dollars among Binance and its associated entities. The filing reveals that in 2021 alone, $145 million was transferred from BAM Trading to a Sigma Chain account, and an additional $45 million from BAM Trading’s Trust Company B account to the Sigma Chain account. Shockingly, $11 million from this account was used to purchase a yacht. Moreover, since the launch of Binance.US, Merit Peak’s US bank account allegedly received over $20 billion, including customer funds from both the US and global Binance platforms. Merit Peak then transferred the majority of these funds to Trust Company A for the purchase of BUSD. The transfer of customer funds to Merit Peak, an allegedly independent entity, could have placed these funds at risk of loss or theft without customer notification.

Misrepresenting Trading Controls

The lawsuit highlights Binance’s failure to implement the trading controls it claimed to have. The SEC alleges that the controls were either nonexistent or ineffective in monitoring and protecting against manipulative activities like wash trading and self-dealing. Evidence provided by the regulator shows that Sigma Chain was engaged in wash trading from September 2019 to June 2022, artificially inflating the trading volume on the Binance.US platform.

Binance Responds and Future Implications

In response to the lawsuit, Binance expressed disappointment with the SEC and affirmed its commitment to cooperating with regulators to seek clarity. The exchange denied allegations of fraud, market manipulation, and commingling of user funds through Zhao-controlled entities, reiterating that these entities were solely used to facilitate user purchases.

Key Takeaways for Investors

Investors should closely monitor the situation, as the SEC’s actions may lead to the delisting of specific tokens from exchanges like Uniswap. However, it is important to note that delisted assets can still be accessed through the underlying smart contracts, which are immutable and uncensorable.

On the other hand, the non-custodial infrastructure could witness improved liquidity as users and liquidity providers shift towards decentralized exchanges that allow them to retain ownership

of their assets. This trend began after the collapse of FTX in November and is expected to accelerate further. If altcoins are officially classified as securities, it is anticipated that the long tail of crypto assets may face tighter market conditions and reduced liquidity. Market makers like Jane Street and Jump Crypto might also scale back their operations in the United States until there is greater clarity regarding the regulatory classification of crypto assets.

Looking ahead, it is important to note that the SEC is not the only agency targeting Binance. The allegations from the Commodity Futures Trading Commission (CFTC) and the US Department of Justice (DOJ) should also be closely monitored, as they could have additional implications for the exchange.