- After slamming lawsuits for offering unregulated securities, SEC brings fresh allegations related to wrongdoings with the customers’ assets.
Binance’s legal complications do not seem to be stopping anytime soon. In fact, they are piling up with a new allegation every time. In the most recent one, the Security and Exchange Commission has alleged that Binance is actively involved in what is seen as an act of money laundering. According to the regulator’s statement, Binance and its US unit have redirected over $12 billion of its customer assets into entities privately controlled by its founder and owner Changpeng ‘CZ’ Zhao.
This fresh allegation strengthens the case in favor of the SEC as it has already slammed lawsuits against the exchange. As per the regulations, the money was moved between 2019 and 2021. It has also pleaded with the judiciary to freeze the assets of BinanceUS and Zhao momentarily. The body has filed a temporary restraining order on the exchange.
Reacting to the allegations, the Binance spokesperson gave a lengthy statement. Though they did not say anything immediately, took a defensive mantle a little later. They said they want to protect their platform with all their might.
SEC took the banking route for investigation
The regulatory came up with these allegations after they analyzed the bank statements of the accounts held by Binance, Binance US, Signature Banks, and Zhao at Silvergate. As per the reports, the banks assisted SEC by giving them the document for analysis. The documents will be submitted to the US District Court for examination. Sachin Verma, the assistant chief accountant for SEC’s enforcement division will do this handover.
The paper provided by the legal team SEC reveals that these assets were moved to another entity called Merit Peak. The agency further informs that Merit Peak Zhao’s own trading firm that he establishes with this personal income.
However, the funds that were slipped into this entity belong to Binance’s customers. As per the SEC, this is an egregious violation of norms of doing business in the US. In fact, the regulatory informed that Merit Peak has a total seed fund of $22 and out of it, $12 came from Binance’s customers’ assets.
Furthermore, the regulatory divulged that there is another entity called Key Vision Development Limited that received funds to the tune of $11 from Binance customer assets.
And the list of beneficiaries does not stop here. Paxos, a New York-based trust company also got $21.6 billion out of the $22 billion amount. This company tied up with Binance over the development of BUSD stablecoin.
The name of Paxos cropped up in another investigation of SEC back in February. Since then, the firm stopped issuing the stablecoin, but it still redeems the token. According to its spokesperson, the company distanced itself from Binance. It said that it’ll function as a trust company and will cooperate with the government to nab the culprits.
In the same month, Paxos decided to part ways with Binance. It has been snapping all the business ties with the crypto exchange behemoth since then. It also said that the complaint against Binance does not involve the name Paxos.
According to SEC, Merit is also registered with Binance US for trading. The body has expressed its doubts over the fact that Zhao’s personal trading firm was trading on Binance. Giving a brief to the court, it said that the personal funds should have been routed through a “pass-through” personal account. It should not have crossed paths with Binance’s customers’ funds.
Insights into the SEC filings
Reportedly, the SEC has used these documents for building its case stronger against the Binance. It has submitted a dossier that contains hundreds of pages disclosing the transaction details. The docs reveal how Binance, Binance US, and Zhao’s personal trading firm misused funds acquired by its customers.
The filings also mention that the SEC has been investigating Binance US actions since 2020. According to it, the scrutiny predates the appointment of current chairperson Gary Gensler.
As per its statement, the regulator issued the first subpoena to the US affiliate on Dec. However, the exchange blatantly ignored it and refused to cooperate. Finally, they gave a response in February this month, but the answers were not satisfactory.
Disclosing the internal operations further, the SEC tells that Binance has total control over the Binance US and its crypto assets. The company just shows that the two are separate entities, but actually, they’re not. And this information was acquired by Binance US’s own auditor. According to the personnel, Binance has total ownership over its US affiliate’s assets.
The auditor notified the exchange about this messy arrangement. It warned that the firm will face issues in securing sufficient funds to pay its customers if they wanted to withdraw their assets.
However, the report did not make clear who will have custody of US customers’ assets. The SEC says that all those details are included in the voluminous account that they have submitted. It also involves the testimony given by the erstwhile Binance US CEOs. On Tuesday, the agency asked the court to freeze the assets of Binance US excluding those available for withdrawals to customers.
Drawing a comparison with FTX
As per the lawyers of SEC, Binance and Binance US have illegally moved assets worth approximately $8 billion. Also, the body reveals that the ex-FTX CEO is also accused of doing something similar. He moved the assets from FTX to the sister trading company Alameda Research.
Today, Bankman-Fried is the poster boy for crypto-related frauds. Also, he told the reporters that he wasn’t the only one indulging in such actions. Interestingly, he accepted investments from Binance too at that time.
In a tweet shared in November 2022, he said that most cryptocurrency exchanges were involved in such activities in one way or the other. The difference is just the scale to which they are doing it.
The FTX failure remains the biggest crypto scam to date for which Bankman-Fried faces over 100 years in prison. He is scheduled for trial in October for the charges of misuse of customer funds along with civil fraud charges.
If the allegations are proven, then it would definitely be a big jolt to Binance. After all, it’s exactly what brought FTX to bankruptcy and its CEO to court. We’ll have to wait and see how the Binance holds its grounds and emerge from this situation.