Earlier this month, the Securities and Exchange Commission (SEC) filed charges against the parent companies of Binance.com and Binance US, plus their founder, Changpeng Zhao (CZ). The charges are similar to the SEC’s December 2022 civil suit against FTX’s parent companies and founder Sam Bankman-Fried (SBF).
In both lawsuits, the SEC alleges unregistered offering of securities to US residents.
- Binance has not registered its eponymous tokens – BNB and BUSD – nor its various interest-bearing products with the SEC.
- FTX has never registered several crypto asset securities it has listed for trading in the US, including Solana (SOL), Algorand (ALGO), Cardano (ADA), and many others.
The SEC also alleges that Binance.com secretly controlled certain assets and operations from Binance USA. FTX.com also secretly monitored the wallets used to hold the digital assets of FTX.US customers.
Binance and FTX have both borrowed the banking relationships of founder-controlled non-exchange entities to facilitate fiat deposits on the exchange.
Binance occasionally instructed depositors to transfer funds to Merit Peak, a hedge fund controlled by CZ. According to the SEC, “billions of US dollars in customer funds from both Binance platforms were commingled into an account of a [CZ] controlled entity called Merit Peak Limited.”
Read more: Binance audited the bank accounts of its US arm: Reuters for two years
FTX, on the other hand, occasionally instructed depositors to transfer money to Alameda Research, a hedge fund controlled by SBF.
Both companies created special entities just for US residents and claimed they would not allow the use of the international exchange. However, both companies secretly encouraged major US traders to circumvent these restrictions and use the international exchange.
Binance founded Binance US but encouraged its wealthiest US clients to trade with the international exchange. According to the SEC, Binance’s “VIP Handling document instructed Binance employees to ensure that US customers opened new accounts ‘with no US documents allowed’ and to inform the customer to ‘keep this confidential’.
Similarly, FTX created FTX US but encouraged its wealthiest US clients to trade with the international exchange.
Binance and FTX leaders controlled both trading companies
Binance founder CZ controlled two trading firms that traded on Binance: Merit Peak and Sigma Chain. According to the SEC, “From at least September 2019 to June 2022, Sigma Chain, a trading company owned and controlled by [CZ]engaged in wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform.
FTX founder SBF controlled Alameda Research, the largest trading company on both FTX.com and FTX.US.
Both companies pledged to separate customer assets from corporate funds. In reality both companies blended client and corporate funds.
Indeed, according to the SEC, “billions of US dollars in client funds from both Binance platforms were commingled into an account of a CZ-controlled entity.”
SBF intermixed client assets with FTX’s corporate funds. According to the SEC, SBF “directed FTX to have clients send money to North Dimension in an attempt to hide the fact that the money was being sent to an account controlled by Alameda. Alameda did not segregate these client funds, but instead mixed them with its other assets and used them indiscriminately to finance its trading activities and other SBF ventures.
Both founders too used their own tokens to support the company’s balance sheet of their exchange. CZ promoted BNB while holding huge amounts of BNB and BNB-dependent assets. During Binance’s inaugural year, CZ used Binance’s corporate profits to buy back and burn BNB, rewarding token holders with reduced supply.
Likewise, SBF consistently promoted FTT. According to the SEC, “FTX had significant exposure to FTT as the token was posted, among other things, as collateral for billions of dollars that FTX had loaned to Alameda to make speculative investments.”
To be fair, the two exchanges have differences. The circumstances surrounding the SEC’s respective civil charges are unique, and the charges against both companies and their founders are different. The most important, FTX is currently out of business while Binance is still operational.
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