In a one-two punch earlier this month, the U.S. Securities and Exchange Commission (SEC) filed back-to-back actions against two of the world’s largest cryptocurrency exchanges — the first succeeding in what are likely to be lengthy lawsuits against some of the biggest players in the industry. digital world. assets industry. First, on June 5, 2023, the SEC filed a complaint against Binance and its owner Changpeng Zhao. The next day, on June 6, 2023, the SEC filed a complaint against another major exchange in the United States.
None of these actions should come as a surprise to those watching the cryptocurrency industry. In March 2023, the Commodity Futures Trading Commission (CFTC) filed an enforcement action against Binance, and around the same time, the other national exchange announced that it had received a notice from Wells from the SEC regarding a likely enforcement action. The only real surprise was the SEC’s decision to file the two complaints within a day of each other.
A closer look
Both SEC complaints contain some similar claims. Specific:
- operating an unregistered exchange in violation of Section 5 of the Securities Exchange Act of 1934 (Exchange Act)
- brokering the purchase or sale of securities without registration in violation of Section 15(a) of the Exchange Act
- acting as a clearing house with respect to unregistered securities in violation of Section 17A(b) of the Exchange Act
- liability of the controlling person to parent companies of the entities for the above violations under section 20(a) of the Exchange Act
- offering and selling unregistered securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933 (Securities Act)
The similarities remain. Each complaint claims that:
- many digital assets traded on the respective exchanges are securities – 10 or 13 tokens respectively, with some token overlap between the complaints
- the stock exchange services are securities that are offered and sold without registration1
Finally, both complaints contain similar prayers for relief, including civil fines, remission and injunctions against future such violations of federal securities laws.
But that’s where the similarities between the two complaints end.
Unlike the other SEC complaint against a primarily US-based exchange, the SEC complaint against Binance alleges egregious conduct – significant, that Zhao has made an active effort to create an illusion of regulatory compliance by to create the US-based empty entity. , operating as binance.us, which would ostensibly serve US customers and would be separate from Binance’s international arm – itself operating as binance.com. The SEC alleges that these entities were never actually separated, assets of the different entities’ customers were commingled, binance.us violated the Securities Act’s negligent anti-fraud provisions, and Zhao maintained control of all entities — by failing to comply with the business formalities that would have made the entities separate and independent from other Binance affiliates.
In addition, the SEC alleges that Zhao operated two market-making entities, Sigma Chain and Merit Peak, to manipulate trading volumes, token prices and engage in wash trading. Also, contrary to the complaint against the US-based exchange, the SEC alleges that Binance issued and sold its own digital asset securities – BNB and BUSD tokens.
The SEC is also seeking a permanent officer and director against Zhao, barring him from ever acting as an officer or director of a public company.
In particular, the Binance complaint contains detailed allegations pointing to the SEC’s apparent access to collaborating witnesses and the receipt of internal communications and text messages. For example, “Binance’s CCO flatly admitted to another Binance compliance officer in December 2018,
‘we operate like a fking [sic] unlicensed stock exchange in the US bro.”“
Also unique to the Binance action, on June 6, 2023, the SEC filed an emergency motion asking the court to issue a temporary restraining order (TO) to freeze certain assets of Binance. The motion called for an order to be entered, requiring, among other things, the repatriation of certain assets belonging to or owed to customers of binance.us, prohibiting document destruction, requiring certified accounts and ordering expedited discovery. According to the SEC, a TRO is necessary because there is evidence, as described in the SEC’s memorandum and several statements, showing that Zhao and Binance are not reliable custodians of assets, refused to agree to satisfactory procedures to protect the status quo , and be able to easily evade assets from court jurisdiction.
In response, Binance argued that a restraining order was unnecessary and stated it was willing to make numerous concessions to address SEC concerns. At a motion hearing on June 13, 2023, District Judge Amy Berman Jackson agreed with Binance and ordered the parties to agree on the terms of a consent order. A few days later, the parties entered into a consent order in which binance.us agreed to 1) limit access to US customers’ assets to binance.us employees, 2) repatriate to the United States and under the control of binance. us to place. assets of US clients, 3) not giving access to assets of US clients to binance.com or Zhao, 4) providing written records of binance.us accounts, 5) providing the SEC with monthly operating expense reports, and 6) expediting discovery, under other things.
It is not clear whether such sweeping concessions from Binance will move the needle in terms of its reputation with the SEC. Chairman Gary Gensler, at a conference on June 8, 2023, merged Binance and Zhao with FTX, Terra/Luna, Do Kwon, Tron and Justin Sun:
We’ve seen this story before. It’s reminiscent of what we had in the 1920s before federal securities laws came into effect. Retailers. scammers. scammers. Ponzi schemes. The public lined up at bankruptcy court.
Binance, for its part, filed a motion on June 21, 2023, asking the court to order the SEC “not to make misleading out-of-court statements that could materially affect legal proceedings.”2 At the time of publication, the SEC has yet to comment.
The SEC’s actions earlier this month against two of the largest cryptocurrency exchanges in the world are the latest steps in an evolving agency trend: shifting focus from individual digital asset issuers – what appears to be regulatory whack-a-mole – to the scrutinizing major industry intermediaries through which digital assets are traded.
Key learning points
In the US, digital asset intermediaries may consider ways to either register their activities with the SEC or strictly adhere to applicable exemptions.
Expect more SEC investigation from:
- digital asset brokers seeking to circumvent U.S. federal securities laws by failing to serve U.S. customers
- created internal token listing policies to ostensibly prevent any intermediary from offering securities on their platform
- any intermediary that traditionally combines separate functions – e.g. securities issue, custody, brokering, buyer/seller matching, settlement and clearing
1. Staking is a way of generating a return on digital assets by tying up the digital asset for a period of time – analogous to a certificate of deposit.
2. Sure.’ Moth. for an Order Directing Counsel for Pl. to comply with the applicable code of conduct, SEC v Binance Holdings Ltd.No. 23-cv-01599 (DDC 21 June 2023), ECF No. 74.
The content of this article is intended as a general guide to the topic. Specialist advice should be sought regarding your specific circumstances.