Is Binance vs SEC Eric Peaked? The Matchups News of the Week

2023-06-28, 09:25

[TL; DR]

SEC has sued Binance for providing securities related services without registering with it.

The SEC claims that Binance and Changpeng Zhao have risked the funds invested by its citizens through handing them to a third party.

The value of BNB fell after the SEC sued Binance.
Some market analysts believe that the price of BNB may fall to its 2022 low of $180.

Introduction

The United States’ crackdown on crypto activities seems to continue since it has issued lawsuits against big cryptocurrency exchanges that are operating in the country, Binance and Coinbase. The Securities and Exchange Commission (SEC) has charged the two exchanges for contravening the United States’ Securities laws.

Today, we focus on the SEC against Binance Lawsuit. We will also discuss Binance’s reaction to this legal development.

SEC’s Lawsuits against Crypto Exchanges

On June 5 and 6, The Securities and Exchange Commission (SEC) announced its legal charges against Binance, the biggest crypto exchange operating in the United States. This move shows the tenacity of the United States’ bid to stamp its authority on cryptocurrency issues.

The collapse of FTX exchange gave the SEC additional impetus to regulate crypto activities to protect the consumers. Despite SEC’s cases against Coinbase and Binance being slightly different they have something in common.

Binance CEO - Changpeng Zhao

The SEC accuses both exchanges of failure to register some cryptocurrencies as securities following the recent designation of 68 crypto assets in that category. According to the United States laws all businesses that deal with securities should first register such investment assets before allowing the public to buy them.

In a press release, dated 5 June, the SEC accuses “Binance and BAM Trading of operating unregistered national securities exchanges, broker-dealers, and clearing agencies.”

It further accuses, “Binance and BAM Trading of unregistered offer and sale of Binance’s own crypto assets, including a so-called exchange token, BNB, a so-called stablecoin, Binance USD (BUSD), certain crypto-lending products, and a staking-as-a-service program.”

Markedly, the SEC under the leadership of Chair Gensler, is determined to designate many cryptocurrencies as securities. In fact, Gensler recently said that almost all cryptocurrencies are securities. Nevertheless, time will tell whether or not the SEC will designate all crypto assets as securities.

The Charges Against Binance

Let’s briefly discuss the charges which the SEC has levelled against Binance. On 5 June this year, the SEC filed 13 charges against Binance Holdings Ltd, Binance Exchange founder and CEO Changpeng Zhao and BAM Trading Services Inc. (“BAM Trading”)- which collaborates with Binance to operate the crypto asset trading platform.

The SEC charged that although Binance claims to restrict United States residents from trading on its platform it clandestinely allows its high-value citizens to trade with them.

It also alleges that although Binance.US claims that it is independent from Binance Global Unit it falls under its control and supervision.

Another allegation is that Binance exercises much control on the assets of its customers to the extent of commingling them as well as diverting them to other uses and entities like Sigma Chain which Zhao controls.

The SEC also believes that Binance and or Zhao have been performing manipulative activities. In a press release it said “The SEC’s complaint further alleges that BAM Trading and BAM Management US Holdings, Inc. (“BAM Management”) misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume.”

The allegations against Binance CEO Zhao are based on the fact that he is the one who is in control of Binance’s and BAM Trading’s activities. Further, SEC deems that the two entities are “unregistered national securities exchanges, broker-dealers, and clearing agencies.”

The statement by the SEC Chair Gary Gensler’s clearly summarizes the allegations against Binance, BAM Trading and CEO Changpeng Zhao. He said: “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.”

Potential risks of Binance’s Activities on investor funds: SEC

One of the complaints in the SEC lawsuit against Binance is that Zhao and Binance have put the funds of the investors at risk. It succinctly stated that the funds of the customer are at the mercy of Binance and Zhao who “have enriched themselves by billions of U.S. dollars.”

It supported its position by claiming that Binance and BAM Trading have intentionally bypassed the United States’ regulatory oversight through offering unregistered securities-related services to its citizens. It said, “[This] puts the safety of billions of dollars of U.S. investor capital at risk and at Binance’s and Zhao’s mercy.”

According to the SEC the risks arise from the commingling of Binance and Binance.US customer funds in an account controlled by Merit Peak Limited, an entity which Zhao owns and controls. As such, Binance normally transfers its US customer funds into the hands of a third party for the purpose of buying and selling cryptocurrencies.

Furthermore, the regulators believe that this arrangement has provided Zhao with the freedom to use the billions of dollars deposited by US investors without regulatory oversight from the relevant authorities. As a result, on 6 June the United States regulators filed a motion for a restraining order against Binance for operating without a license and mishandling its citizens’ invested funds. They also requested freezing of Biance.US funds.

Binance may have misled US lawmakers with its statement

One of US regulators’ complaints against Binance is that it might have given them misleading statements pertaining to its business operations in the United States. For instance, earlier during the year Binance made a statement claiming that Binance US is independent from its global entity. However, the Securities and Exchange Commission believes that Binance US and Binance’s global entity are commingled.

As a result of this suspicion, the US senators have asked the Justice Department to investigate whether or not Binance made a misrepresentation of fact to the Congress through its statement. The senators think that Binance might have misrepresented its relationship with its local unit to avoid sanctions, evade US regulatory oversight and to facilitate money laundering.

Jack Graves, a law professor at Syracuse University, told Cointelegraph that if Binance has a strong financial relationship or has control over the US Unit there are clear legal implications.

He said “If you don’t keep them independent, then the U.S. regulators will go after Binance International and say we have jurisdiction because you are acting through the U.S. entity. And in fact, I think the SEC is looking at that.”

The SEC might want clarity on the relationship between the two entities since that has legal implications in case the US unit becomes bankrupt. If the two entities are commingling funds it means that Binance Global Unit will have the obligation to pay for Binance US debts in case of a bankruptcy.

According to Graves, however, if “Binance.US is fully independent, and it ends up in bankruptcy, Binance International is not obligated to pay the debts of Binance.US.” These scenarios could be the reason why US Senators want clarity on the issue.

Binance US Puts US deposits on hold

In response to the lawsuit and US investigations Binance suspended all USD deposits and withdrawals with effect from 13 June. Further to this, it has encouraged its customers to withdraw USD through bank transfers. According to Binance this is because the situation is dire.

It explained, “The SEC has taken to using extremely aggressive and intimidating tactics in its pursuit of an ideological campaign against the American digital asset industry. Binance.US and our business partners have not been spared in the use of these tactics, which has created challenges for the banks with whom we work.”

Binance vs SEC: The downward trajectory of BNB and its potential limit

Despite its early June bullish momentum BNB gave in to the pressure exerted by the SEC against Binance. Already, by the second week of June, the price of BNB had dropped by 15%. Notably, during the same period Binance halted the trading of several pairs including Bitcoin.

The current lawsuits against crypto exchanges including Binance has resulted in a decrease in demand for Binance Coin. However, some technical indicators showed that BNB was still bullish during the second week of June despite losing its momentum. Particularly, the BNB/USD pair showed a possibility of a short term rebound. That possibility was backed by the fact that the Relative Strength Index (RSI) entered the oversold region, below 30.

Nonetheless, some analysts predict that BNB value will drop within the next few months. For instance, TraderSZ, an independent market analyst thinks that the price of BNB may fall to $180 due to the ongoing lawsuits against crypto exchanges including Binance.

At the time of writing, 18 June, the price of BNB is $246.94 after registering a 4.5% increase within the last 7 days. Overall, however, it lost 20.1% within the last 30 days. The diagram below gives a summary of the important statistics.

Price movements of BNB within the last 30 days- Coingecko

As the diagram indicates, the price of BNB dropped significantly from $300.85 on 5 June to $224.47 on 12 June. However, it has been on a rebound since 15 June.

Conclusion

Binance US has halted the deposit of USD following the SEC complaint against it. At the same time, it recently advised its customers to withdraw their USD via bank transfer. Primarily, SEC sues Binance for offering securities related services without registering them with it. Also, the current Binance investigation and SEC’s enforcement of securities laws against crypto exchanges operating in the United States has led to the reduction in the demand for crypto assets like BNB.

Is there a lawsuit against Binance?

On 5 June The Securities and Exchange Commission (SEC) filed a lawsuit against Binance accusing it of offering unregistered securities services to the public. In all, Binance is facing thirteen charges from the SEC.

Why did the SEC sue Binance?

The SEC sued Binance for offering unregistered crypto securities to the public.This follows the SEC’s designation of 68 cryptocurrencies as securities.

Is my money safe at Binance?

The investors’ funds which include cryptocurrencies and USD are safe at Binance despite the recent lawsuits. There is no sign that they will lose their assets since the SEC aims to protect the investments of its citizens.

What is going on with Binance?

The Securities and Exchange Commission (SEC) sued Binance on 5 June 2023, accusing it of selling unregistered securities services. This comes after the SEC has designated 68 cryptocurrencies as securities.

Author: Mashell C., Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment suggestions.

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