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  • Writer's pictureAkeju Abiola

Breaking: SEC indicts Binance, as Changpeng Zhao agrees to step down.

Updated: Nov 27, 2023

Photo of Changpeng Z

In June 2023, the US Securities and Exchange Commission, a federal agency saddled with enforcing federal securities laws, sued Binance, the world's largest cryptocurrency exchange, for breaking several federal securities laws.

The market reacted swiftly, with investors moving funds out of Binance and the general crypto market suffering a minor price dip. The FTX saga of November 2022, which cost users $8.9 billion in customer assets and caused more losses on the general crypto market, was still fresh on everyone’s mind.

That was not the first time a US institution had sued Binance. In March 2023, the Commodity Futures Trading Commission (CFTC), the agency responsible for promoting the integrity of the U.S. derivatives markets, filed a complaint against Binance and its CEO, Changpeng Zhao (CZ), in a federal court in Chicago. The complaint alleges that Binance offered crypto futures and derivatives to U.S. residents without registering these offerings with the CFTC.

The Binance lawsuit came at a time when many traditional players were advocating for clearer regulatory guidelines for the general crypto industry, believing it was a necessary step to address uncertainties and usher in crypto’s next phase of growth.

The SEC lawsuit alleges many things about Binance.

Among other allegations, they alleged that Binance, which launched in 2017, knowingly and willfully operated an unlicensed Money Transmitter Business (MTB) for US citizens without meeting registration requirements under the United States MTB laws. According to the SEC, the bulk of Binance's initial liquidity, which gave it trade volumes and helped it expand as a global brand, came from US citizens. They claimed that Binance was aware of this situation, yet rather than taking appropriate measures, it employed tactics to avoid regulation. It involved the refusal to register its business as mandated by US laws.

The SEC further alleged that Binance operated a VIP membership, under which Binance users were expected to maintain substantial balances, keep the Binance native token, and do other things that helped the exchange grow, which was how Binance built its market dominance. VIP members then received exclusive rewards, including trading fee rebates, free transfers, and staking rewards, among others. According to the SEC, the bulk of these VIP users were US citizens.

Furthermore, the SEC alleged that Binance failed to carry out adequate KYC procedures for its users. They alleged that users could make trades by just providing an email without carrying out any other KYC between when Binance launched and August 2021.

Although users were limited to withdrawing only 2 BTC per day, they could open multiple accounts by providing different emails, which they could use for money laundering. This contravened US laws because it was important for Binance to carry out KYC for all users to distinguish potential users on the US terror watch list.

They further alleged that Binance did not put adequate anti-money laundering structures in place, which would have prevented individuals under US sanctions from using Binance. According to the SEC, Binance handled about 1.1 million transactions between US citizens and Iranian nationals (Iran is under US sanctions) in violation of the IEPA rules, totaling $896,618,820

Although Binance finally registered its US subsidiary in 2019, it still devised ways to retain some US-based VIP users on the Binance global platform.

According to the SEC's findings, Binance’s data showed that US-based users conducted transactions worth trillions of dollars on their platform between August 2017 and October 2020 that generated approximately $1.6 billion in profits for Binance. This happened while Binance failed to submit itself to adequate regulatory approval and scrutiny under US laws.

In a plea bargain arrangement that has now been confirmed, Changpeng Zhao has stepped down as the chief executive officer of Binance. He has been replaced by Richard Teng.

Binance will also be paying a monetary fine to the tune of $4.3 billion for willfully evading U.S. law, illegally operating a Digital Asset Derivatives Exchange, and other violations, according to the SEC.

The positive of this Binance lawsuit conclusion is that the market did not go wild after the news broke. Although there is increased market volatility, it is nothing compared to what happened after the FTX and Terra Luna sagas of 2022.

With the conclusion of this lawsuit, the US SEC has affirmed its authority as the apex regulatory body in financial matters. Although Bitcoin and other cryptocurrencies are designed to operate outside central government control, the SEC’s success in proving and winning this case challenges this notion.

The general crypto industry should now create means to carry central authorities along when launching products or entering new markets.

This Binance-SEC court conclusion comes amid the BlackRock Bitcoin ETF application, with the SEC expected to approve several Bitcoin ETF applications in the coming months.

The SEC-Binance debacle has put to rest the notion that cryptocurrencies should operate completely out of regulation from central authorities. As the cryptocurrency industry continues to grow, there is a need to create more robust collaboration with regulatory agencies to get the most out of what blockchain and crypto have to offer. This collaboration could include providing information to regulators to better understand the industry, creating regulations that are beneficial for the industry, and providing support to companies to help them comply with these regulations.

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