U.S. SEC sues Binance, founder Zhao alleging securities law violations

Binance is also under investigation by the Justice Department for suspected money laundering and sanctions violations

Changpeng Zhao, founder and chief executive officer of Binance. File. | Photo Credit: Reuters

The world's largest crypto exchange Binance and its CEO and founder Changpeng Zhao were sued by the U.S. Securities and Exchange Commission on Monday for failing to restrict U.S. customers from its platform and misleading investors about its market surveillance controls, as well as for operating an unregistered securities exchange.

The SEC’s complaint, filed in federal court in Washington, D.C., also alleged that Binance and Zhao secretly control customers’ assets, allowing them to commingle and divert customer funds, and that Binance created separate U.S. entities “as part of an elaborate scheme to evade U.S. federal securities laws.”

Binance did not immediately respond to a request for comment on the charges. In a tweet, Mr. Zhao said the company would issue a response once it had viewed the complaint.

The move is the latest in a series of legal woes for Binance, which was also sued by the U.S. Commodity Futures Trading Commission (CFTC) in March for operating what the regulator alleged were an "illegal" exchange and a "sham" compliance program, with Zhao calling those charges "disappointing” and an “incomplete recitation of facts.”

Binance is also under investigation by the Justice Department for suspected money laundering and sanctions violations, according to people familiar with the probe.

The world's biggest crypto exchange, Binance was founded in Shanghai in 2017 by CEO Changpeng Zhao, a Canadian citizen born and raised until the age of 12 in China.

While its holding company is based in the Cayman Islands, Binance says it does not have a headquarters and has declined to state the location of its main Binance.com exchange.

Binance's global trading platform, Binance.com dominates the crypto trading landscape, last year processing trades worth about $65 billion a day with up to 70% of the market.

The firm has processed at least $10 billion in payments for criminals and companies seeking to evade U.S. sanctions, Reuters has previously reported.

Reuters also reported on May 23 that Binance commingled its customers’ funds with its corporate revenues in Silvergate Bank account belonging to trading firm Merit Peak, in breach of U.S. financial rules that require client money to be kept separate.

Binance denied mixing customer deposits and company funds, saying that users who sent money to the account were not making deposits but rather buying Binance’s bespoke dollar-linked crypto token.