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Why Binance, the world’s largest cryptocurrency exchange, is in trouble

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Binance, the world’s largest cryptocurrency exchange, is being accused by US authorities of defrauding investors, evading security laws, mixing customer money with corporate funds, and lying about who controls its US platform

After the fall of FTX, now crypto giant Binance seems to be in hot water.

Authorities in the US are accusing Binance of securities violations and misusing customer funds.

But what is Binance? And why exactly is it in trouble?

Let’s take a closer look:

What is it?

Binance is the world’s largest cryptocurrency exchange.

According to, the company was founded in 2017 by Changpeng Zhao – also known as CZ.

Zhao, a Canadian citizen, was born in China’s Jiangsu and lived there till age 12.

Zhao, once seen as the archrival of disgraced crypto tycoon Sam Bankman-Fried,  previously developed financial software including high-frequency trading and served as an executive at crypto exchange OKCoin.

Initially headquartered in China, the company moved to Japan, Taiwan and Malta.

The holding company of Binance is based in the Cayman Islands.

In mid-2019, Binance’s operating firm BAM Trading launched its Binance.US trading platform under then chief executive Catherine Coley.

In the years since, Binance towered over all its competitors in the crypto space.

Why is it in trouble?

The Securities and Exchange Commission filed a civil complaint listing 13 charges involving platforms and other investment entities controlled by founder Zhao.

“Defendants have enriched themselves by billions of US dollars while placing investors’ assets at significant risk,” the suit stated, as per The Verge.

It claimed that Binance and Zhao “defrauded equity, retail, and institutional investors about purported surveillance and controls over manipulative trading on the Binance.US Platform, which were in fact virtually non-existent.”

Lying about ownership

In 2019, Binance announced a partnership with a US company called BAM trading that would launch the Binance.US platform to serve American clients in compliance with US laws.
According to Coindesk, Binance.US has always claimed to be an independent operation.

Allowing US residents to trade on platform

Binance is alleged to have permitted US residents to trade, even though the platform is not registered in the United States as a securities exchange.

Zhao and Binance publicly claimed that US customers were barred from transacting on, but the platform “secretly” allowed high-value customers to keep trading, the SEC said.

 Evading US laws

Binance created separate US entities “as part of an elaborate scheme to evade US federal securities laws,” the SEC also alleged, citing a number of practices first reported by Reuters in a series of investigations into the exchange published this year and in 2022.

The agency said Binance’s chief compliance officer admitted that: “We do not want [Binance].com to be regulated ever.”

From almost three years ago until June 2022, a trading firm owned and controlled by Zhao, Sigma Chain, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform, the SEC also alleged.

Zhao instructed Binance.US to onboard Sigma Chain and Merit Peak as market makers on the Binance.US platform, the SEC said. Both firms were operated by Binance employees, including one that had authority over Binance.US’s US dollar bank accounts.

Transferring billions of dollars

Merit Peak and Sigma Chain were used to transfer tens of billions of dollars involving Binance, Binance.US and other related entities, the SEC said. For example, the SEC said that in 2021 at least $145 million was transferred from Binance.US to a Sigma Chain account.

The SEC said billions of dollars in Binance customer funds were commingled, or mixed with corporate funds, in breach of US laws, in a bank account of an entity controlled by Zhao, then transferred to a trading firm, Merit Peak, also controlled by Zhao.

Merit Peak then transferred the “vast majority of those funds” to an unidentified company, “in transfers that appear to relate to the purchase of” Binance’s bespoke dollar-linked crypto-token BUSD.

“Sending Binance customer funds to Merit Peak placed those funds at risk, including of loss or theft, and was done without notice to customers,” the SEC wrote in its complaint.

 ‘Web of deception’

“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,” said SEC Chair Gary Gensler.

“Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied.”

Zhao said the Binance “team is all standing by, ensuring systems are stable, including withdrawals, and deposits,” he said on Twitter.

In a blog post, Binance said: “We intend to defend our platform vigorously,” adding that “because Binance is not a US exchange, the SEC’s actions are limited in reach.”

“All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure,” the blog post said.

In a statement, Binance said it had “actively cooperated” with the SEC “from the start” and “respectfully disagree” with the SEC’s allegations. Binance had been trying to find a “reasonable resolution” with the SEC but the agency “at the eleventh hour” issued new requests and went to court. Binance said the SEC’s actions appeared to be an effort to “claim jurisdictional ground from other regulators.”

The SEC case comes on the heels of charges in March by another US regulator, the Commodities Futures and Exchange Commission.

Bitcoin falls 6 per cent

Bitcoin, the world’s biggest cryptocurrency, fell as much as 6 per cent on the news to its lowest in almost three months. Binance’s own cryptocurrency BNB, the world’s fourth-largest by market size, dropped more than five per cent.

Market players said the SEC’s allegations could hobble Binance, with the lawsuit likely to reverberate through the crypto industry. Binance dominates crypto trading, last year processing trades worth about $65 billion a day.

A March report from CCData showed that Binance’s spot market share across top-tier exchanges fell in March for the first time in five months to 57.7 per cent from 62.0 per cent in February. Its derivatives trading volume, however, rose.

“I think that there’s a big risk here that this could be crippling to Binance,” said Ed Moya, senior market analyst at Oanda.

Source By : FirstPost

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