Key Points:
This is a huge amount of money that we need to talk about. The SEC’s allegations come as supporting evidence in a request by the agency to a federal judge to place a temporary freeze on assets, beyond customer redemptions, at Binance.US. This means that Binance and Binance.US are facing some very serious legal issues and could potentially face serious consequences.
The SEC also wants a judge to freeze Binance and Zhao’s assets but has only filed a temporary restraining order on Binance.US’s assets. This demonstrates the severity of the situation and the potential legal repercussions that Binance and Zhao could face if they are found guilty.
Spokespeople for Binance and Binance.US did not immediately provide comment. This is concerning, as it suggests that they may be trying to avoid the issue or may be uncertain about how to respond to the allegations. In a lengthy statement in response to the SEC’s initial enforcement action, Binance said, “We intend to defend our platform vigorously.” This statement is understandable, as any business facing such serious allegations would want to defend themselves. However, it remains to be seen how successful Binance will be in doing so, given the severity of the allegations and the legal challenges they are facing.
According to recent accusations, Zhao and Binance, Binance.US, and Merit Peak have been involved in funneling assets, as revealed in a document filed in federal court late on Tuesday. The SEC based their allegations on an analysis of documents produced by Silvergate and Signature Banks, and as sworn testimony by Sachin Verma, assistant chief accountant for the SEC’s Enforcement Division, submitted to the U.S. District Court of the District of Columbia.
The SEC alleges that most of the assets were funneled to Merit Peak. This determination was based on a statement by Merit Peak describing itself as “a proprietary trading firm with [Zhao’s] self-made wealth from the digital asset business.” Those funds consisted primarily of Binance Platforms customers’ assets, including those of Binance.US Platform customers and other sources. The SEC alleges that over $12 billion of the $22 billion Merit Peak received between 2019 and 2021 came from Binance and Binance.US customer assets.
The SEC claims that the $11 billion from Binance customer assets was funneled through another entity called Key Vision Development Limited. Additionally, the SEC alleges that most of Merit Peak’s money — $21.6 billion out of approximately $22 billion — was then transferred to a foreign affiliate of the firm Paxos, the New York-based trust company that partnered with Binance on the BUSD stablecoin. However, Paxos ceased issuing the stablecoin after disclosing an SEC investigation in February, although the company still redeems the token. A Paxos spokesperson did not immediately respond to a request for comment.
Furthermore, the SEC alleges that Merit Peak also traded on Binance.US, which raises questions about why a Zhao-controlled entity purportedly trading on the Binance.US Platform using Zhao’s personal funds would have acted as a “pass-through” account for billions of dollars of Binance Platforms customers’ funds. The SEC has been unable to determine the reason and is investigating the matter further.
It is worth noting that the allegations against Binance come amid growing regulatory scrutiny of the cryptocurrency industry. The SEC has been vocal about its concerns regarding the lack of regulation in the industry, and the risks associated with investing in digital assets.
The SEC alleges that Zhao and Binance, Binance.US, and Merit Peak were involved in funneling billions of dollars of customer assets to a foreign affiliate of Paxos, while questions remain about the role of Zhao-controlled entities in these transactions. The allegations against Binance underscore the need for increased regulation in the cryptocurrency industry, and the risks associated with investing in digital assets.
The Securities and Exchange Commission (SEC) has recently filed several pages of documents against Binance, Binance.US, and Zhao’s proprietary trading funds, alleging that the companies have been operating inappropriately. According to the SEC, these documents contain more details on how Binance and its subsidiaries allegedly operated.
The SEC’s filing alleges that Binance.US has been under investigation since at least 2020, even before current SEC Chair Gary Gensler’s tenure at the agency. It also details that the SEC issued a subpoena to the company on Dec. 17, 2020, requesting documents related to how the company controlled and stored its crypto assets. However, the agency claims that Binance.US has been stalling them for years, with a final response only coming in February 2023.
According to the SEC, Binance controlled Binance.US crypto assets as the U.S. affiliates custodian, despite public assurances that separation exists between the two companies. This information comes in part from Binance.US’s own auditor, which stated that Binance held custody of its U.S. affiliate’s assets until Dec. 1, 2022. The auditor warned that this arrangement made it “very difficult” to ensure the company had enough assets to pay customers if they withdrew from their accounts.
Moreover, the SEC alleges that Binance has been using customer funds for Zhao’s personal gain. The agency says that Binance.US’s answers were not reassuring and that the audit report did not make clear who has custody and control of those U.S. customer assets since December 1, 2022.
The documents, which include internal Binance documents and partial testimony from former Binance.US CEOs, contain many more details about the allegations against Binance. The SEC has filed for a temporary restraining order on the movement of assets from Binance.US, except for customer redemptions.
As an expert editor, summarizing a lengthy article into the three most critical points can be challenging. However, based on the SEC’s documents, the following are the most crucial points to take note of:
The allegations around Binance’s operating procedures have been a topic of discussion in the crypto world. The SEC’s filing is a significant development that is worth reading to understand the allegations and their potential implications.
The Securities and Exchange Commission (SEC) has accused Binance and Binance.US of illegally redirecting funds. The amount of money that they are accused of illegally redirecting exceeds the approximately $8 billion in customer assets that Sam Bankman-Fried, a one-time rival of Binance CEO Zhao, is also accused of redirecting from failed trading platform FTX to the now-defunct exchange’s sister company, Alameda Research.
Bankman-Fried, who also owned Alameda, has been criminally charged for redirecting billions of customer funds to backfill losses at his company. Interestingly, Bankman-Fried has claimed that most exchanges have done something similar, but not on the same scale as his company, and not as recently.
Before his indictment and arrest, Bankman-Fried accepted investment from Binance. In a November 2022 Twitter DM exchange with a reporter, he revealed that his company was not the only one that used customer funds for their own purposes.
If Bankman-Fried is found guilty on all current charges, he could face over 100 years in prison. His trial is scheduled for October. In addition, the SEC has also sued Bankman-Fried on civil fraud charges.
The alleged illegal redirection of customer funds by Binance and Binance.US is a serious issue that could have significant consequences for those involved. The accusation is a reminder of the importance of ethical business practices and the need for companies to prioritize the interests of their customers.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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