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Earlier on June 5, a piece of news from Bloomberg sparked heated discussions in the market. The news pointed out that Binance and CEO Zhao Changpeng (hereinafter referred to as CZ) will be sued by the U.S. Securities and Exchange Commission (hereinafter referred to as SEC). This revelation also directly triggered a plunge in the crypto market.

On the evening of June 5, the rumor came true that the crypto trading platform Binance and its CEO CZ were sued by the SEC for allegedly violating securities trading rules. This is the second time that Binance and its CEO CZ have been sued by the US regulatory authorities, following the CFTC's indictment on March 28 for allegedly violating trading and derivatives rules. The regulatory crisis facing Binance is self-evident.

01. SEC accuses Binance

The SEC has charged Binance Holdings Ltd., BAM Trading Services, BAM Management USA Holdings, and CZ with violating federal securities laws and disregarding investor protection. The defendants are accused of illegally marketing crypto-asset securities to U.S. investors and conducting multiple unregistered offerings and sales of crypto-asset securities and other investment schemes through unregistered online trading platforms on Binance.com and Binance.US. The defendants allegedly made billions of dollars in profits in this manner while putting investors’ assets at significant risk.

After the allegations came to light, Bitcoin fell as much as 6.7%, the biggest one-day drop in nearly three months.

Among other charges, the SEC said that two tokens associated with Binance, BNB and BUSD, were securities improperly offered and sold by the company. The SEC said Binance and its U.S. affiliates were not actually independent of each other and acted as exchanges, brokers, and clearing agencies without registering with the SEC.

The SEC disclosed that although CZ and Binance publicly claimed that Binance.US was an independent trading platform created for US investors, CZ and Binance secretly controlled the operation of the Binance.US platform behind the scenes. And since August 2021, Binance no longer requires customers with account withdrawal restrictions to submit any KYC information when opening an account, enabling them to bypass anti-money laundering restrictions.

At the same time, the SEC also mentioned that while Binance provided securities-related services to US customers, it deliberately evaded the supervision of US regulators, exposing billions of dollars of US investor funds to security risks and leaving them at the mercy of Binance and CZ.

In addition, the SEC accused Binance of misleading investors about controls implemented by U.S. entities to prevent manipulative trading. From at least September 2019 to June 2022, Sigma Chain, a trading firm owned and controlled by CZ, used wash trading to artificially inflate Binance.US’s trading volume.

The SEC said Binance improperly transferred and commingled customer funds. Billions of dollars of those funds went into the bank account of an entity called Merit Peak Limited, which was controlled by CZ, and the entity's funds were then transferred to third parties and then appeared to be used to buy and sell cryptocurrencies.

At least $145 million was transferred from Binance.US to the Sigma Chain account in 2021. Another $45 million was deposited into the account from a Nevada trust company associated with the U.S. platform. The SEC said Sigma Chain used $11 million from the account to buy a yacht.

In its complaint, the SEC also deemed certain tokens traded on Binance.com and Binance.US, including SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI, as securities, a move that could have broad implications for other exchanges that offer these tokens.

02. Binance responds to allegations as "disappointing"

Binance said it had entered into good faith negotiations with the SEC to resolve the issues. Binance said this was another typical example of the SEC being misled and knee-jerk in refusing to provide much-needed clarity and guidance to the digital asset industry.

Binance responded by mentioning that from the beginning, Binance actively cooperated with the SEC's investigation, worked hard to answer its demands and resolve their questions. Recently, Binance held extensive goodwill talks to reach a negotiated solution to cooperate with the SEC's investigation. Despite Binance's efforts, the SEC abandoned the process and chose to act unilaterally and file a lawsuit. Binance is disappointed with this choice.

Binance said that like other crypto projects facing similar lawsuits from the SEC, the SEC decided to use the blunt weapon of enforcement and litigation to regulate rather than taking a more thoughtful and nuanced approach. Unilaterally labeling a token and service as a security, even if it is a token and service over which other U.S. regulators have asserted jurisdiction, will only complicate the problem.

The SEC's actions undermine the United States' position as a global center of financial innovation and leadership. In much of the world, digital asset regulations remain undeveloped, and one-size-fits-all regulation is not the best path forward. An effective regulatory framework requires collaboration, transparency, and thoughtful policy engagement, and the SEC has abandoned that path.

Binance has also refuted the specific allegations of the SEC one by one. Binance believes that any allegations by the SEC that user assets on the Binance.US platform have been at risk are false and have no basis, considering that regulators have had ample time to investigate. User assets on all Binance and Binance-related platforms (including Binance.US) are safe, and Binance will firmly resist any allegations to the contrary. On the contrary, the SEC's actions seem to be aimed at preempting the jurisdiction of other regulators, and investors are not the SEC's priority. Due to its size and global visibility, Binance has become an intermediate target in the battle for US regulators.

03. Binance’s leadership change mystery

Before the SEC’s charges were filed, there were rumors that Richard Teng would take over as Binance CEO if CZ left due to regulatory difficulties.

According to Richard Teng's resume, before joining Binance, Richard Teng worked at the Monetary Authority of Singapore for 13 years. He started working at the Singapore Stock Exchange (SGX) in 2007 as the Chief Regulatory Officer for nearly 8 years, responsible for the formulation of rules, frameworks and policies for listing, trading and clearing. He then served as the head of the Financial Services Regulatory Authority of the Abu Dhabi Global Market for 6 years. During his tenure as CEO of ADGM's FSRA, Richard Teng launched a number of products, including digital banking, venture capital, fintech regulatory sandbox, private REIT system, manager licensing system and digital asset trading framework. Richard Teng may not have been in the crypto industry for a long time, but his rich experience in government regulation and financial risk control is exactly the "middleman" that Binance needs most under the current regulatory difficulties.

Judging from Richard Teng’s promotion history, the two years when he was promoted were the two most turbulent years in the crypto market. Many well-known crypto institutions and exchanges collapsed, and these were also the two years when Binance faced the most complicated regulatory challenges.

Let's review Richard Teng's experience at Binance. In August 2021, Richard Teng joined Binance as CEO of Singapore. From December 2021 to October 2022, Richard Teng served as the new head of Binance Middle East and North Africa. From November 2022 to April 2023, Richard Teng served as the head of Asia, Europe, Middle East and Africa, and was appointed to lead all regional markets outside the United States two months later. Judging from the timeline, Richard Teng has been promoted four times in less than two years.

But in reality, Richard Teng is at most a "working emperor". He is a suitable "middleman" for Binance during its transition to compliance. Richard Teng will not be held responsible for Binance's past problems; and in the future, even if CZ resigns as CEO due to litigation issues, there will be someone in control behind the new CEO. Binance is currently more like a "hot potato", so Teng's response to outside speculation is not modest. In his response to the media on June 6, Teng emphasized that Binance admitted that there were problems with compliance in the past, but a major shift has taken place in the past 18 to 24 months, and they hope to resolve all regulatory issues with all parties in a responsible manner.

04. Conclusion

This is not the first time that Binance has been investigated and regulated by US regulators. In March this year, the US Commodity Futures Trading Commission also sued Binance for illegally operating a digital asset derivatives exchange. In addition, Binance has also been investigated by the US Department of Justice for suspected money laundering and other activities.

Image source/Twitter

Before the SEC publicly released a statement, CZ denied the relevant foreign media reports. CZ posted a tweet at 11:27 on June 5, including the number "4", and said that the company team was on standby to ensure the stability of the system, including withdrawals and deposits. "We will respond after seeing the lawsuit. We haven't seen it yet. The media got the information before us." Combined with the description of a tweet posted by CZ on January 2, if the number "4" is mentioned in the future, it means "ignore FUD (fear, uncertainty and doubt), fake news, and attacks, etc."

At present, the message that the number "4" wants to convey seems to have been refuted, and the SEC's accusation against Binance has become a foregone conclusion. As a leading giant in the crypto field, its every move has a huge impact on the crypto field. It is currently unknown how Binance, which is under close scrutiny by regulators, will respond next and whether it can reach a settlement with US regulators.

But for Binance and global crypto companies, yesterday's accusations may already be quietly changing the future of the crypto world.

References

"Setting up reserves" or "taking over a hot potato" - is Binance in trouble this time?