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Changpeng Zhao, or “CZ,” is one of the major players in crypto.
AFP via Getty Images
The US Securities and Exchange Commission on Monday charged cryptocurrency exchange Binance and its founder, Changpeng Zhao, with a series of securities violations.
This has dealt a blow to the heart of crypto and the effect is already rippling across the markets.
It’s a landmark move from regulators against one of the major digital asset players. Binance is by far the world’s largest crypto exchange, and Zhao – known in the industry as “CZ” – is arguably the industry’s most influential person, playing a key role in the collapse of rival FTX last year.
Markets are already reacting to the SEC’s charges, with the price of
Bitcoin
lose as much as 5% in the wake of the news. Shares in
Coinbase worldwide
(ticker: COIN), the largest US crypto exchange – which was warned by the SEC earlier this year about impending charges – fell 10.5% in New York.
The SEC alleges that while Binance and Zhao publicly claimed that US customers were not allowed to use Binance, the top offshore trading venue, the group allegedly bent controls to allow continued access to high-value customers. The agency also alleges that while Binance.US was positioned as an independent US-based platform, it was actually secretly controlled by Binance and Zhao.
Binance referenced from Baron to a blog post, when approached for comment, stating, “We intend to vigorously defend our platform.”
SEC Chairman Gary Gensler said in a statement: “Through thirteen indictments, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflict of interest, lack of disclosure and calculated evasion of the law.”
The agency also alleges that Binance exercises control over assets held on its platform, “allowing them to co-mingle client assets or redirect client assets as they see fit, including to any entity owned by Zhao”, and that this has been concealed.
For traders, this claim is likely to be particularly shocking. The alleged mixing of client money between FTX and an affiliated hedge fund, Alameda Research, controlled by Sam Bankman-Fried, was integral to that crypto exchange’s collapse last November. Amid the market turmoil that followed the collapse of FTX, more money flowed into Binance in what was seen as a flight to quality.
Binance said in the blog post that it has engaged in good faith with US regulators and is “disheartened” by the agency’s decision to litigate. It added that user assets on Binance and Binance.US are safe.
Unfortunately, the SEC’s refusal to engage with us in a productive manner is just another example of the Commission’s misguided and deliberate refusal to provide much-needed clarity and guidance to the digital asset industry. .
The rapid response to crypto markets, with digital asset prices falling, is not surprising.
Binance is a pillar of the digital asset economy, commanding nearly two-thirds of all crypto trading volumes in some months, though it has recently lost some of its market share. A crisis at Binance threatens to undo remarkable gains for Bitcoin, up nearly two-thirds this year.
The news is also likely to have a negative impact on the broker
Coin base
.
While Binance has operated offshore for years, dodging requests from lawmakers for disclosure about its finances, Coinbase has positioned itself as crypto’s answer to a blue-chip stock that complies with the rules. But Coinbase revealed in March that the SEC had sent it a so-called Wells Notice, a warning that the agency could sue the exchange. After Monday’s developments at Binance, investors will become more concerned.
Write to Jack Denton at jack.denton@barrons.com
