SEC seeks emergency freeze of Binance assets, accusing the exchange of commingling customer funds

The U.S. Securities and Exchange Commission (SEC) has filed an emergency application seeking to freeze all of Binance.US’ assets, citing concerns that the company could dissipate customer funds to evade any potential legal judgment.

The SEC told the court that freezing Binance’s assets was necessary “given the Defendants’ years of violative conduct, disregard of the laws of the United States, evasion of regulatory oversight, and open questions about various financial transfers and the custody and control of Customer Assets.”

The SEC further alleges that Binance and founder Changpeng Zhao commingled customer assets while moving billions of dollars from Binance accounts and into various bank accounts ultimately controlled by Zhao.

This commingling included sending more than $22 billion worth of funds to a trading firm owned by Zhao called Merit Peak. Despite representing that Merit Peak was a “proprietary trading firm with Zhao’s self-made wealth from the digital assets business,” the $22 billion actually “consisted in significant part” of Binance customer assets.

Another Zhao-controlled offshore entity, Sigma Chain, has been used to effect wash trades on the Binance platform since 2019. These wash trades were used to pump Binance trading volume in a ‘”strategic pattern” that coincided with key dates for Binance fundraising, namely the launch of the Binance.US platform in September 2019, the listing of key new assets on Binance.US and a three-month period leading up to seed funding rounds.

Both Sigma Chain and Merit Peak were included in the CFTC’s suit against Binance, in which the regulator similarly alleged that accounts controlled by the two companies and Zhao directly were used for trading against Binance customers.

The filing also reveals that contrary to Binance’s repeated complaints of a “lack of engagement” by the SEC, the Commission had been in constant contact with Binance representatives as it sought more information on how Binance was managing its customer assets. Responses from Binance and their attorneys were evasive and seemed to focus only on asserting that neither Zhao nor Binance’s business was subject to the jurisdiction of U.S. courts.

“Zhao’s attorneys have continued to maintain that Zhao is not subject to the jurisdiction of the United States—despite setting up a crypto trading platform in the United States that has made hundreds of millions from trading with US customers, and despite his beneficial ownership of accounts held at banks in the United States through which billions of dollars flowed to some of his foreign domiciled companies like Merit Peak and Sigma Chain.”

“Binance and Zhao further submitted a joint response…stressing their concerns with having to submit to the personal jurisdiction of the court or court oversight of any agreement.”

The SEC’s application also requests the “repatriation” of the custody and control of fiat and digital assets held on Binance platforms on behalf of U.S. customers, a sworn accounting from the defendants, and an order expediting discovery. Given what internal Binance communications have already been made public, the SEC is no doubt eager to get stuck into formal discovery to see what time bombs are yet to be uncovered.

The SEC also seeks permission to serve Binance and Zhao via e-mail, noting that “they are widely known for disagreeing with the premise of a headquarters or domicile, let alone identifying one, and Zhao is famously protective of revealing his whereabouts.”

If the SEC’s application is granted, Binance’s assets must be frozen immediately. Further, it would be down to the defendants to demonstrate to the court a reason why the freezing should not remain in place.

The allegations that Binance commingles customer funds are disturbing yet unsurprising. The spotlight shone on the industry since the ‘crypto’-chaos of 2022 has revealed a deeply interconnected network of businesses doing whatever it takes to stay ahead of regulators and keep the gravy train running as long as possible.

However, the possible criminal malfeasance committed by Zhao and Binance is less important than the question of whether the digital assets listed by Binance (and virtually every exchange operating in the market) amount to securities. If the court agrees with the SEC that they are, then it will be a clear judicial statement that almost the entire industry is non-compliant and must submit to the oversight of the securities regulator.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.