SEC Sues Binance Billionaire Changpeng Zhao for Alleged Unregistered Exchange Activity

The U.S. Securities and Exchange Commission targeted the most influential figure in the cryptocurrency industry on Monday.

The Securities and Exchange Commission (SEC) accused Binance founder Changpeng Zhao of “running a fraud network” and charged him and his exchange with 13.

These ranged from Binance’s alleged manipulation of trading volumes and inability to shut out US customers from the unregulated platform to mixing and moving billions of dollars of customer funds “as they please”.

The complaint continues to threaten Zhao’s vast business empire, which has dominated the cryptocurrency industry for years. The billionaire billionaire is already facing charges from the US Commodity Futures Trading Commission in March, and his position is also being investigated by the Justice Department.

Zhao’s bold ambitions now collide with a concerted effort by U.S. regulators to clamp down on the company, which they say grew into a giant by systematically circumventing U.S. laws.

In response to the SEC’s allegations, Binance said, “We intend to vigorously defend our platform,” adding that “because Binance is not a US exchange, the SEC’s actions are limited.” Binance said any claims that user assets are at risk are “simply false.”

Ever since Zhao launched Binance in Shanghai in 2017, he has dreamed big. “We want to dominate the market completely!” he told employees on a company chat group that year.

The 46-year-old CEO never wavered in his faith when building his own crypto exchange. This year, Zhao felt a big goal was within his reach: a place at the top table of the financial industry.

“The idea that a five-year-old startup could mature and operate at the same level as a financial institution that existed 200 years ago was unfathomable,” the billionaire wrote in January in his review of the previous year.

“But we’re almost there today.”

That dream now seems even more distant after the SEC’s action.

In its 2022 review, Binance praised its progress in regulatory compliance around the world. It said the exchange had worked during the year to strengthen its customer verification processes and develop “the best security and compliance team” in the crypto industry.

But according to the SEC, Zhao and Binance “knowingly chose to circumvent” US laws in an effort to maximize their profits. The SEC argued that this “puts its customers and investors at risk,” citing several practices reported in the Reuters article. A series of stock market studies published this year and in 2022.

“Entities Zhao and Binance have engaged in an extensive web of fraud, conflict of interest, lack of disclosure and deliberate evasion of the law,” SEC Chairman Gary Gensler said.

Reuters reported in December that the U.S. Department of Justice is investigating Binance for alleged violations of criminal sanctions and money laundering, and some prosecutors believe they have enough evidence to indict Zhao and other executives. At the time, Binance said it had no insight into the inner workings of the Justice Department.

Chin “No one answers”

Zhao was born in China before moving to Canada in 1989 when he was 12, two months after China attacked pro-democracy protesters in Tiananmen Square, he wrote in a blog post last year.

Known to employees and CZ followers online, the billionaire tycoon has found success around the world, working in Tokyo and New York before moving to Shanghai, where he embraced cryptocurrency and founded Binance in 2017.

Its expansion has been dramatic.

Binance has become the world’s largest cryptocurrency exchange in six months, and now accounts for around 60% of global cryptocurrency trading, according to research firm CCData. However, the exchange has repeatedly refused to reveal the location of its trading location.

A Reuters report last year noted that Zhao had kept a firm grip on Binance since the company’s early days as a strong executive committed to secrecy and focused on a dominant market position.

Zhao appointed a narrower group of colleagues to top positions, many of whom had worked or studied in China. Founder Yi He now heads Binance’s $7.5 billion venture capital division as well as other major divisions. Zhao assigned Chinese-born background manager Guangying Chen to manage the company’s finances. Reuters reported last month that this included several accounts opened by Binance at the now-defunct US Silvergate Bank.

In one such account, owned by a trading firm called Merit Peak and controlled by Zhao, Binance commingled customer funds with corporate revenue and used the funds to buy dollar-pegged cryptocurrency tokens on the exchange, according to Reuters. The SEC also argued this in its complaint.

Chen also managed the bank accounts of Binance.US, an ostensibly independent subsidiary of Binance, ensuring that Zhao could guide the company’s expansion into the US crypto market as well, Reuters reported on Monday.

Although Binance has worked broadly out of the traditional worlds of finance and regulation in recent years, Zhao’s tight control over his company continues. Calling itself an “ecosystem,” the company has created at least 70 entities that Zhao personally manages.

“Zhao answers only to himself,” the CFTC said in its complaint in March.