Global Expansion Plans of Binance Exchange Could Be Thwarted by SEC Lawsuit

On June 5, the United States Securities and Exchange Commission initiated legal action against Binance, its American platform, and CEO Changpeng Zhao in a federal district court in Washington, D.C., for supposedly breaching securities regulations and offering unregistered securities.

The U.S. regulatory agency has accused the cryptocurrency exchange of distributing unlicensed securities in the form of its suspended Binance USD (BUSD) stablecoin and its own token BNB (BNB). The SEC also determined that its Simple Earn and BNB Vault products and its staking program contravened securities regulations.

The SEC further alleged that Binance.US and its related company, BAM Trading, had not registered as an exchange, broker, or clearing agency, and identified Zhao as a “controlling person”. Although Binance has consistently maintained that the global entity and the U.S.-based crypto platforms are separate, the lawsuit claimed that funds from the Binance global platform and Binance.US had been mixed together on multiple occasions.

The suit also named nine crypto tokens being traded on the platform as securities, namely Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS) and Coti (COTI).

The SEC has brought forth a lawsuit containing thirteen accusations against the crypto exchange, its U.S. branch and the CEO, which was soon after a Reuters article was released claiming the exchange was combining customer funds.

The report stated that during 2020 and 2021, the crypto exchange blended its corporate income with customer funds on a daily basis.

Reuters reported, according to three sources familiar with the crypto exchange’s finances, that a large amount of commingling had taken place on accounts held at the now-defunct Silvergate Bank, with the total reaching billions of dollars.

The report also asserted that Zhao had many Silvergate accounts linked to commingling. Binance denied these allegations at the time, deeming them a conspiracy theory, yet the SEC included them in their lawsuits only a few weeks later.

Binance rejected the allegations put forward by the SEC in the lawsuit in a blog post, contending that the SEC is responsible for not providing any definite regulatory instructions for crypto platforms in the United States.

The SEC’s lawsuit was filed not long after another lawsuit was brought against the crypto exchange and its CEO Zhao by the U.S. Commodity Futures Trading Commission on March 27. The CFTC accused them of violating derivatives law and failing to register with the necessary agencies.

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Many were surprised by the SEC lawsuit, even though the security regulator had been investigating the crypto exchange since the beginning of 2022.

The SEC’s social media post, which featured a 2018 message from Binance’s chief compliance officer, raised further suspicion.

Some viewed the SEC’s inclusion of this comment in their public announcement as an act of vengeance rather than an effort to enforce regulations.

Dominik Schiener, co-founder of Iota, informed Cointelegraph that the purpose of the SEC under Gary Gensler has never been to obstruct the regulation of digital assets, but instead to provide companies with a route to meet compliance standards.

Bitfinex’s CTO, Paolo Ardoino, has encouraged regulators to provide proactive guidance rather than just enforcement. He told Cointelegraph that the “MiCA License is a great illustration of a regulator committing to creating a clear set of directions and actively striving to create a comprehensive system that offers businesses a dependable base to operate from and allows for feedback.”

“Regulators in Hong Kong, Singapore, Dubai, and El Salvador have adopted a proactive stance towards digital assets. The worry is that regulators who are not as communicative may drive away businesses and skilled personnel. It is essential to have regulations that are both inclusive and consistent, so that innovation is encouraged and the well-being of customers and investors is protected,” Ardoino stated.

Parallel to FTX?

Binance’s history with regulatory issues is not new, and over time the crypto exchange has had to confront numerous regulatory difficulties in various parts of the world. In the past, the crypto exchange has usually been able to get away with a warning or a fine for its infringements, but this has changed with the fall of a number of crypto platforms and loan companies in recent years.

Despite the decline of FTX in late 2022 which caused a lack of confidence in the crypto sector, Binance and Zhao earned more trust due to their openness. Yet, the recent legal disputes and claims of mixing funds have detrimentally impacted the public’s faith in the world’s largest crypto exchange.

The crypto community was quick to make comparisons between FTX and Binance when the allegations of mixing funds emerged.

The market depth of the exchange’s U.S. entity decreased by over 78%, while its U.S. market share fell below 1%.

Itai Avneri, Deputy CEO of INX – a broker-dealer service registered with the SEC for digital assets – informed Cointelegraph that, although it is hard to guess the result of the exchange, it is evident that Binance was trading cryptocurrencies in the US that the SEC classified as securities without a broker-dealer license.

Avneri further stated that there is an explicit regulatory procedure to register digital securities that abides by the Securities Exchange Act of 1934. “Regardless of how old the regulations may be, they are still applicable today. Binance opted to bypass the rules and now has to face the consequences of their decision and other activities,” Avneri added.

He suggested that, despite the SEC’s stance that most cryptocurrencies are securities, industry players should register them as such and find a way to list and trade them in a manner that complies with U.S. securities law.

Dave Birnbaum, the product director at Coinbits, a crypto trading platform centered on Bitcoin, informed Cointelegraph that “it appears evident that Binance.US will not endure this lawsuit. Correspondences that have been made public seem to indicate that Binance compliance officers were disregarding U.S. law – not a good look. The most favorable situation is that Binance keeps up international operations and [Zhao] remains out of the U.S. and away from incarceration.”

He stated that Binance may possess enough resources to survive the crisis and continue its non-U.S. activities; however, one crucial element to pay attention to is the worth of its BNB token, which has plummeted after the SEC accusations.

Binance’s legal trouble in the U.S. dents its global goals

Binance has stated that it is committed to adhering to the Markets in Crypto-Assets (MiCA) laws recently passed in the European Union in the next 18 months.

Despite its best efforts, Binance’s legal issues in the United States may have impeded its worldwide aspirations. After the SEC filed its lawsuit, the exchange pulled out of the Dutch market as it had been unable to secure a virtual asset license from the authorities.

Binance asserted that they had examined a variety of different methods to satisfy the requirements of Dutch inhabitants according to local regulations. Nevertheless, none of these avenues presented a way to register as a virtual asset service provider.

Binance, a global crypto exchange, has applied to withdraw its registration in Cyprus after receiving a Class 3 registration, the highest level of service provision, as a Crypto Asset Services Provider (CASP) in the country. The exchange stated that the decision was made to focus on the larger EU market; however, Reuters reported that Binance never actually provided its services in the region despite having the Class 3 registration.

Binance has also submitted a request to deregister from the Financial Conduct Authority for businesses that are not active in the United Kingdom. The exchange informed Cointelegraph that Binance Markets Limited has terminated its existing authorizations, which were not being utilized and had nothing to do with cryptocurrency operations.

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Amid its efforts to meet MiCA requirements and join the European Union, news of an investigation being conducted in France has been revealed. Allegedly, the inquiry into the exchange is for “aggravated money laundering.”

While Binance has stated that the reason for its recent cancellation of multiple registrations in European countries is to become MiCA-compliant, some have speculated that European states are collaborating with the SEC to put pressure on Binance.