Binance, the world’s largest cryptocurrency exchange, and its CEO Changpeng Zhao, also known as CZ, are facing a lawsuit filed by the US Securities and Exchange Commission (SEC) for their “blatant disregard of the federal securities laws”. The complaint, which includes 13 charges, accuses the exchange of operating an unregistered exchange and violating various US laws. The SEC alleges that Binance and CZ knew that they were operating Binance.com in violation of US laws and that they created two US corporate entities, BAM Management and BAM Trading, as part of an elaborate scheme to evade US laws.
Binance and CZ have been accused of directing the creation of the US entities to launch Binance.US, with the SEC alleging that they had a lot of involvement and control of the US entity. The agency also claims that Binance and CZ hired several advisors to help them manage their US legal exposure. A Binance consultant proposed a plan in 2018 to create a US entity called the “Tai Chi” entity, which Binance implemented much of, according to the SEC. The plan involved releasing a detailed Howey Test evaluation framework, but Binance denied the allegations and even sued Forbes for defamation when they wrote about the entity in 2020.
The SEC also claimed that Binance and CZ implemented policies and controls to give the impression that the Binance.com platform was blocking US customers while secretly subverting those controls. The SEC named several cryptocurrencies, including Solana, Cardano, and Polygon, as securities that were offered and sold as investment contracts on the Binance platforms.
Binance has said that it plans to fight the lawsuit “to the full extent of the law” and accused the SEC of using “blunt weapons of enforcement and litigation” rather than a “thoughtful, nuanced approach” to regulating the dynamic and complex technology of cryptocurrency.
The lawsuit against Binance and CZ reveals a mix of stark revelations about the exchange, including the creation of US entities to evade US laws and internal conversations about Binance.US. The SEC’s accusations against Binance and CZ are serious and suggest that the exchange has been operating in violation of US laws. The lawsuit is likely to have far-reaching implications for the cryptocurrency industry, as regulators around the world continue to grapple with how to regulate this emerging technology.