Published: September 20th, 2023
Gary Gensler’s Securities and Exchange Commission (SEC) is digging in on its pursuit of Binance in the USA, insisting on full cooperation and comparing its investigation into the world’s number one crypto exchange as 'walking through a house of mirrors.’
In court documents filed on Monday 18th September, America's top financial agency accused Binance’s US subsidiary of attempting to stymie its investigation with ‘weak legal claims of prejudice and irrelevance’.
The SEC hit Binance US and the company's Founder and CEO Changpeng Zhao with a lawsuit carrying stiff penalties in June, saying the exchange had breached US securities law.
Key to that action is a motion for expedited discovery which would give the SEC access to internal documents that unveil how the company operates. The agency is particularly interested in finding out exactly who within the organization has control over customer assets.
The company first said it would comply, but then changed its mind and said the agency had made an ‘unreasonable demand’ by seeking access to the documents.
Earlier in September, the SEC said Binance had demonstrated ‘lack of transparency’ as its investigation got underway.
Now America’s top financial watchdog has accused the exchange of stonewalling its attempts to obtain information that would clarify how Binance treats custody of customer’s crypto assets.
'The ongoing exodus of American Binance staff, including its CEO and other senior executives who may be able to shed light on how the company handles custody and control of assets, underlines the need for expedited discovery into these issues, Monday's court filing said.
The SEC’s action against Binance in 2023 has already taken a toll on its business.
Figures from blockchain data firm Kaiko shows that liquidity on Binance US cratered by nearly 80 per cent in the seven days following the SEC's first legal filing against the world’s leading crypto exchange.
On Monday, 5th June, the regulator named Binance and its American affiliate in a lawsuit. The SEC alleged that Binance founder and CEO Changpeng Zhao (known as CZ) created a ‘web of deceit’ that allowed the exchange to commingle customer funds with its own, something that violates US finance law.
In an analyst note, Kaiko wrote that in the seven days following the SWEC’s action, ‘crypto traders large and small have fled Binance US. The exchange’s liquidity has fallen by 78 per centas a result.’
Kaiko noted that both Coinbase and Binance proper had also seen a fall in liquidity, but the impact was much less damaging.
According to the Binance website, Binance US is an independent crypto exchange for US traders. It uses the same Binance logo but operates independently of the corporate mother ship. This supposed independence, however, has also been questioned by the SEC.
Binance isn't the only exchange that’s felt the agency's wrath this year. Coinbase, America’s largest digital asset exchange, was hit with an SEC lawsuit the day after Binance. The complaint against it, however, is less serious.
Binance US suspended dollar deposits immediately when the SEC filed its lawsuit. Kaiko says that the move to restrict US-denominated fiat volume hit the exchange hard.
It’s been a challenging year for crypto exchanges. The collapse of FTX in November and the subsequent closure of FTX-exposed Silicon Valley Bank precipitated a U.S. banking crisis. American financial regulators have cracked down on the industry as a result, leading to a number of companies closing their doors.
The SEC seems particularly keen to clamp down on crypto companies suspected of dealing in unregistered securities.
The scale and reach of Binance means any disruption to its operations can cascade negatively across the wider crypto market.
In early June, Bitcoin’sprice fell sharply and kicked off an overall plunge in crypto markets after the US Securities and Exchange Commission (SEC) began its enforcement action.
The company, regulators said, had ‘demonstrated utter disregard for American securities law.’ The SEC’s filing says Binance has 'illegally tried to convince US crypto traders to buy, sell, and trade digital assets’ which the SEC says are ‘securities’ under US law.
The agency’s lawsuit alleges that in December 2018, Binance’s Chief Commerical Officer (CCO) admitted the company was running afoul of US securities law.
‘We are running an unlicensed securities exchange in the USA bruh,” the executive (who’s name has been withheld) replied in an email to Binance’s compliance officer.
In a separate filing also made on 5th June, the SEC added several leading cryptocurrencies, including Solana, Cardano, and Binance’s own Binance Coin (BNB) to the list of securities that fall under its jurisdiction.
In total, the agency said 12 separate tokens being traded on Binance were classed as securities. Crypto market watchers have noted that most of the 12 fetch minimal volumes and depend on Binance for the lion’s share of their liquidity.
In terms of overall trading volume, Binance is a dominant force in global crypto trading. At time of writing, data from CoinGecko showed that more than USD 11 billion in trades had occurred in the 24 hours between Monday 5th June and Tuesday 6th June. That beats the volume achieved by Coinbase, Binance’s nearest competitor, by a factor of 10.
The world's leading crypto exchange has often failed to inspire confidence amongst regulators and even business partners. In May of this year the company announced it would end deposits and withdrawals in Sterling from 22nd May.
An email sent to exchange users on Monday, 13th March said the company’s payments processor Skrill, which provides Binance’s Faster Payments Service in the UK, has backed out of a deal to support GBP transactions.
According to Binance, the change affected less than one per cent of Binance customers. But it wasn’t the first time the exchange had difficulties accommodating trades in GBP.