The U.S. Securities and Exchanges Commission (SEC) has filed a lawsuit against Binance, the world’s biggest crypto exchange, and its chief executive Changpeng Zhao for violating securities laws. The agency filed 13 charges against Binance corporate entities and Zhao, including for operating unregistered securities exchanges, unregistered sales of securities, and misrepresenting controls of the Binance.US exchange.

The SEC’s lawsuit is the latest legal headache for Binance and Zhao, who founded the exchange in 2017. This March, the U.S. Commodity Futures Trading Commission (CFTC) also filed a lawsuit against Binance and Zhao for offering derivative products to U.S.-based customers without proper registration. According to Reuters, the U.S. Justice Department is also considering criminal charges against Binance.

• The SEC alleges that Binance and related corporate entities ran a securities exchange without proper registration and licensing. According to the agency, Binance earned at least $11.6bn in revenue since 2017, including transaction fees paid by U.S.-based customers. Zhao personally received $63mn from a Binance-controlled bank account between October 2022 and January 2023, the agency said.

• The SEC also charged Binance with unregistered sales of its BNB and BUSD tokens and crypto-lending products like “BNB Vault” and “Simple Earn.” It charged BAM Trading, the parent firm of the Binance.US exchange, for an unregistered sale of its crypto staking program.

After its launch in 2017, Binance initially allowed U.S.-based customers to trade on its platform. It formally blocked them in 2019 due to regulatory issues, and in 2019, Zhao founded a separate exchange called Binance.US to serve U.S.-based persons. Binance.US didn’t offer derivative products, unlike the main Binance platform. Yet, the SEC alleges that Zhao secretly allowed high-value U.S. customers to continue trading derivatives on the main Binance platform, violating securities laws.

• An amusing part of the lawsuit is a message that Binance’s chief compliance officer allegedly sent to a colleague; “[w]e are operating as a fking unlicensed securities exchange in the USA bro.”

The SEC alleged that Zhao used Merit Peak and Sigma Chain, two market-making companies he controlled, to inflate trading prices on Binance.US and misled customers and equity investors by not disclosing the situation.

Some other interesting bits from the lawsuit include

• Binance allegedly transferred at least $190mn to a bank account controlled by Sigma Chain, which, in turn, spent $11mn on a yacht.

• Binance comingled billions of dollars worth of customer and corporate funds and sent some of it to entities controlled by Zhao, risking loss or theft without customers’ notice.

• The first two CEOs of Binance.US, identified as “BAM CEO A” and “BAM CEO B,” resigned over a perceived lack of independence in their roles, as Zhao overruled them repeatedly on corporate decisions. These pseudonyms likely refer to Catherine Coley and Brian Brooks.

Binance and Zhao retain the right to defend themselves in court against the allegations. Zhao is a Canadian citizen who is reportedly based in Dubai. Binance has offices across the globe but no currently known headquarters.

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