SEC Lawsuit Heats Up the War Between Binance and the US

SEC Lawsuit Heats Up the War Between Binance and the US

The lawsuit against Binance and its CEO yesterday (Monday) has brought havoc to the cryptocurrency industry. The market prices of Bitcoin and also the publicly listed shares of crypto companies plummeted significantly. The civil changes brought by the SEC are very serious, but the exchange might face further action.

SEC’s Lawsuit against Binance

The SEC brought a total of 13 charges against Binance, its two affiliates, and Founder CEO, Changping Zhao, which includes operating illegal trading platforms, offering unregistered crypto asset securities, and commingling customers’ funds.

However, a part of the industry is not surprised by the actions of the US regulator against the largest global crypto exchange, a title that Binance has been holding for a while now.

“I think this was to be expected, and anyone that has been in the financial industry for years should have seen this coming,” Ilies Larbi, the Co-Founder and CEO at Ouinex, told Finance Magnates.

In an official response, Binance complained that the SEC abandoned negotiations with the exchange to reach a “settlement to resolve their investigations.” Earlier, the SEC settled with companies like BlockFi and Poloniex for hefty fines.

However, according to Anndy Lian, an expert and advisor on blockchain, Binance still has some options.

“In general, companies facing lawsuits from regulatory agencies such as the SEC have several options. They can choose to fight the lawsuit in court, which can be a lengthy and costly process. Alternatively, they can try to negotiate a settlement with the SEC, which may involve paying a fine and agreeing to certain conditions. Binance may also choose to cooperate with the SEC and provide information to help resolve the matter,” he told Finance Magnates.

“Zhao’s stand has always been cooperative. Being the leading crypto exchange, their next step means a lot to the whole industry.”

Are Criminal Charges on the Way?

“The charges are extremely serious, and the mere fact that the settlement route has been ignored by the SEC (despite Binance’s efforts) while requesting from the Department of Justice that Binance’s asset be frozen and repatriated is a testament to how serious the situation is,” Larbi added.

Additionally, the request for an asset freeze indicates that the SEC’s concerns against Binance’s operations are grave. FTX’s Sam Bankman-Fried also faces criminal and civil charges in the US. Both FTX and Binance allegedly solicited users’ funds, among other similar charges.

Like FTX, Zhao and Binance’s access to Binance.com and Binance.US gave them the opportunity to commingle customer assets or divert them to Sigma Chain, the market maker and trading firm said to be owned and controlled by Zhao. In addition, they allegedly merged ‘billions of dollars of investor assets’ and sent them to Merit Peak Limited, which is also owned by the Binance Founder. These funds were later subsequently transferred to a third party “apparently in connection with the purchase and sale of crypto assets,” the SEC added.

“The Commission respectfully requests that the Court order temporary and preliminary injunctive relief, including, but not limited to, asset freezes, a verified accounting, repatriation of assets, expedited discovery, preservation of documents and information, prohibition on the destruction of evidence, the appointment of a receiver, alternative service, and/or any other necessary equitable relief,” the lawsuit stated.

Earlier media reports revealed that the Department of Justice was investigating Binance’s failure to implement an anti-money laundering program. Moreover, the exchange faces US investigations for allowing services to Russians, thus breaching sanctions.

“While the SEC has filed a civil action, it is likely that criminal violations have been referred to the Department of Justice as it pertains to matters such as RICO violations, Russian Sanctions violations, fraud, etc,” said Larbi.

In a separate civil lawsuit against Binance, the US derivatives market regulator called the compliance measures of Binance a “sham.” The CFTC’s lawsuit against Binance is along the same lines as its securities market counterpart.

“US regulators are taking a more firm stance towards Binance and are working to enforce compliance with US securities laws,” Lian added. “On the other hand, when I spoke to my counterparts in US who are mainly professional investors, they are supportive of Binance and see them as a force that could challenge SEC and give people more choices to take control of their own money.”

More Incoming Regulatory Actions?

Binance operates on a global scale. While the exchange has obtained several regulatory licenses over the past couple of years, it has operated in many jurisdictions without permission for years.

Now, the SEC’s action might encourage other global regulators to take action against the exchange.

“Many regulators across the globe will look to the US for direction on this, and we are slowly seeing many regulators across the globe following this trend,” said Remonda Kirketerp-Møller, the Founder and CEO at Muinmos. “At the end of the day, it’s about investor protection, and the US does this very well.”

Recently, the Australian financial market regulator revoked the license of Binance Derivatives.

The Goal of Binance

Zhao, a Canadian national of Chinese origin, established Binance in 2017. In its early days, the exchange operated without a license, and Zhao publicly boasted that it had no headquarters.

On top of that, the lawsuit mentioned earlier internal statements from top Binance executives, including Zhao, indicating the goal of the exchange is to avoid regulations.

Zhao allegedly designed and implemented a multi-step plan to surreptitiously evade US laws. A Binance Chief Compliance Officer even admitted that: “we do not want [Binance].com to be regulated ever.”

In the early days of Binance, Zhao publicly boasted his ambitions to facilitate crypto trading with every fiat available globally. However, the US market has always been tricky with its stringent regulatory oversight, which led to the launch of its separate US affiliate.

The Binance CCO explained: “[o]n the surface we cannot be seen to have US users[,] but in reality, we should get them through other creative means.” Moreover, Zhao stated that the “goal” was “to reduce the losses to ourselves, and at the same time to make the US regulatory authorities not trouble us.”

BAM Trading officially operates Binance.US without Zhao in any of its executive roles. It is touted to be operationally independent of the global exchange, Binance.com. However, the reality is different.

The SEC found that Zhao and Binance were intimately involved in directing BAM Trading’s US business operations and providing and maintaining the crypto asset services of the US affiliate.

BAM Trading employees referred to the controls of Zhao and Binance on the company as “shackles” that prevented them from understanding and freely operating the US platform. A former CEO of BAM Trading even told Binance’s CFO that her “entire team feels like [it had] been duped into being a puppet.”

Indirectly, Zhao holds majority ownership of Binance.US, which operates in the US with money-transmitting licenses.

Zhao's ownership in Binance

“Whether Binance fights this in court or not is irrelevant at this stage,” Larbi added. “The consequences are going to be, at best, being banned from the USA with fines that mirror Binance’s size.”

“We are only starting to see the tip of the iceberg, and mid-term consequences could go as far as the closure of the Binance operations globally. At the very least extreme consolidation of their operations and reduction in size.”

Gold-i’s Tom Higgins believes the lawsuit will “end Binance US eventually but will not have as much impact on Binance globally.”

The Fall of a Mammoth?

Binance’s strategy worked for years as the exchange became the largest globally in terms of crypto trading volume. The peak of its dominance hit last February when it controlled 57.5 percent of the average monthly volume on the world’s crypto exchanges, according to CCData. However, by the end of April, it dropped to 43 percent.

Binance's market share

“Crypto, in general, started as a completely unregulated activity which led first movers such as Binance to onboard clients initially with barely a name and an email. That already set the scene for extreme risk exposure once regulations kicked in. Now the reality is that Binance has not been getting away with these violations. Investigations take time, and this one has been going on for over four years now,” Larbi said.

The Crypto Industry Is Taking the Heat

Though on the surface, the lawsuit is only against Binance, it directly or indirectly hinted at actions against other crypto projects.

One of the major allegations of the SEC against Binance and its US affiliate is for offering and selling unregistered tokens and stablecoin, BNB and BUSD, respectively, to US customers. However, the lawsuit categorized ten other cryptocurrencies as unregistered securities – Solana’s SOL, Cardano’s ADA, Polygon’s MATIC, Filecoin’s FIL, Cosmos’ ATOM, Sandbox’s SAND, Decentraland’s MANA, Algorand’s ALGO, Axie Infinity’s AXS and Coti’s COTI tokens.

With these new additions, the SEC is now categorizing 61 cryptocurrencies in total as unregistered securities. The regulator is already fighting a long-running legal battle with Ripple on the status of XRP.

The SEC’s lawsuit against Binance came after the exchange was hit with a Wells Notice seeking clarification for its alleged lapses. Another crypto exchange that was served with the Wells Notice is Coinbase.

“We observe that several of the details of the lawsuit that the commission filed against Binance echo those it previously filed against crypto exchanges Bittrex and Kraken, and we believe these cases, in aggregate, represent a preview of the action that is likely to be filed against COIN,” Berenberg’s analyst, Mark Palmer wrote in a note.

Furthermore, Coinbase admitted that it is expecting enforcement action following the Wells Notice. The American exchange is fighting a legal battle with the SEC over its regulatory decision-making processes.

The share price of Coinbase dropped 10 percent following the announcement of the lawsuit against Binance.

“Any large exchange that performs all of the trading functions in one place is in danger,” Higgins added. “The traditional finance world separates responsibilities like execution, prime broking, and custody for good reasons. Big crypto exchanges want to own it all, and this will not fly in the long term.”

The Market Reaction

The SEC’s formal allegations against Binance triggered its users to withdraw funds. According to Data from Nansen.ai, Binance and its US affiliate endured about $790 million in net outflows in the past 24 hours, which is the highest since mid-March.

However, Seoul-based crypto analytics firm CryptoQuant pointed out that the outflows remain within historical norms.

“The Crypto market is only now entering its regulated era,” Kirketerp-Møller added. “Crypto firms will have to adjust and “change their mindset,” if you like, from an industry operating at the peripherals of the financial sector to now occupying its main avenue, and as such also very much in the “regulators’ eye.” A similar process happened in recent years in CFDs; for example – we see a lot of online investment firms adopting our mPASS™ solution, which automatically classifies investors and performs cross-border suitability and appropriateness checks. In the past, only a handful of firms applied mPASS™, seeing it as a “luxury”; now it’s the standard and the only way to protect both investors and secure compliance of the institution.”

Itai Sadeh, the CEO of iFOR Fintech the technology arm of the iFOREX Group, said: “The complaint brought by the SEC against Binance, its controlling shareholder Changpeng Zhao and other companies under Zhao’s control, proves the importance of having well structured and strong compliance procedures and functions, which includes robust KYC procedures. US regulations are very strict on the ability of offshore brokers to accept US clients and regulators in the US are swift in enforcing such restrictions. Companies who are not licensed in the US should implement both technological and human measures in order to verify that US clients cannot access overseas trading platforms and that KYC processes are in place to detect and block any US client who manages to circumvent such restrictions.”

“If the SEC allegations that Binance has intentionally allowed US clients to onboard onto Binance’s unregulated platform are proven to be true, Binance and Zhao may face severe consequences.”

Source: https://www.financemagnates.com/cryptocurrency/sec-lawsuit-heats-up-the-war-between-binance-and-the-us/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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Anndy Lian: SEC政策收紧对数字资产将产生什么影响?

Anndy Lian: SEC政策收紧对数字资产将产生什么影响?

2023年5月10日,Anndy Lian在金融期刊Financial Express上发表了一篇引人深思的文章《SEC撤销在对冲基金规定中的数字资产部分,将对数字资产未来产生什么影响?》(SEC removes digital assets from hedge fund rule: What does it mean for the future of digital asset regulation)。

Anndy Lians是畅销书《Blockchain Revolution 2030》和 《NFT: from Zero to Hero》的作者,对区块链和数字化领域有着广泛的研究和见解。目前,Anndy Lian担任蒙古生产力组织的首席数字顾问,致力于推动国家数字化的发展。

作为一位新加坡知名科普作家和新科技投资者,Anndy Lian以增长型投资的思维方式在业界有着广泛影响力。他坚信区块链技术将彻底改变和重新定义传统企业,并且主张实现区块链行业的“再去中心化”(Re-decentralized)。

在他最新的文章中,Anndy Lian探讨了美国证券交易委员会(SEC)最近关于数字资产的决定。SEC是负责监管证券行业的机构,过去将数字资产定义为证券,并在对冲基金规则中对其进行了额外监管。然而,SEC最近删除了这一定义,这意味着他们仍在评估这一术语,并尚未决定是否将数字资产归类为证券。这一决定引发了人们对SEC监管数字资产方式的质疑和讨论。

在这篇文章中,Anndy Lian将带领我们深入探讨SEC对数字资产的监管态度转变,以及这对数字资产监管未来的意义。他的专业知识和对区块链技术的了解将为我们提供深入的洞察力,并帮助我们更好地理解数字资产市场的发展趋势。

对冲基金规则

对冲基金规则,正式称为1940年投资顾问法案下的206(4)-8号规则,是美国证券交易委员会(SEC)制定的一项规则,旨在防止投资顾问向对冲基金等集合投资工具的投资者提供虚假或误导性陈述。

该规则对对冲基金和其他私募基金的顾问施加了额外的报告和披露要求,并要求他们实施具体的合规程序和风险管理措施。该规则旨在通过确保投资顾问在客户的最佳利益下行事,并提供关于投资策略和风险的准确完整信息,保护投资者并维护金融市场的完整性。

在数字资产的背景下,SEC在其对冲基金规则中将“数字资产”定义为证券,从而使其受到额外的监管。然而,SEC最近取消了这个定义,表明他们仍在评估这个术语,并尚未决定是否应将数字资产归类为证券。

“数字资产”作为新的资产类别

许多人对此举感到惊讶,并质疑SEC在数字资产监管方面的方法。值得注意的是,SEC主席加里·根斯勒(Gary Gensler)在2023年4月18日出席美国众议院金融服务委员会的听证会上就该机构对数字资产的立场发表了讲话。这次听证会并不专门针对SEC的加密策略,但监管机构的主席在被批评存在过度监管和缺乏明确的加密分类的问题上受到了批评。在听证会上,根斯勒拒绝对以太币(ETH)是证券还是商品发表评论,称这取决于事实和法律,尽管他被告知他清楚。值得注意的是,美国众议院金融服务委员会和农业委员会计划制定监管加密领域的立法。该法案将在未来两个月内提交。

话虽如此,我认为这是积极的一面。这表明SEC正在制定数字资产的监管框架,并且这个决定可能是整体战略的一部分。SEC可能从对冲基金规则中删除了“数字资产”的定义,以便进一步考虑和评估对这个新资产类别适当的监管方法。SEC可能采取谨慎的态度,以确保其制定的任何监管框架适用于数字资产的独特特征,并解决潜在风险,同时不妨碍创新。

对数字资产的监管是复杂而有争议的

专家对SEC取消将数字资产定义为证券的决定发表了评论,这将使它们受到额外的监管。加密货币行业的主要参与者Coinbase公开反对SEC对数字资产的监管立场。一些专家认为,数字资产领域需要更加注重风险管理和运营尽职调查,并结合思考周全的监管,以修复其声誉。

需要认识到SEC对数字资产的态度一直在变化,这次的决定并不是他们第一次对其分类立场。此前,SEC确认401(k)计划可以被视为根据第3(c)(1)条和第3(c)(7)条的单一投资者和合格买方,如果计划参与者具有分配他们账户的投资自由裁量权。

关于如何监管数字资产的问题是复杂而有争议的。除了上述观点外,一些人认为数字资产与传统证券有根本的不同,应被视为一种独立的资产类别。由于它们在分散网络上运作,数字资产不受传统证券的同样监管和监督。这种缺乏监管导致了对市场操纵、欺诈和其他非法活动的担忧。

此外,数字资产没有实物资产或政府担保支持,这使其具有固有的风险。然而,它们也有潜在的高回报,这可能吸引愿意在投资中承担更多风险的投资者。由于这些独特的特征,一些专家建议在风险管理、估值和投资策略方面,数字资产需要与传统证券有所不同的方法。

数字资产市场的发展可能需要更清晰的监管框架和标准。然而,对这些资产的分类和监管以及其对整体市场的影响仍存在不确定性。数字资产具有与传统资产不同的独特特征,包括分散化和区块链技术的应用。这种技术实现了无边界交易、智能合约和去中心化应用,为零售和机构投资者提供了新的投资机会。

结束语

数字资产市场的增长吸引了监管机构和投资者的广泛关注,有人主张将数字资产视为证券以保护投资者免受欺诈行为。SEC从对冲基金规则中删除数字资产作为证券的定义,引发了关于这个资产类别适当的监管框架的持续辩论。随着数字资产的使用不断扩大,SEC很可能会继续制定其监管方法。

总之,SEC最近的决定对于监管数字资产是一个重大发展,并引发了关于如何对这些资产进行分类和监管的问题。随着数字资产市场的成熟,可能需要更清晰的监管框架和标准,以保护投资者、防止欺诈,同时允许创新和增长的发生。

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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SEC removes digital assets from hedge fund rule: What does it mean for the future of digital asset regulation

SEC removes digital assets from hedge fund rule: What does it mean for the future of digital asset regulation

The U.S. Securities and Exchange Commission (SEC), which regulates the securities industry, has recently decided about digital assets. Digital assets are virtual or digital currencies that can be traded or exchanged. The SEC previously defined digital assets as securities in its hedge fund rule, subjecting them to additional regulations.

Hedge fund rule

The hedge fund rule, officially known as Rule 206(4)-8 under the Investment Advisers Act of 1940, is a rule created by the U.S. Securities and Exchange Commission (SEC) to prevent investment advisers from making false or misleading statements to investors in pooled investment vehicles such as hedge funds.

The rule imposes additional reporting and disclosure requirements on advisers to hedge funds and other private funds and requires them to implement specific compliance programs and risk management measures. The rule is designed to protect investors and maintain the integrity of the financial markets by ensuring that investment advisers act in their client’s best interests and provide accurate and complete information about their investment strategies and risks.

In the context of digital assets, the SEC included a definition of “digital assets” as securities in its hedge fund rule, subjecting them to additional regulations. However, the SEC recently removed this definition, indicating that it is still evaluating the term and has not yet decided whether digital assets should be classified as securities.

New asset class for “digital assets”?

Many people have been surprised by this move and have questioned the SEC’s approach to regulating digital assets. It’s worth noting that SEC Chair Gary Gensler gave a speech before the House Financial Services Committee on April 18, 2023, regarding the agency’s stance on digital assets. The hearing was not dedicated exclusively to the SEC’s crypto strategies, but the regulatory agency’s chairman faced criticism over perceived regulatory overreach and lack of clear crypto classification. During the hearing, Gensler refused to comment on whether Ether (ETH) was a security or a commodity, saying it depends on the facts and the law, despite being told he knows. It is worth noting that the U.S. House Financial Services Committee and House Agriculture Committee are set to put together legislation to oversee the crypto sector. The bill will be introduced within the next two months.

Having said so, I do see this in a more positive light. This suggests that the SEC is working on a regulatory framework for digital assets, and this decision may be part of a larger strategy. The SEC may have removed the definition of “digital assets” from the hedge fund rule to allow for further consideration and evaluation of the appropriate regulatory approach for this new asset class. The SEC could be taking a cautious approach to ensure that any regulatory framework it develops is appropriate for digital assets’ unique characteristics and addresses potential risks without hindering innovation.

Regulating digital assets is complex and contentious

Experts have commented on the SEC’s decision to remove its previous definition of digital assets as securities, which would have subjected them to additional regulations. Coinbase, a major player in the crypto industry, has publicly opposed the SEC’s stance on regulating digital assets. Some experts believe that the digital assets sector needs to focus more on risk management and operational due diligence, coupled with thoughtful regulation, to repair its reputation.

It’s essential to recognize that the SEC has had a changing stance on digital assets, and this recent decision isn’t the first time they’ve taken a position on their classification. Previously, the SEC confirmed that a 401(k) plan could be considered a single investor under section 3 (c) (1) and a qualified purchaser under section 3 (c) (7) if plan participants have investment discretion to allocate their accounts.

The question of how to regulate digital assets is complex and contentious. In addition to the points made, some argue that digital assets fundamentally differ from traditional securities and should be treated as a separate asset class. Because they operate on a decentralized network, digital assets aren’t subject to the same regulations and oversight as traditional securities. This lack of regulation has led to concerns about market manipulation, fraud, and other illicit activities.

Moreover, digital assets aren’t backed by physical assets or government guarantees, which makes them inherently risky. However, they also have the potential for high returns, which can entice investors who are willing to take on more risk in their investments. Due to these unique characteristics, some experts suggest that digital assets require a different approach to risk management, valuation, and investment strategies than traditional securities.

The evolving nature of the digital asset market may require clearer regulatory frameworks and standards as it matures. However, there is uncertainty surrounding how these assets will be classified and regulated and how this will affect the overall market. Digital assets have unique characteristics that differentiate them from traditional assets, including decentralization and the use of blockchain technology. This technology enables borderless transactions, smart contracts, and decentralized applications that offer new investment opportunities for retail and institutional investors.

Ending remarks

The growth of the digital asset market has attracted significant attention from regulators and investors, with some arguing that digital assets should be treated as securities to protect investors from fraud. The SEC’s decision to remove the definition of digital assets as securities from its hedge fund rule have fueled ongoing debate about the appropriate regulatory framework for this asset class. As the use of digital assets continues to expand, the SEC will likely continue to develop its regulatory approach.

In conclusion, the SEC’s recent decision is a significant development in regulating digital assets and raises questions about how these assets will be classified and regulated. As the digital asset market matures, there may be a need for clearer regulatory frameworks and standards to protect investors and prevent fraud while allowing for innovation and growth.

 

Source: https://www.financialexpress.com/business/blockchain-sec-removes-digital-assets-from-hedge-fund-rule-what-does-it-mean-for-the-future-of-digital-asset-regulation-3080830/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j