The Crypto Drama: SEC v. CZ
web3 brew 2023/13
Hey folks, get ready for some serious crypto drama.🍿 I know, it's been way too long since we published this edition, but I was in London having a blast and didn't even open my laptop. So please bear with me. It's been ages since I had a trip like this, not since 2017. Can't blame a girl for enjoying, right?
So, you remember that lawsuit from the U.S. Commodities Futures Trading Commission (CFTC) against Binance in March 2023, right? Well, it seems like the Securities and Exchange Commission (SEC) decided to join the party. They didn't just copy-paste the CFTC's suit, though. They've got their own beef with Binance, and it's all about how Binance has been playing fast and loose with crypto in the US.
On June 5, the SEC dropped a whopping thirteen charges against Binance, the companies under its control, and its CEO Changpeng “CZ” Zhao. The charges are all about unregistered offers of securities and investment schemes, not registering with the SEC, and making false and misleading statements to investors. CZ himself is in the hot seat for two of these charges. 🔥
Just to give you a sense of scale, Binance is the biggest crypto exchange in the world. Like, by a lot. So, if the SEC manages to land a punch here, it's going to send shockwaves through the crypto industry. And, ofc, detailing how Binance execs openly discussed their plans to evade regulations. 😲
Binance and Binance.US : Dual Deception
Let's get into the nitty-gritty. Now, the SEC's lawsuit has some similarities with the CFTC one. Both of them claim that Binance was pretending that Binance and Binance.US were separate entities, when in reality, CZ was pulling all the strings. The SEC has documents suggesting that Binance.US was essentially created as a regulatory diversion. There was even a consultant who advised that Binance.US could help insulate Binance from regulatory scrutiny. This echoes the infamous “Tai Chi document” that Forbes reported on back in 2020.
What's astonishing is the candidness of Binance executives. The SEC has unearthed communications where Binance’s Chief Compliance Officer stated, “we are operating as an unlicensed securities exchange in the USA.” That's quite an admission.
Inside chaos:
Now, let’s talk about the internal operations of Binance.US. According to the SEC, it was far from smooth sailing. Two former CEOs of Binance.US have provided testimony to the SEC, and it paints a chaotic picture.
Catherine Coley, one of the former CEOs, expressed frustration about the lack of autonomy and control. She even mentioned not being aware of significant asset transfers within the company. Brian Brooks, who succeeded her, resigned after a short stint, stating that it became clear that CZ was the one truly in control of Binance.US.
In summary, the allegations suggest that Binance.US was not operating independently as it should have been, and that CZ had a significant influence over its operations. The auditors also faced difficulties in verifying financial information due to the disarray. This is a developing story with serious implications for Binance and the cryptocurrency industry. It's important to keep an eye on how it unfolds
The SEC also spills the tea on the chaos at Binance.US. Apparently, even the CEOs had little control over the company. Two former Binance.US CEOs, Catherine Coley and Brian Brooks, gave some juicy details to the SEC. They talked about being strong-armed by CZ, being kept in the dark about big money transfers, and feeling like puppets.
Wash trading:
Which is basically trading with yourself to create fake market activity. Despite Binance's claims of having top-notch monitoring systems, the SEC says they had little to no controls in place to prevent this.And get this, a company controlled by CZ called Sigma Chain was allegedly a big source of this wash trading. On Binance.US's first day of operation, wash trading between Sigma Chain and other Binance-operated accounts made up a huge chunk of the trading volume.
![264. Moreover, in January 2021, BAM Trading’s Director of Institutional Sales informed BAM CEO A that “[a]pparently we have nothing in place to prevent wash trading? Just tested myself, sold market order into my own bid.” He then warned that he was “not sure if this is being exploited on any level. The lower the fees for a [market maker], the easier it might be to manipulate the market.” Another BAM Trading employee responded, “Yikes.” 265. In fact, BAM Trading lacked any trade surveillance mechanisms until at least February 2022—six months after BAM Trading and BAM Management began approaching prospective Equity Investors with the Pitch Deck and more than three-and-a half years after the Binance.US Platform launched and stated publicly that it prohibited fraudulent trading.](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fad4c3e90-326a-47a4-bf01-9c9b183083f2_1364x746.png "264. Moreover, in January 2021, BAM Trading’s Director of Institutional Sales informed BAM CEO A that “[a]pparently we have nothing in place to prevent wash trading? Just tested myself, sold market order into my own bid.” He then warned that he was “not sure if this is being exploited on any level. The lower the fees for a [market maker], the easier it might be to manipulate the market.” Another BAM Trading employee responded, “Yikes.” 265. In fact, BAM Trading lacked any trade surveillance mechanisms until at least February 2022—six months after BAM Trading and BAM Management began approaching prospective Equity Investors with the Pitch Deck and more than three-and-a half years after the Binance.US Platform launched and stated publicly that it prohibited fraudulent trading.")
The SEC is throwing some heavy punches at Sigma Chain, claiming it was basically playing financial solitaire. Between January and June 2022, Sigma Chain was allegedly "wash trading" 48 out of 51 new crypto assets. That's like selling confetti to yourself and pretending it's a party. The SEC says the folks at Binance knew about this merry-go-round but didn’t lift a finger. No controls, no nothing.
Now, let's add a dash of irony. CZ, Binance's head honcho, was once all about credibility, saying it’s an exchange's most important asset. He even questioned if anyone would trust an exchange that fakes volumes. Well, CZ, the SEC is basically asking the same thing about Binance.
Asset commingling:
Sigma Chain pops up again in the complaint, and it's like a high-stakes game of hot potato with billions of dollars. We're talking Binance companies, Sigma Chain, and another firm called Merit Peak, all tossing around stacks of cash like it's Monopoly money. At one point, Binance.US was like, "Here, have $190 million," and sent it over to Sigma Chain. And guess what? $11 million of that went straight into buying a yacht.
Customer funds were also doing the cha-cha between these so-called independent entities. The SEC is like, "Hold up, customers didn't sign up for this dance." They didn’t get a heads up or give the green light for their money to be part of this financial conga line. The SEC says billions of dollars in customer funds from both Binance platforms were all mixed up together - they call it "commingling."
So, there you have it. Billions in assets doing the shuffle between companies and yachts being bought. It's like a financial soap opera over here
Market manipulation:
Binance had little to no monitoring in place to prevent market manipulation, despite claiming to have robust controls. In fact, a CZ-owned company called Sigma Chain was reportedly a major source of this manipulation. The SEC claims that Sigma Chain accounts engaged in wash trading in 48 of 51 newly listed crypto assets.
Securities:
The SEC is giving Binance's tokens, BNB and BUSD, a hard look. They're saying BNB, which was launched to fund Binance, is a security. Binance bigwigs even linked BNB's value to the platform's success, which is a classic security move. The SEC is using the Howey test, which checks if something is an investment expecting profits from others' efforts, and BNB fits the bill.
But here's the twist: the SEC is also labeling BUSD, a stablecoin tied to the USD, as a security. This has people scratching their heads. The SEC's angle? BUSD was used in reward programs and profit schemes, which makes it more than just digital dollars.
In short, the SEC is calling out Binance's tokens as securities, and it's causing quite the stir. Which meant labeling ten major non-Binance crypto tokens as securities. This list includes some big players like Solana (SOL), Cardano (ADA), and Polygon (MATIC), among others. These tokens are pretty high up on CoinMarketCap’s rankings, making this a big deal in the crypto world. It's like the SEC went for the big fish, short of calling Bitcoin or Ethereum securities. This move has the crypto community buzzing and could have some serious ripple effects.
![264. Moreover, in January 2021, BAM Trading’s Director of Institutional Sales informed BAM CEO A that “[a]pparently we have nothing in place to prevent wash trading? Just tested myself, sold market order into my own bid.” He then warned that he was “not sure if this is being exploited on any level. The lower the fees for a [market maker], the easier it might be to manipulate the market.” Another BAM Trading employee responded, “Yikes.” 265. In fact, BAM Trading lacked any trade surveillance mechanisms until at least February 2022—six months after BAM Trading and BAM Management began approaching prospective Equity Investors with the Pitch Deck and more than three-and-a half years after the Binance.US Platform launched and stated publicly that it prohibited fraudulent trading.](https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fad4c3e90-326a-47a4-bf01-9c9b183083f2_1364x746.png "264. Moreover, in January 2021, BAM Trading’s Director of Institutional Sales informed BAM CEO A that “[a]pparently we have nothing in place to prevent wash trading? Just tested myself, sold market order into my own bid.” He then warned that he was “not sure if this is being exploited on any level. The lower the fees for a [market maker], the easier it might be to manipulate the market.” Another BAM Trading employee responded, “Yikes.” 265. In fact, BAM Trading lacked any trade surveillance mechanisms until at least February 2022—six months after BAM Trading and BAM Management began approaching prospective Equity Investors with the Pitch Deck and more than three-and-a half years after the Binance.US Platform launched and stated publicly that it prohibited fraudulent trading.")
Staking-as-a-service program:
Where Binance helps individuals stake their Ethereum or other proof-of-stake tokens by pooling assets with other customers. The SEC seems to believe that even this simple configuration of staking-as-a-service still qualifies as a security.
The SEC is cracking down on staking, and it's not pulling any punches. They've already taken Kraken to task, settling for a cool $30 million because Kraken was the puppet master controlling the staking rewards instead of just passing them through. This got Coinbase rethinking their game, and they made changes to emphasize that rewards come from the protocol, not Coinbase, with Coinbase just being the middleman.
But here’s the plot twist: the SEC is now saying, "Not so fast." Even the most basic form of staking, where customer assets are pooled, a validator runs the show, and rewards go back to customers, is under fire. The SEC is hinting that this might still be a security. This is like a cold shower for Coinbase and other staking providers, including decentralized ones like Lido. The message is clear: the SEC is watching staking like a hawk.
Enjoy the read!
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