SEC defendant Binance to pay $4.3-billion (U.S.)

Technology
Wednesday, November 22nd, 2023 5:31 pm EDT

Cryptocurrency exchange Binance Holdings Ltd. and its Canadian founder, Changpeng Zhao, have pleaded guilty to criminal charges in the United States arising from money laundering violations and from operating in the U.S. without regulatory oversight. Prosecutors claim that Binance, which operated the world’s largest cryptocurrency exchange, facilitated illegal transfers of money in and out of the United States. In particular, it allowed $898-million in trades between users in the U.S. and Iran, the government says. (All figures are in U.S. dollars.)

Binance and Mr. Zhao entered the guilty plea in an appearance in federal court in Seattle on Tuesday, Nov. 21. As part of the plea agreement, Binance will pay financial penalties totalling $4.3-billion. The figure includes a $1.8-billion fine and the forfeiture of $2.5-billion. The firm will also hire an independent monitor to ensure that it complies with rules designed to prevent money laundering and financial transactions with sanctioned jurisdictions.

As for Mr. Zhao, he has agreed that he will resign as the chief executive officer of Binance. He will also pay a $50-million fine. The charge to which he has pleaded guilty is a violation of the Bank Secrecy Act, which carries a maximum of 10 years in prison. At Tuesday’s hearing, the judge released Mr. Zhao on a $190-million appearance bond and ordered him to return to the U.S. 14 days before he is to be sentenced. Prosecutors have not agreed to recommend any particular sentence, but they did not contest his release on bond or seek any conditions that would have kept him in the U.S.

While Tuesday’s plea largely settles the U.S. government’s prosecution of Binance and Mr. Zhao, both still face civil charges from the U.S. Securities and Exchange Commission. That case may take some additional time to resolve as it includes an additional bit of legalese. The SEC is claiming that it has the power to regulate cryptocurrency exchanges such as Binance that have U.S. customers. Binance has so far contested that position, saying that the SEC is using the “blunt weapons of enforcement” to pursue cryptocurrency companies. Binance is seeking a “thoughtful policy engagement” with the SEC on digital asset laws.

Details of Binance’s operation are set out in a complaint that the SEC filed on June 5, 2023, in federal court in the District of Columbia. The SEC claimed that Binance had been violating the law since its founding in 2017. Its platform, which set out to be “one of the fastest exchanges in the market,” held billions of dollars worth of customer assets. It made money by taking fees for transactions, typically charging between 0.015 per cent and 0.2 per cent of the value of a trade. By 2021, its trading volume had reached $9.58-trillion and it had earned at least $11.6-billion in revenue, the SEC said.

The problems, at least according to the SEC, arose from Binance’s operation as an unregistered exchange. In particular, the SEC said that Binance was not subject to any oversight or controls over the billions of dollars in assets it held. As the SEC sees things, it has the power to regulate any organization participating in the securities industry, including the many cryptocurrency businesses that have appeared in recent years.

According to the SEC, Binance made some efforts to comply with U.S. registration requirements, but those attempts were superficial. Publicly, Binance stated that it would not accept U.S. customers, and it set out to block anyone attempting to access its platform from the U.S. Privately, it encouraged high-volume U.S. customers to use a VPN service to conceal their location, the SEC claimed. Binance also had those customers move their trading volume offshore where possible, according to the SEC.

On top of that, Binance set up a U.S. platform (called Binance.US) that purportedly complied with the rules, but that platform was not independent from Binance at all, with Mr. Zhao maintaining control over its bank accounts, the SEC claimed. The U.S. platform was a vehicle for manipulative trades and wash trades, according to the complaint. There was no trade surveillance or controls, and management reported wash trades as part of the overall volume as part of an effort to deceive investors into thinking that the trades were “robust, real and reliable,” the SEC claimed.

The SEC is seeking court orders that would bar any future violations, as well as a permanent ban for Mr. Zhao. The SEC is further asking that the judge order Mr. Zhao and his companies to disgorge their gains and pay appropriate fines. In addition to Binance and Mr. Zhao, the defendants are BAM Trading Services Inc. and BAM Management Holdings Inc.

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