SEC Lawsuit Against Binance Demonstrates Extent of Its Crypto Enforcement Efforts

[ad_1]

On June 5, 2023, the SEC filed a broad civil lawsuit against Binance Holdings Limited, its various affiliates, and its beneficial owner and CEO, Changpeng Zhao, alleging multiple violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.

The SEC and Crypto

For years, the SEC has made it clear that crypto enforcement is among its highest priorities. In 2022, the SEC filed a total of 30 cryptocurrency-related enforcement actions, up 50% from 2021. And, in the first half of 2023, the SEC is poised to increase more than 25% compared to last year’s figures. SEC Chairman Gary Gensler bluntly stated his concern about the crypto industry in a recent Wall Street Journal interview:

I’ve seen instances of non-compliance in traditional finance from time to time, but I’ve never seen a field so built on non-compliance with the law, and frankly, that’s what a lot of [cryptocurrency] business model is.

Binance’s lawsuit illustrates how the SEC will take legal action against such alleged wholesale non-compliance by taking a utilitarian approach to the crypto industry, essentially overlapping the functions and participants of the traditional securities industry to their crypto counterparts.

inance Holdings Limited, the lead defendant, is a Cayman Islands-based private limited company that operates the binance.com platform, an international crypto asset trading platform serving clients in over 100 countries.

Binance operated through a network of subordinate or affiliated entities, in multiple jurisdictions, all tied to Zhao as the beneficial owner. As the complaint states, Zhao rejected traditional mindsets about corporate formalities and the regulatory requirements that come with it, stating: Wherever I sit is Binance’s office. Wherever I meet someone, it will be the Binance office.

In the United States, professionals participating in the securities market are subject to significant regulatory oversight by the SEC. For example, brokers (those who buy or sell securities on behalf of others) and stockbrokers (those who buy or sell securities on their behalf) must register with the SEC. Any organization or group of individuals that provides a marketplace for bringing together buyers and sellers of securities constitutes an exchange under the Exchange Act, is required to register with the SEC.

Unless there is an applicable exemption, any company offering its securities for sale must file a registration statement with the SEC containing material information about the company and its securities. In addition, anyone who acts as an intermediary in the exchange of payment for a security is a clearing agency that is also required to register with the SEC (subject again to available exemptions). Finally, brokers are financial institutions subject to the Bank Secrecy Act (BSA), which the SEC is legally authorized to enforce.

The complaint

As the complaint claims, Binance was aware of all of this. In a chat exchange with a Binance employee, its chief compliance officer (CCO) said: If US users access .com [w]We become subject to the following US regulators, FinCEN OFAC and SEC. To avoid regulation, Binance has engaged in a massive scheme to hide its customer base in the United States, thereby breaking numerous laws. In the words of Binance’s CCO: we operate as a fking unlicensed stock exchange in the United States.

The core of Binances’ alleged efforts to evade US regulation was to manipulate its KYC processes. Binance has made numerous public statements disavowing any US-based activity and touting restrictions against US-based activity while privately encouraging US customers to bypass these restrictions through strategic virtual private network (VPN) processing. that would disguise their locations and thus minimize the economic impact. public proclamations by Binances barring US investors from accessing the platform.

To allegedly conceal its presence in the United States, Binance encouraged its customers to circumvent the geo-blocking of US-based IP addresses by using a VPN service to disguise their location. He also encouraged some US-based VIP clients to circumvent Binances KYC restrictions by submitting updated KYC information that omits any connection to the US. Additionally, until August 2021, Binance did not require all of its clients to submit KYC documents.

The revendications

Binance is facing eleven claims for various violations of the Exchange Act. These counts include illegal sale of securities; act as an unregistered exchange, broker and clearing agency; liability of the controlling person against Zhou; and securities fraud.

Interestingly, the SEC submits the securities fraud complaint to Section 17(a)(2) of the Securities Act rather than Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Securities fraud is generally enforced in civil cases under Rule 10b-5, but in recent years the SEC has begun to assert more claims under Rule 17(a)(2). The elements of Rule 10(b-5) and Rule 17(a)(2) are similar in that they each require a misrepresentation or omission of a material fact. In this case, the claim centers on Binances’ statements regarding its KYC program and avoidance of US markets.

The main distinction between Rule 17(a)(2) and Rule 10(b) is that Rule 17(a)(2) does not require science and can be established if the defendant acted negligently. . In contrast, a civil violation of Rule 10b-5 requires a scientist, so the defendant must have acted recklessly. The Section 17(a)(2) proceeding against Binance indicates that the SEC may be more eager to pursue these cases under Section 17(a)(2) to take advantage of the lack of required scientists.

On the minds of many interested in SEC enforcement actions, the Supreme Court recently announced that it would reverse the precedent set by Chevron USA, Inc. v. NRDC, 467 US 837 (1984) next quarter. The previous Chevron set, widely referred to as Chevron deference, gives federal agencies the power to interpret vague laws and enforce them as they seem reasonable.

While the SEC’s classification of nearly all cryptocurrencies as securities, which is based on the SEC’s interpretation of the Howie test derived from Supreme Court precedent, is unlikely to of the Chevron Doctrine by law could certainly impact the SEC’s regulatory authority in the crypto space, setting the stage for future litigation.

Disclaimer: The opinions of our editors are their own and do not reflect the opinion of CryptoSlate. None of the information you read on CryptoSlate should be taken as investment advice, and CryptoSlate does not endorse any project that may be mentioned or linked in this article. Buying and trading cryptocurrencies should be considered a high-risk activity. Please exercise due diligence before taking any action related to the content of this article. Finally, CryptoSlate takes no responsibility if you lose money trading cryptocurrencies.

[ad_2]