The SEC's Binance Charges Could Have Serious Consequences for All Crypto Investors. Here's Why

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  • The SEC accuses Binance and founder Changpeng Zhao of creating an "extensive web of deception."
  • In addition to charges about how Binance, Binance.US, and related entities handled client funds, the SEC says management knew about wash trading and manipulative practices.
  • The charges could impact Binance's operations. More widely, it could affect how we buy, sell, and store cryptocurrency.

The SEC has taken action against so many crypto platforms in the past year or two that it's tempting to view its latest charges against Binance and its founder Changpeng Zhao as part of a wider anti-crypto crusade. That's certainly what some senior figures in the crypto industry are saying. Viewed in the context of other SEC actions, including its latest charges against Coinbase, there's a certain logic to that argument.

However, there are two main threads to the SEC's accusations against Binance. One is the sale of unregistered securities, which is similar to its actions against other platforms. The other is that Zhao (aka CK) and various entities connected with Binance and Binance.US deliberately misled investors and misused customer funds.

Binance says it will "vigorously defend against any allegations" and that all user assets are safe. Nonetheless, given what we now know about FTX and the subsequent accusations of fraud, as crypto investors, we can't ignore the SEC's allegations.

An 'extensive web of deception'

The SEC brought 13 charges against Binance and Zhao in a detailed 134-page complaint. "We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law," said SEC Chair Gary Gensler. Here are three of the most concerning accusations for Binance and Binance.US customers.

1. The SEC argues that Binance deliberately created Binance.US to get around American securities laws

The SEC says the resulting lack of oversight meant, "Defendants were free to and did transfer investors’ crypto and fiat assets as Defendants pleased, at times commingling and diverting them in ways that properly registered brokers, dealers, exchanges, and clearing agencies would not have been able to do."

2. The SEC alleges that management knew wash trading was rife

The SEC says the controls to stop manipulative trading such as wash trading -- a practice that artificially increases trading volume amongst other things -- on Binance.US were "non-existent." The complaint also highlights several instances where management assured the public that it had robust measures in place. For example, senior executives claimed the platform had on-chain analytics and other monitoring in place to guard against market manipulation and abusive practices. According to the SEC, these claims were misleading.

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3. The SEC says Binance.US customers don't have enough information about where their assets are stored

The SEC argues that Binance -- the international company -- is involved in the custody of assets belonging to Binance.US customers. It argues: "This arrangement has given and continues to give Zhao and Binance free rein to handle billions of dollars of crypto assets that customers have deposited, held, traded, and/or accrued on the Binance.US Platform with no oversight or controls to ensure that the assets are properly secured."

The SEC says two connected companies -- Sigma Chain and Merit Peak -- were used in the transfer of tens of billions of U.S. dollars, including customer funds. This final point is the most concerning. If you deposit funds in a custodial wallet with a crypto exchange, it is beyond disconcerting to think those funds could be used for other purposes, particularly after the collapse of FTX.

Sale of unregistered securities

Several of the SEC's recent crypto cases center around the question of whether or not cryptocurrencies and crypto earn programs are securities. Up until now, crypto has been treated as a commodity and comes under the remit of the CFTC. If this changes, it could have significant ramifications for crypto investors and the crypto industry.

The SEC has said repeatedly that it believes many cryptos are unregistered securities, which means they should come under its jurisdiction. If a product is a security, it needs to follow strict rules in terms of reporting and trading. The SEC argues that many cryptocurrencies fit the definition of "investment contracts" under the Howey Test. These exist when, "There is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."

In its charges against Binance and Zhao, the SEC says that Binance's various earn products are a form of an investment contract. It also says several popular cryptos are unregistered securities. These include:

What it means for crypto investors

The SEC says that Binance, Binance.US, and the other entities involved should have registered as exchanges or broker-dealers. Given that those cryptos above are available from many top crypto exchanges, we may see more enforcement actions soon. As such, the charges could have ramifications for the way we buy and sell crypto.

At a practical level, if you have cryptocurrency in a custodial wallet on a centralized exchange, now is a good time to learn more about crypto wallets. Moving your assets to a non-custodial crypto wallet that you control takes a bit of technical know-how, and you need to be confident you won't lose your seed phrase. However, it means you are in control of your assets. You won't lose them if a platform fails, and they can't be used in ways you haven't agreed to.

If you're a customer of Binance or Binance.US, take heed of the SEC's accusations about how the companies handle deposits. This is your money, and you'd be justified in wanting to know what's being done with it.

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