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Changpeng Zhao, or “CZ”, is one of the biggest players in crypto.
AFP via Getty Images
On Monday, the United States Securities and Exchange Commission charged cryptocurrency exchange Binance and its founder, Changpeng Zhao, with a series of securities violations.
This struck a blow to the heart of crypto and the effect is already rippling through the markets.
This is a landmark decision by regulators against one of the biggest players in digital assets. Binance is, by far, the largest crypto exchange in the world, and Zhao, known in the industry as “CZ”, is arguably the most influential person in the industry, playing a key role in the collapse of rival FTX last year.
Markets are already reacting to the SEC accusations, with the price of
Bitcoin
losing up to 5% as a result of the news. Shares in
Coinbase global
(ticker: COIN), the largest US crypto exchange – which was warned earlier this year by the SEC of the impending charges – fell 10.5% in New York.
The SEC alleges that although Binance and Zhao publicly claimed that US customers were not allowed to use Binance – the main offshore trading venue – the group twisted controls to allow continued access to high-value customers. The agency also alleges that while Binance.US positioned itself as an independent US-based platform, it was actually secretly controlled by Binance and Zhao.
Binance sponsored Barrons to a blog post, when approached for a comment, in which he said, “We intend to vigorously defend our platform.”
SEC Chairman Gary Gensler said in a statement, “Through thirteen counts, we allege that the Zhao and Binance Entities engaged in an extensive web of deceit, conflict of interest, misconduct, disclosure and calculated circumvention of the law”.
The agency also claims that Binance exercises control over the assets held on its platform, “allowing them to mix client assets or divert client assets as they see fit, including to an entity owned by Zhao,” and that it was concealed.
For traders, this allegation is likely to be particularly shocking. The alleged mixing of client money between FTX and an affiliated hedge fund, Alameda Research, controlled by Sam Bankman-Fried, was an integral part of the collapse of this crypto exchange last November. Amid the market turmoil following FTX’s collapse, more funds poured into Binance in what was seen as a flight to quality.
Binance said in the blog post that it engaged in good faith with US regulators and was “disheartened” by the agency’s decision to pursue legal action. He added that user assets on Binance and Binance.US are safe and secure.
“Unfortunately, the SEC’s refusal to productively engage with us is just another example of the Commission’s misguided and conscious refusal to provide much-needed clarification and guidance to the digital asset industry,” Binance said.
The rapid reaction of the crypto markets, with the prices of digital assets falling, is not surprising.
Binance is a mainstay in the digital asset economy, controlling nearly two-thirds of all crypto trading volume within months, although it has recently lost some market share. A crisis at Binance threatens to undo Bitcoin’s remarkable gains, up nearly two-thirds this year.
The news is also likely to have a negative impact on the broker
Coinbase
.
While Binance has operated overseas for years and dodged demands from lawmakers to open up about its finances, Coinbase has positioned itself as crypto’s answer to a blue chip stock that plays by the rules. But Coinbase revealed in March that the SEC had sent it a so-called Wells notice, a warning that the agency might pursue the exchange. After Monday’s developments at Binance, investors will have heightened concerns.
Write to Jack Denton at jack.denton@barrons.com