According to a lawsuit filed by the US SEC, Binance and its founder have mishandled funds and violated US securities laws.
The world's largest cryptocurrency exchange Binance and its founder Changpeng Zhao have been accused of misusing investor funds, operating as an unregistered exchange, and violating a slew of US securities laws in a lawsuit filed by US regulators.
Filed in a federal court in Washington DC, the US Securities and Exchange Commission (SEC) lawsuit on Monday lists 13 charges against the firm - including commingling and divert customer assets to an entity Zhao owned called Sigma Chain.
The news caused Bitcoin, the largest crypto in terms of value in circulation - worth over $500 billion (€468 billion) - to plummet, losing almost 2 per cent in a matter of minutes.
Why is Binance in the dock?
Binance is a Cayman Islands limited liability company founded by Zhao and the charges are familiar to practices uncovered after the collapse of the second largest cryptocurrency exchange, FTX, last year.
The lawsuit lays out the extent to which the firm's owners knew of the alleged legal violations, stating "Binance’s CCO bluntly admitted to another Binance compliance officer in December 2018, 'we are operating as a fking unlicensed securities exchange in the USA bro'".
SEC Chair Gary Gensler in a written statement that Zhao and Binance "engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law".
"The public should beware of investing any of their hard-earned assets with or on these unlawful platforms," Gensler said.
In a social media post, Binance said that it has been cooperating with the SEC's investigation but said that the agency "chose to act unilaterally and litigate".
"While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to defend our platform vigorously,” the company said in a Twitter post.
"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 clarity and guidance to the digital asset industry".
New blow for crypto after FTX collapse
The lawsuit comes roughly eight months after the collapse of FTX, which was also accused of co-mingling customers' funds and investing the proceeds in high-risk investments that customers were unaware they were participating in.
US prosecutors and the SEC charged FTX's founder Sam Bankman-Fried with a host of money laundering, fraud, and securities fraud charges in December. His criminal trial is likely to be in the fall.
"The new complaint from the SEC against Binance is a laundry list of charges laying out exactly the same claims that many in the Bitcoin and crypto communities have made against Changpeng Zhao and his companies for many years," said Cory Klippsten, CEO of Swan Bitcoin, a Bitcoin financial services company.
"These practices of Binance have essentially been open secrets, so no one who operates in the space will be surprised by any of the charges".
US regulators have gone after Binance before.
In March, the Commodity Futures Trading Commission filed an enforcement action against Binance and Zhao in the US District Court for the Northern District of Illinois charging them with numerous CTFC violations.
The complaint also charges Samuel Lim, Binance’s former chief compliance officer, with aiding and abetting Binance’s violations.