On June 16, Binance.US and the U.S. Securities and Exchange Commission (SEC) came to a temporary agreement to restrict access to customer funds.
The agreement, still pending approval from a federal judge, aims to prevent Binance officials from accessing private keys, hardware wallets and root access to Binance.US Amazon Web Services tools. Binance.US will disclose detailed information about business expenses in the coming weeks.
The agreement is a response to a motion filed by the SEC, which sought to freeze all of Binance.US assets during the ongoing legal proceedings. The SEC expressed concerns about funds transferred offshore or essential records being intentionally destroyed without a granted temporary restraining order.
“Given that Changpeng Zhao and Binance have control of the platforms’ customers’ assets and have been able to commingle customer assets or divert customer assets as they please, as we have alleged, these prohibitions are essential to protecting investor assets,” said Gurbir Grewal, director of SEC’s division of enforcement in a statement.
However, Binance.US’ legal representatives strongly opposed the idea, arguing that a complete freeze on assets would severely punish the company.
During a recent hearing, U.S. district court judge Amy Berman Jackson suggested that agreeing on a proposed stipulation would be more beneficial than relying on a court-issued restraining order.
She said that a temporary restraining order only lasts for two weeks, which may not be enough time for a comprehensive hearing, especially considering the extensive volume of exhibits submitted, totaling over 4,000 pages.
“Shutting it down completely would create significant consequences not only for the company but for the digital asset markets in general,” the judge said.
As reported by PYMNTS last week, this regulatory battle has placed more pressure on lawmakers to develop guidelines for digital assets.
The proposed agreement includes additional provisions, such as creating new crypto wallets exclusive to Binance.US and inaccessible to employees of other Binance entities.
In addition, Binance.US has pledged to furnish the SEC with additional details and consented to an expedited discovery timetable. Customers based in the U.S. will retain the ability to withdraw their funds throughout this duration.
“We ensured that U.S. customers will be able to withdraw their assets from the platform while we work to resolve the alleged underlying misconduct,” said Grewal.
Binance.US also took to Twitter to share the update and express its determination. Despite the adverse effects inflicted on its business and reputation, the company emphasized its resolute “fighting spirit” and commitment to stand up against accusations and use “regulation by enforcement” practices that defy its principles of justice.
If approved, the agreement will partially address the SEC’s concerns while the broader lawsuit continues to unfold.
Binance grapples with allegations
The SEC’s claims include accusations against Binance CEO Changpeng “CZ” Zhao. According to the agency, he had access to Binance.US customer funds and moved $12 billion through his controlled entity, Merit Peak.
In a joint memorandum submitted before the restraining order hearing on June 12, Binance.US and Zhao denied mishandling funds. They challenged the SEC’s inability to identify any instances of misused customer funds.
“Indeed, there is no ’emergency’ here at all, other than the one manufactured by the SEC for its own purposes,” the memorandum reads.
The SEC’s complaint also identified certain digital coins, including ADA from Cardano, SOL from Solana and MATIC from Polygon, as securities traded on Binance’s platform. However, the companies involved maintain that these coins are not offered as securities to U.S. investors.
Experts, such as Ed Moya, a senior market analyst at Oanda Corp., see the SEC’s actions against Binance and another major exchange, Coinbase, as part of a larger regulatory push against crypto exchanges. The outcome of these cases could have far-reaching implications for other trading platforms.
Even though Binance operates primarily outside the U.S. and does not have an official headquarters, it prohibits American users from trading on its Binance.com platform. Instead, U.S. users are directed to trade on Binance.US, a more restricted platform intended for their use.
The SEC alleges that all these businesses were under the tight control of Binance founder Zhao and that a significant amount of money from U.S. investors flowed to Binance.com.
The SEC claims that Binance engaged in covert practices, including encouraging U.S. customers to use virtual private networks (VPNs) to bypass location restrictions and access the primary exchange.
The complaint suggests that Binance’s former chief compliance officer admitted in 2018 that the company was operating as an unlicensed securities exchange in the U.S.
The SEC accuses Binance of misleading customers through “wash trading,” a practice in which a single entity sells securities to itself. The financial watchdog maintains that Sigma Chain, a trading company owned and controlled by Zhao, may have artificially inflated crypto trading volumes on Binance.US through this practice.
Binance has firmly denied these allegations and expressed disappointment with the SEC’s decision. The company criticized the regulator in a blog post for choosing heavy-handed enforcement instead of a more nuanced approach.
Responding to the SEC complaint, Zhao posted a tweet with the number “4,” signaling his customers and online followers to disregard any fear, uncertainty, and doubt surrounding the company.
SEC lawsuit ripple effects
Following the SEC lawsuit, Binance.US has reportedly undertaken a significant round of layoffs, according to a recent report by Reuters.
Insiders familiar with the matter revealed that at least 50 employees had been laid off from Binance.US since the lawsuit was filed. Those affected primarily come from Binance’s legal, compliance and risk departments. As the situation is confidential, the sources chose to remain anonymous.
With the SEC cases against both Coinbase and Binance anticipated to be lengthy proceedings, the crypto community has begun considering alternative strategies outside of the U.S.
The consent order, however, aims to expedite the legal process in Binance’s case by requiring all defendants to provide swift discovery and sworn testimony to the SEC. This accelerated approach is expected to reduce the time required to reach a conclusion significantly.
The order also mandates Binance.US to furnish a “verified written accounting” of all accounts and transfers conducted between December 31, 2022, and the date specified in the accounting. This provision ensures that a comprehensive record of financial activities is provided to the SEC for scrutiny.